What does bad-faith mean in terms of bankruptcy?
The National Rifle Association (NRA), which has been incorporated in New York State since 1871, filed for bankruptcy with the plan to reorganize in the state of Texas.
Regardless of how you view the NRA or New York State, New York State Attorney General Letitia James investigated and charged the NRA with several crimes. Since the NRA was incorporated in New York, despite being currently headquartered in Virginia, the organization is bound by New York law. The NRA filed for Chapter 11 Bankruptcy protection in Texas.
Bankruptcy courts are units of federal district courts and have subject matter jurisdiction over all bankruptcy cases. Even though states have bankruptcy laws specific to their states, all bankruptcy cases are filed and heard in federal court.
The ability to recover from financial distress was so important to the founders of this country, bankruptcy was specifically discussed in the Constitution.
The Texas bankruptcy court dismissed the case saying that the NRA was solvent and was able to pay their bills and other debts. They found that the filing was meant to give the NRA a legal advantage and avoid prosecution by moving out of the legal reach of the New York Attorney General by recreating itself in Texas. The federal court found this an inappropriate and a “bad-faith” use of the federal bankruptcy code and dismissed the case “with cause.”
What is a bad-faith filing?
Bankruptcy is the legal process of gaining legal protections while working out a plan to pay off your debts or having debt discharged to allow a business or individual to gain a new start. When a bankruptcy is filed, the petitioner is required to disclose all their assets and liabilities. While certain assets may be protected, everything must be disclosed.
Hiding assets from the bankruptcy court to avoid having that asset sold off is an example of filing in bad faith.
Filing for bankruptcy in bad faith means that a person or entity uses the bankruptcy law in a manner other than is legally intended. If a filing is used specifically to delaying creditors, such as a bank selling a foreclosed house at auction, with the intention of dropping the case without seeing the bankruptcy through to its conclusion, it could be seen as a bad-faith filing as the petitioner took advantage of the automatic stay with no intention of seeing the bankruptcy through.
Other examples of bad-faith in bankruptcy can be a known pattern of filings and dismissals, taking out large loans with no intention of paying them back just before filing bankruptcy, or falsely representing your assets or other information on your bankruptcy forms to attempt to receive better terms than would otherwise be available.
When a decision is rendered, you will occasionally see additional terminology such as dismissed “with cause”.
The NRA bankruptcy case was dismissed “with cause.” This means that there was a specific reason why the case was dismissed, as opposed to a case being dismissed due to it coming to a logical conclusion. In this case, the “cause” was the finding of the case having been filed in bad-faith.
Bankruptcy is a powerful hand to play. Getting through a bankruptcy can be very difficult and extremely stressful for an individual or a family. When a business files for bankruptcy it could be the difference of continuing to do business or shutting down and potentially putting hundreds of people out of work and on the unemployment line.
While our legal system allows for a certain amount of maneuvering to try to gain a legal advantage, every move must be done within the framework of the law. For bankruptcy laws to work and be available for everyone when needed, it is essential that the laws be followed to the letter. When cases are filed in bad faith, it can cause creditors to lose more money than necessary, and it will cause calls for tighter restrictions making it harder for people to get a fresh start.