Saturday, January 16, 2021

NRA Filing Illustrates Venue Loophole for Chapter 11 Filers

The National Rifle Association likes guns. Texans like guns. Therefore, when the NRA decided to file bankruptcy, there was a certain logic to filing in Texas. Unfortunately, however, prior to November 24, 2020, the NRA had no legal right to file bankruptcy in Texas. This did not deter the gun rights advocates. They created one.

Let me explain how this works. Under the bankruptcy venue statute, 28 U.S.C. Sec. 1408(a), a debtor can file bankruptcy in its domicile, residence, principal place of business or where its principal assets in the United States were located during the preceding 180 days. The NRA did not meet any of these tests. It is incorporated in New York. Its principal place of business and presumably principal assets are located in Virginia. However Sec. 1408(b) offers a loophole. A company can file in a district where a bankruptcy by one of its affiliates is pending. An affiliate includes a company owned by the debtor.

Prior to November 24, 2020, the NRA could not have filed in Texas under affiliate venue either. So, on that day, less than sixty days before filing bankruptcy, the NRA created a Texas affiliate called Sea Girt, LLC. Sea Girt, LLC filed bankruptcy first and was assigned Case No. 21-30080. It did not list any creditors, which is not surprising for an entity created so recently. A few minutes later, the National Rifle Association filed its case and was assigned Case No. 21-30085.

This is a clear case of forum shopping. Indeed, a statement from the NRA said that it was trying to escape the "toxic political environment of New York." 

In an article in USA Today, Bankruptcy Prof. John Pottow speculated that the company might be attempting to obtain a judge who would be Second Amendment friendly. The judge assigned to the Sea Girt case is Harlan "Cooter" Hale. The judge assigned to the NRA case is Stacey Jernigan. The two cases will likely be consolidated under one of the judges. However, either judge is a straight shooter who may question whether the choice of venue was a misfire. 

I make no predictions about how the judge will deal with a politically charged debtor who is transparently attempting to manipulate the rules on venue. However, I do note the irony here. In 2001, Texas-based Enron filed bankruptcy in New York based on a filing by an obscure affiliate. Now the New York based NRA is attempting to do the same thing in Texas. 

Follow-up: NRA and Sea Girt have filed a motion for joint administration under Case No. 21-30085 which would leave Judge Jernigan as the presiding judge. 

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