Federal Judge Rejects NRA Bankruptcy Filing

The National Rifle Association (NRA) has made progress to correct past and present misconduct but a bankruptcy court judge stopped short of appointing a trustee because it can pay its creditors and continue to improve governance and internal controls.

In a 38-page ruling handed down in U.S Bankruptcy Court’s Northern District of Texas, Dallas Division, Judge Harlan Hale said the NRA did not file for bankruptcy in good faith, describing its process of deciding to file for bankruptcy as “nothing less than shocking,” and some conduct that still raises concerns is ongoing.

The NRA filed for Chapter 11 bankruptcy in January in a bid to circumvent litigation brought by New York Attorney General Letitia James last summer.

“It’s not clear that they have a lot of options left to them,” said Matthew Bruckner, an associate professor at Howard University School of Law. It seems that the NRA will be left to fight it out in the New York courts with the attorney general although the judge didn’t prevent them from refiling. If it seems like they’re going to lose the New York litigation, he said the organization may refine their bankruptcy and accept the appointment of a trustee. “At this point though, the main takeaway is that the Hail Mary to dislodge the New York court from deciding their future has failed and the New York courts will decide their fate in due course,” he said.

Should the NRA file a new bankruptcy case, the judge wrote that court would “immediately take up some of its concerns about disclosure, transparency, secrecy, conflicts of interest of officers and litigation counsel, and the unusual involvement of litigation counsel in the affairs of the NRA, which could cause the appointment of a trustee out of a concern that the NRA could not fulfill the fiduciary duty required.”

The judge stopped short of appointing a trustee, writing that it would not be in the best interests of creditors and the state. “The question the Court is faced with is whether the existential threat facing the NRA is the type of threat that the Bankruptcy Code is meant to protect against,” Hale wrote. “The Court believes it is not.”

But Hale still had myriad concerns about the NRA’s machinations. “There are several aspects of this case that still trouble the Court, including the manner and secrecy in which authority to file the case was obtained in the first place, the related lack of express disclosure of the intended Chapter 11 case to the board of directors and most of the elected officers, the ability of the debtor to pay its debts, and the primary legal problem of the debtor being a state regulatory action.

“What concerns the Court most though is the surreptitious manner in which Mr. LaPierre obtained and exercised authority to file bankruptcy for the NRA,” Hale wrote. He was referencing NRA Executive Vice President Wayne LaPierre. “Excluding so many people from the process of deciding to file for bankruptcy, including the vast majority of the board of directors, the chief financial officer, and the general counsel, is nothing less than shocking.”

Ohio State University accounting professor Brian Mittendorf has examined the NRA’s finances for years. “Don’t interpret the ruling as saying they have no financial problems (they definitely do). But, their financial problems are a slow burn; the ruling is simply that an emergency remedy for them is not warranted,” he said via Twitter after yesterday’s ruling.

The Fairfax, Va.-based NRA said it will continue to explore moving its operations to Texas. In a statement, the organization’s leaders said they remain determined to “further streamline its legal and business affairs in the best interests of its constituents and members.” NRA President Carolyn Meadows said the record reflects that the organization “undertook a ‘course correction’ with respect to its management.”

In a statement, James said her office will continue to pursue enforcement action against the NRA, in addition to seeking a number of other forms of relief she requested when initially filing suit last summer. “This trial underscored that the NRA’s fraud and abuse continued long after we filed our lawsuit,” James said in a statement after the ruling. “Without a doubt, the board was deceived when the bankruptcy language was hidden in Mr. LaPierre’s contract earlier this year. Today’s order reaffirms that the NRA does not get to dictate if and where it will answer for its actions.”