## Facts

- A New York not-for-profit corporation and its affiliate filed voluntary Chapter 11 petitions in the Northern District of Texas.
- New York’s attorney general had filed a state enforcement action seeking dissolution of the corporation after an investigation alleging widespread misuse of assets, governance failures, and persistently unlawful conduct by leadership.
- The debtors asserted Chapter 11 was needed to preserve the organization as a going concern, address obligations, and permit reorganization and reincorporation in Texas.
- The attorney general and other parties moved to dismiss under 11 U.S.C. § 1112(b), arguing the filing was a bad-faith tactic aimed at gaining advantage in the New York dissolution proceeding rather than addressing financial distress.
- The debtors sought, as alternative relief to dismissal, appointment of an examiner or trustee; the unsecured creditors’ committee likewise supported dismissal and requested a trustee or examiner only if the case proceeded.
- The court found conflicting testimony and inconsistencies concerning the reasons for filing and concluded the dominant motive was avoiding the threatened dissolution and state oversight.

## Issues

1. Whether the Chapter 11 petitions lacked good faith and therefore constituted “cause” for dismissal under 11 U.S.C. § 1112(b).
2. Whether Chapter 11 may be used to impede or evade a state attorney general’s regulatory dissolution/charity-oversight action, as opposed to managing ordinary money-judgment litigation.
3. If dismissal were denied, whether appointment of an examiner or Chapter 11 trustee was warranted based on governance concerns and alleged misconduct.

## Decision

- The court granted the motions to dismiss the Chapter 11 cases for cause under § 1112(b).
- The court held the petitions were filed in bad faith because they did not serve a valid bankruptcy purpose and instead sought an improper litigation/regulatory advantage.
- The court denied requests to appoint a trustee or examiner, treating such relief as extraordinary and unnecessary in light of dismissal.

## Legal Principles

- Under § 1112(b), a Chapter 11 case may be dismissed “for cause,” and in the Fifth Circuit lack of good faith in filing can constitute cause.
- A Chapter 11 petition is not filed in good faith unless it serves a valid bankruptcy purpose (e.g., addressing financial distress through reorganization), not merely obtaining leverage in non-bankruptcy disputes.
- Bankruptcy courts may distinguish between cases filed to manage existential financial exposure from money judgments and cases filed primarily to interfere with a state’s sovereign regulatory enforcement, including dissolution proceedings for not-for-profit entities.
- Appointment of a trustee or examiner is an extraordinary remedy and is generally disfavored where the case will be dismissed rather than administered.

## Conclusion

The bankruptcy court dismissed the Chapter 11 cases after finding the filings were a bad-faith attempt to avoid a pending state regulatory dissolution action rather than a bona fide effort to reorganize in response to financial distress, and it declined to appoint a trustee or examiner once dismissal was ordered.


In re National Rifle Ass'n of Am., 628 B.R. 262 (Bankr. N.D. Tex. 2021)