🔥NRA Gets Whipped in Bankruptcy Court🔥
TX Judge Hale Dismissed the NRA’s Bankruptcy Case
When the National Rifle Association of America and its affiliate Sea Girt LLC (lol) first filed chapter 11 bankruptcy cases in the Southern District of Texas back in January, we titled our initial coverage of it, “🔥NRA. LOL.🔥,” which … let’s be honest … basically sums things up. Because, seriously, folks, it was a f*cking stupid filing premised on a f*cking stupid affiliate spun up out of thin air for the dubious purpose of filing in Texas. Contemporaneous with the f*cking stupid filing came a f*cking stupid press release where the NRA flicked off the New York State Attorney General Letitia James, a f*cking stupid poke-the-bear tactic that she saw right through and is now primed to throw right in the NRA’s face. It was, as we said previously, an epic “own the libs” moment that was … well … f*cking stupid. Of course, Texas Governor Greg Abbott celebrated the theatrics at the time, exhibiting f*cking stupid ignorance about bankruptcy law and the concept of “bad faith filings.” Yesterday, he was curiously silent on the subject. When you compound f*cking stupid with f*cking stupid you just end up with a whole lot of f*cking stupid. And since the integrity of the bankruptcy system is the flavor of the year, we’re not very surprised that, after some f*cking stupid testimony in court and some even more f*cking stupid leaked video of Wayne LaPierre being a stupid bad shot out of court, Judge Hale booted this f*cking stupid ploy to the curb.
Back in January we wrote:
All of this leaves us with some questions.
First, what’s the deal with the affiliate debtor? It’s a f*cking mockery, that’s what. The entity mysteriously appeared less than two months ago and appears to be a shell with little to no assets or liabilities. It’s questionable whether anyone actually works there but we suspect not. We’d expect, therefore, a challenge to venue. That said, we’ve seen so much venue-related BS over the years (looking at you SDTX and White Plains) that “venue shopping” is something that’s fun to talk about in academic circles but often has no real world ramifications. Moreover, Texas — judging by the Governor’s response — seems more than happy to welcome the NRA there. Query whether the judge will be as welcoming. Will anyone care that the NRA has virtually zero pre-existing connection to the state whatsoever? Probably not. 🤷‍♀️
Indeed the action remained in Texas.
But:
Then there’s the issue of “good faith.”
Here’s where the press release is particularly fascinating. In the same breath, the NRA says it is “dumping New York,” “there will be no immediate changes to the NRA’s operations or workforce,” “[t]he move [to Texas] comes at a time when the NRA is in its strongest financial condition in years,” and there’ll be “a plan that provides for payment in full of all valid creditors’ claims” with the organization “uphold[ing] commitments to employees, vendors, members, and other community stakeholders.” Soooooo, the bankruptcy is foooooor what exactly? Oh, right. Dumping New York. They told us that. The NRA might as well blast in flashy neon lights that it’s operating in bad faith, filing solely to circumvent a governmental authority’s power. Will it matter? Probably not. (emphasis in original)
But it did!! We were too cynical for our own good.
Yesterday in an “Order Granting Motions to Dismiss,” Judge Hale noted that “…it has become apparent that the NRA was suffering from inadequate governance and internal controls.” This goes to the heart of the NY AG’s effort to enforce the law against the NRA and its leadership! And if successful, the end result (and stated goal) of the NY AG’s efforts would be the dissolution of the NRA. And so the Court underscored:
The question the Court is faced with is whether the existential threat facing the NRA is the type of threat that the Bankruptcy Code is meant to protect against. The Court believes it is not. For the reasons stated herein, the Court finds there is cause to dismiss this bankruptcy case as not having been filed in good faith both because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme. The Court further finds the appointment of a trustee or examiner would, at this time, not be in the best interests of creditors and the estate.
đź’ĄBOOM!đź’Ą
The NRA apparently offered testimony that was all over the place. They offered a variety of reasons for the bankruptcy filing — from (a) controlling the cost of ongoing litigation (not just the NY AG action) to (b) dealing with banking and insurance issues to (c) effectuating a move from Texas to New York to (d) streamlining operations with the benefit of the bankruptcy “breathing spell.” Judge Hale didn’t bite. Why not? So what were the reasons the Court relied upon?
First, it appears that Mr. LaPierre unilaterally decided to file for bankruptcy without the knowledge of the rest of management or the board of directors. Second, testifying witnesses were in consensus that “the NRA is in its strongest financial condition in years and intends to pay creditors all allowed claims in full.” The NRA’s former CFO and current acting CFO testified that the NRA is capitalized enough to fund all litigation. Moreover, the NRA’s general counsel apparently failed to establish that there was any immediate threat of dissolution or other litigation which might reasonably place a financial strain on the company. There was also no near-term existential threat: Mr. LaPierre testified that the NRA had not been put on notice that the NY AG intended to seek a receiver. All of which, in the aggregate, indicated that there was no imminent financial distress and only speculative near-term legal risk that my impact the financials. Here’s some testimony taken from the Order:
That’s pretty damn clear. And so the Judge concluded:
The evidence does not support a finding that the purpose of the NRA’s bankruptcy filing was to reduce operating costs, to address burdensome executory contracts and unexpired leases, to modernize the NRA’s charter and organization structure, or to obtain a breathing spell. While some of these could be added benefits of going through a bankruptcy process, they do not appear to have been significant considerations for the NRA.
Rather:
Based on the statements of counsel and the evidence in the record, the Court finds that the primary purpose of the bankruptcy filing was to avoid potential dissolution in the NYAG Enforcement Action.
So then, thanks to late 20th century case law that stands for the proposition that “a Chapter 11 petition is not filed in good faith unless it serves a valid bankruptcy purpose,” Judge Hale had to consider whether there was such a valid bankruptcy purpose, keeping in mind whether “the petition [was] filed merely to obtain a tactical litigation advantage.” Thanks to Mr. LaPierre, it wasn’t hard to conclude that it was.
Interestingly, Judge Hale highlights the high burden the NY AG must fulfill to achieve the dissolution of the NRA. A successful pursuit by the NY AG is no fait accompli (though this filing may have actually made the case easier!). The court noted:
A dissolution that requires this showing is not the type of dissolution that the Bankruptcy Code is meant to protect against. The Court is not in any way saying it believes the NYAG can or cannot make the required showing to obtain dissolution of the NRA, but the Court is saying that the Bankruptcy Code does not provide sanctuary from this kind of a threat.
And continued:
For this reason, the Court believes the NRA’s purpose in filing bankruptcy is less like a traditional bankruptcy case in which a debtor is faced with financial difficulties or a judgment that it cannot satisfy and more like cases in which courts have found bankruptcy was filed to gain an unfair advantage in litigation or to avoid a regulatory scheme. The purpose of this bankruptcy filing may not have been to end the NYAG Enforcement Action immediately, but it was to deprive the NYAG of the remedy of dissolution, which is a distinct litigation advantage. This differs materially from the prescribed parallel proceedings structure for regulatory actions where regulators can obtain monetary judgments in one forum and then are required to have any claims treated through a bankruptcy process in that it is the NRA’s goal to avoid dissolution and subvert the remedy provided for under New York law entirely through this Chapter 11 case. The Court does not know what specific mechanism the NRA plans to use, but its intention is clearly to “take dissolution off the table.”
The NY AG wasted no time taking a victory lap:
Big picture? Lots of people have been messing with the bankruptcy process lately, doing all kinds of f*cking stupid stuff.
The “process” is finally fighting back.