The Bankruptcy Court for the Northern District of Texas dismissed the National Rifle Association’s (“NRA”) bankruptcy case on May 11, finding that the case was not filed in good faith. In his opinion, Judge Harlin Hale found that there was cause for dismissal because the case was filed “to gain unfair litigation advantage and … to avoid a state regulatory scheme,” neither of which he considered to be a purpose intended or sanctioned by the Bankruptcy Code.
The dismissal order comes against the backdrop of a lawsuit brought by New York attorney general Letitia James in 2020, which sought to dissolve the NRA for its leadership’s diversion of millions of dollars away from the group’s mission for personal expenses and other questionable costs. In public statements made around the time of its bankruptcy filing, the NRA indicated that it was filing bankruptcy in order to escape what it described as New York’s “corrupt political and regulatory environment.” Seizing on those statements, the New York attorney general’s office sought dismissal of the NRA’s bankruptcy case arguing that it had been filed in bad faith grounds.
Following a 12-day hearing, Judge Hale found that the primary purpose of the NRA’s bankruptcy filing was in fact to avoid potential dissolution in connection with the New York attorney general’s action. After reviewing “several—and at times slightly different—reasons” that the NRA put forward for why it filed the case, the court found that the financial reasons put forth by the NRA did not actually motivate the filing, and neither did the purported need to “streamline litigation” or reincorporate in Texas.
Finding instead that the true purpose for the NRA’s filing was to “avoid dissolution that is being sought in a state regulatory action,” Judge Hale concluded that such a purpose was not a good faith reason to file. In particular, the judge noted that the NRA filed for bankruptcy in order “to deprive the [New York attorney general] of the remedy of dissolution,” which would be “a distinct litigation advantage.” Such tactics were problematic because they sought to deprive the state of New York of its regulatory enforcement powers over New York-chartered not-for-profit corporations. Based on the totality of circumstances, the court found that the NRA is “a solvent and growing organization” and that using “bankruptcy as a tool to win its dissolution lawsuit” was “not an appropriate use of bankruptcy.”
The case was dismissed without prejudice, but Judge Hale cautioned that the court’s concerns over the leadership’s fiduciary duties would be immediately taken up and might warrant appointing a chapter 11 trustee if the NRA were to file for bankruptcy again.