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NRA Bankruptcy: A Hot Mess of Uneccessary Activity

On Behalf of | Feb 10, 2021 | Bankruptcy, Business, Firm News, News

By: Laura Day DelCotto

So many unnecessary issues that make this Debtor in Possession look so bad. A great case study in how not to land in front of a bankruptcy judge.

First, how does an entity that is headquartered in Fairfax, VA and incorporated in New York “forum shop” to file chapter 11 in Texas? You know, that well known Texas subsidiary, Sea Girt LLC. Under the venue rules in bankruptcy, affiliate companies may properly file bankruptcy where any affiliate has filed. So, you file the “desired forum” entity case first, and then you may properly join other affiliate companies, from any other location.

Proceedings Heating Up in Bankruptcy Court

The National Rifle Association (NRA) apparently thought that this particular Texas Bankruptcy Court would be a friendly forum to its expressly stated goal of “dumping… a corrupt political and regulatory environment” otherwise known to the NRA as the New York Attorney General. Even if that is what you believe, do you really need to say that in your press release and your letter to members on your website?

So second, pissing off your governmental regulatory body is a bad idea, in all 50 states. The bankruptcy judge in the early stages of this case has already asked the parties to “ratchet things down” in their heated rhetoric.  Bankruptcy courts historically do not like heated rhetoric, although it certainly is and has been on the rise nationally.

Chapter 11 on the Rocks

Third, by making its very public statements of why it filed in Texas (to escape pending litigation in New York), the Debtor itself called into question whether the cases are a “good faith filing” which can be a threshold issue in any chapter 11 case. Rather than work on substantive goals of restructuring and building consensus, this Debtor painted a very easy target on its own back. And by the way, Sea Girt was only formed in November 2020. To state the obvious, this fact combined with other facts are leading in the wrong direction for staying in Texas or even in chapter 11 at all.

Fourth, pretty much everyone knows of the “automatic stay” in bankruptcy, a strong tool to stop collection and litigation-related activities. Less often discussed is the “police and regulatory power” exception to the stay, where governmental units enforcing their police and regulatory powers are not stayed. If the state goal was to escape, that is not working out so well, since the New York state court has already ruled that the bankruptcy filing didn’t stay the litigation.

Lastly (as of this writing), it is extremely unusual to see a board member file a motion to appoint an examiner, calling into question the corporate management. Most often, the board members and the corporate officers either have each other’s backs, or know too much about all the “D&O” problems to start publicly criticizing each other. NRA is a non-profit, so that makes it a bit different, but asking for an examiner is rare, and the Motion by one of the long-time Board Members is very telling.

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