A federal bankruptcy judge recently ruled that the NRA cannot proceed with its bankruptcy because it filed its petition in bad faith. The story starts in New York, where the NRA is incorporated.
Last year, New York’s Attorney General launched an investigation into the NRA and brought various claims against the organization and the organization’s officials, including breach of fiduciary duty, self-dealing, and mismanagement. As one of its remedies, the NYAG sought dissolution of the NRA. In response, the NRA formed Sea Girt LLC – a Texas LLC with no employees or operations, owned by the NRA. Two months after Sea Girt’s formation, the NRA filed for bankruptcy in Texas.
The NRA offered several justifications for its bankruptcy filing, citing to 1) the cost of ongoing litigation, 2) its need to centralize litigation, and 3) its wish to restructure in Texas. The NYAG responded that the NRA filed bankruptcy to evade civil prosecution and regulatory oversight in New York. The NRA, in a colorful response, maintained that it filed for bankruptcy in good faith and that “absent being able to streamline discovery and have all of this litigation . . . handled in a centralized forum, the NRA was indeed facing the adage, death by a thousand cuts.”
However, the evidence demonstrated that the NRA was in one of its strongest financial conditions, ever. In fact, the NRA’s executive vice president admitted that if the bankruptcy case were dismissed, the NRA would still meet its financial obligations and repay its debts in full. When probed further, he admitted that the NRA filed bankruptcy to look for a “fair legal playing field where the NRA could prosper and grow in a fair legal environment.”
The Court held that the evidence did not support a good-faith filing. The Court acknowledged, however, that the NRA did have some legitimate interests in filing for bankruptcy – to reduce operating costs, to address burdensome contracts and leases, and to modernize the NRA’s organization structure. However, “determining whether the debtor’s filing for relief is in good faith depends largely upon the bankruptcy court’s on-the-spot evaluation of the debtor’s financial condition, motives, and the local financial realities. Findings of lack of good faith . . . have been predicated on certain recurring but non-exclusive patterns, and they are based on a conglomerate of factors rather than on any single datum.” In simpler terms, whether an entity filed for bankruptcy in good faith is a “totality of the circumstances” consideration. Here, the Court found that the NRA’s primary motive in filing for bankruptcy was to gain an unfair litigation advantage and to evade New York’s regulatory scheme.
As the Court acknowledged, bankruptcy has a lot of benefits for distressed companies seeking reorganization. But the NRA presents a cautionary tale for organizations pursuing Chapter 11 protection – be prepared to defend your good-faith filing.