The National Rifle Association’s (NRA) bankruptcy filing came five months after the New York Attorney General’s Office sued the gun-rights group seeking to dissolve the organization. The Fairfax,Va.-based NRA incorporated as a nonprofit in New York State in 1871 and said it plans to seek court approval to reincorporate in Texas.
The NRA and one of its subsidiaries filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division. “Chapter 11 proceedings are often utilized by businesses, nonprofits and organizations of all kinds to streamline legal and financial affairs,” the NRA said in a press release.
Despite the bankruptcy filing, the NRA says it is not “bankrupt” or “going out of business” and is actually “as financially strong as we have been in years.” The plan aims to “streamline cost and expenses, proceed with pending litigation in a coordinated and structured manner, and realize many financial and strategic advantages.”
The NRA has framed the move as “dumping” New York and its “toxic political environment” for a state that’s friendlier to its mission. Some 400,000 of its 5 million members are in Texas and the NRA plans its annual convention in Houston this year. A website, NRAforward.org, includes links to a press release, a letter from CEO and Executive Vice President Wayne LaPierre, Q&A, a letter to vendors and more about the bankruptcy filing.
The NRA said it is seeking court approval to reincorporate in Texas yet it also says it has no immediate plans to relocate. Instead, it plans to form a special committee to explore strategic options and determine if there are advantages to relocating the headquarters to another state. There will be no immediate changes to the NRA’s programming, operations or workforce, the organization said, and that it will propose a plan to provide for payment in full of all valid creditors’ claims and expects to “uphold commitments to employees, vendors, members and other stakeholders.”
The NRA is represented by Dallas-based Brewer law firm, which re-iterated many of the points and quotes posted on www.NRAforward.org
New York Attorney General Letitia James filed suit last summer seeking to bar four current and former executives, including LaPierre, from serving on the boards of any charity in the state, claiming they had failed to manage the NRA’s funds, contributing to a loss of $64 million over three years.
The NRA filed a countersuit, slamming the investigation as a partisan effort by the AG to weaponize “its regulatory and legal powers to harm a political adversary.” Transactions in question have been reviewed, vetted and approved, according to the NRA, and in furtherance of its mission to defend constitutional freedoms. Dissolution, they argued, is proper only where “a corporation is so subsumed by waste, misuse or fraud that it no longer fulfills a charitable purpose.”
The NRA portrays the investigation as politically motivated, with James promising to investigate after she was elected to office and filing suit ahead of the November national election. Also filing suit was Washington, D.C., Attorney General Karl Racine regarding loans between the NRA and its charitable arm, the NRA Foundation.
The NRA, a 501(c)(4) social welfare organization, reported total revenue of $352 million and net assets of $16 million in 2018, the most recent tax form available. The NRA Foundation, its separate 501(c)(3) charitable arm, reported $55 million in revenue and $131 million in net assets.
In response to the bankruptcy filing on Friday, James’ office issued a statement: “The NRA’s claimed financial status has finally met its moral status: bankrupt. While we review this filing, we will not allow the NRA to use this or any other tactic to evade accountability and my office’s oversight.”
Brian Mittendorf, senior associate dean for staff, human services and culture, and the Fisher Designated Professor Accounting at The Ohio State University’s Fisher School of Business, has been tracking NRA finances the past several years. “They certainly have had ongoing financial challenges but nothing suggesting that they were suddenly going to run out of cash,” he said. All signs from the NRA’s announcement indicate that it has little to do with restructuring debt but rather a legal strategy.
The largest unsecured creditor in the bankruptcy filing is Ackerman McQueen, an Oklahoma-based advertising and public relations firm that was paid more than $70 million in 2017 and 2018 for services and “out-of-pocket expenditures” that went to entertainment and travel allegedly incurred by NRA executives and associates.
The subsidiary that also filed bankruptcy was an entity called Sea Girt, LLC, created in November 2020 with the primary purpose of allowing the NRA to file for bankruptcy in Texas, according to Matthew Bruckner, an associate professor of law at Howard University School of Law, whose recent work focused on bankruptcy faced by institutions of higher education. Rules about where bankruptcy can be filed are very flexible and Sea Girt’s filing allows the NRA to tag along in the Texas bankruptcy, he said.
The AG has sought dissolution of the NRA in New York and while that dissolution is proceeding, any of its assets are subject to transfer restrictions, which is under the jurisdiction of New York. “Once the bankruptcy case is filed, wherever it’s filed, it falls into the jurisdiction of the federal bankruptcy court,” Bruckner said. “The NRA might suspect, and this is not unreasonable, that a Texas bankruptcy judge might be more willing to listen to the NRA’s arguments than a New York state judge would be,” he said.
The NRA “can’t just up and reincorporate in Texas,” Brian Galle, professor at the Georgetown Law Center in Washington, D.C., wrote via Twitter. “Its assets have to stay attached to the New York entity, so that the New York court, if it decides to do so, can take them and redistribute them to other charities,” he said, not necessarily in New York. Federal bankruptcy laws allow the bankruptcy trustee to decide how to satisfy judgements against the debtor, and to set aside most state law claims. This might allow the trustee to effectively second-guess a New York court’s choices about what to do with the NRA’s assets,” he wrote.
So NRA can’t just up and reincorporate in Texas. Its assets have to stay attached to the NY entity, so that the New York court, if it decides to do so, can take them and redistribute them to other (not necessarily NY) similar charities.
Enter federal bankruptcy law.
— Brian Galle (@BDGesq) January 15, 2021
There’s a good chance that the bankruptcy filing gets dismissed at the very beginning as improper, according to Anthony J. Casey, deputy dean and the Donald M. Ephraim Professor of Law who also is faculty director at The Center on Law and Finance at The University of Chicago Law School.
“A debtor cannot file for bankruptcy just because it wants to avoid a state law. That would be a bad faith filing,” he told The NonProfit Times via email. “So if the NRA filed just to avoid the New York law — and it does look like that is the case — that will be a problem. It needs some bankruptcy purpose — usually the debtor tells a story about a perfect storm of financial distress or the breakdown of negotiations among creditors. The NRA seems to claim the opposite — that they are financially doing great,” Casey said. “They are filing just to dump New York. So they have announced that they are using bankruptcy for an improper purpose — just to avoid this state law. That is a strange way to start. And it could end up with the case getting kicked out,” he said.
The NRA might still ask the court to stop the New York actions, according to Casey, but it is hard to see any valid bankruptcy purpose for that. The NRA is not trying to resolve a dispute among creditors and New York is not gaining an advantage over other creditors; the NRA is just trying to stop the attorney general from regulating the NRA’s behavior. “You could imagine a world where the NRA was already ordered to dissolve, and then creditors including New York would argue about who gets what because there was not enough to pay everyone in full,” he said. “That would be a bankruptcy issue. But that is not what is going on here.”
The filing introduces huge risks for the organization, in particular for its officers and directors, because the NRA will have to disclose all sorts of information about its financial affairs, according to Bruckner. If the financial statements confirm their position, he said the NRA will be open not just to the New York AG’s office but creditors and regulators, to ask for more information about their financial health and transfers. “People will be looking over the NRA’s financial records with a fine-tooth comb,” he said, to determine whether there were appropriate transfers.
“Turning to bankruptcy to halt those regulatory or civil litigation and debt collection lawsuits, that’s very common,” Bruckner said during a telephone interview Monday morning.
The automatic stay is a broad nationwide injunction to prevent certain creditor collection activity and is a very powerful power offered to debtors immediately upon filing for bankruptcy. Whether it’s a person trying to avoid eviction from their apartment or a hospital aiming to retain its license, it’s usually a temporary refuge for folks looking for relief from these sorts of actions, Bruckner said.
The automatic stay in bankruptcy law prevents creditors from taking actions against the debtor but there is an exception that says the government is not prevented from exercising its police or regulatory powers, according to Casey. “The way to think about ‘police or regulatory powers’ is that the state government can enforce its laws, but it cannot collect on past debts. That is, it is prevented from acting like a creditor. But it can still enforce regulation. It seems clear that the New York Attorney General is exercising regulatory power here: They say they are trying to protect people from the NRA’s fraud and abuse. So the automatic stay should not apply to New York’s actions.”
Generally, bankruptcy provides a set of tools to deal with financial distress, Bruckner said. If there are no financial issues at the NRA, he expects the case would be dismissed for not serving a legitimate bankruptcy purpose. “There’s at least a plausible argument that they’re having financial trouble. Maybe they’re not currently insolvent but heading toward it. Maybe there’s a disconnect between the public-facing P.R. operations and the reality of their finances, potentially.”