Court May Dismiss a Chapter 11 Case Filed in Bad Faith

By: Nicholas Wogan

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


            In In Re National Rifle Association of America, the United States Bankruptcy Court of the Northern District of Texas granted motions to dismiss a case filed under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) finding that the filing was motivated by an attempt to avoid certain regulations and was therefore filed in bad faith.[1]  Facing litigation by, among others, the Attorney General for the State of New York, the National Rifle Association and an affiliate filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code  in Texas.[2] After the NRA’s bankruptcy filing, the New York Attorney General, among others, filed motions to dismiss the NRA’s bankruptcy filing, arguing that it was filed in bad faith.[3]  In particular, the New York Attorney General argued that the NRA filed for bankruptcy in Texas to avoid New York state regulation.[4] The NRA argued that bankruptcy was necessary to consolidate litigation filed against it and to facilitate a reorganization plan that could pay its creditors and allow the NRA to exit Chapter 11 as a Texas non-profit.[5]

            Under Section 1112(b) of the Bankruptcy Code there is a non-exclusive list of what constitutes cause for dismissal of a Bankruptcy case.  The United States Court of Appeals for the Fifth Circuit has held that debtor’s lack of good faith in filing is sufficient cause to dismiss a case.[6] According to the Texas bankruptcy court  “a Chapter 11 petition is not filed in good faith unless it serves a valid Bankruptcy purpose.”[7] In its analysis, the court focused on testimony from NRA officials and found inconsistencies in the stated reasons for the Bankruptcy filing which indicated that the main reason for the filing was escaping the threat of dissolution by the NYAG rather than dissolution through an inability to pay debts.[8]

            Here, the court dismissed the NRA’s Chapter 11 filing.[9] In doing so, the court established that courts should give deference to state regulators and make a distinction between “a lawsuit in which . . . a money judgment . . . would pose an existential threat to a debtor and one where the attorney general of a state is specifically seeking dissolution of a debtor under the state’s laws.”[10] The court’s holding corresponds with other Bankruptcy court decisions that hold that a Bankruptcy filing made to gain an advantage in litigation is made in bad faith.[11] The Court also decided not to appoint an examiner or trustee, finding that such an appointment is an “extraordinary remedy.”[12]

[1] See In re Nat'l Rifle Ass'n of Am., 628 B.R. 262, 286 (Bankr. N.D. Tex. 2021).  

[2] See id. at 268.

[3] See id. at 269.

[4] See id. at 272.

[5] See id. at 271.

[6] See id. at 270.

[7] See In re Nat’l R Rifle Ass'n of Am., 628 B.R. at 270-71 (citing Off. Comm. of Unsecured Creditors v. Nucor Corp. (In re SGL Carbon Corp.), 200 F.3d 154, 165 (3d Cir. 1999)).

[8] See id. at 278.

[9] See id. at 286.

[10] Id. at 280.

[11] See id. at 281. See also In re Antelope Techs., Inc., 431 F. App'x 272 (5th Cir. 2011).

[12] See id. at 283.