The NRA tried to run away from the legal consequences of its actions. It didn’t work.
A federal judge has dismissed the National Rifle Association’s bankruptcy case on May 11, 2021. This is bad news for the NRA, who hoped that the judge would allow them to leave the state of New York and flee to Texas to avoid facing legal consequences. This is a victory for New York Attorney General Leticia James, who can now pursue the state’s enforcement action against the NRA.
Judge Harlin Hale, a United States Bankruptcy Judge in the United States Bankruptcy Court Northern District of Texas Dallas Division, wrote the decision on the case. CNBC provided a quote from the judge:
The Court believes the NRA’s purpose in filing bankruptcy is less like a traditional bankruptcy case in which a debtor is faced with financial difficulties or a judgement that it cannot satisfy and more like cases in which courts have found bankruptcy was filed to gain an unfair advantage in litigation or to avoid a regulatory scheme.
A Little Background
In February of 2020, The New York State Department of Financial Services (DFS) charged that the NRA acted as an unlicensed insurance producer and deceived its members with misleading marketing practices. DFS sought civil monetary injunctive relief.
DFS also alleged that the NRA’s Carry Guard program “was primarily offered to firearms owners, in particular those with concealed carry permits, to provide insurance coverage that is unlawful in New York State. Carry Guard offered coverage for losses and costs associated with the aftermath of the purposeful use of a firearm, including defense costs in a criminal prosecution. Under New York law, such intentional acts cannot be insured.”
On April 3, 2020, Bloomberg reported that the NRA sued New York State Governor Cuomo for closing gun shops during the coronavirus pandemic. On April 14, 2021, Bloomberg reported that a federal judge threw out a National Rifle Association lawsuit against New York Governor Andrew Cuomo for refusing to label gun shops as essential businesses allowed to stay open during the coronavirus lockdown he ordered in March.
On August 6, 2020, New York Attorney General Letitia James filed a lawsuit against the National Rifle Association (NRA). The lawsuit was about the inappropriate uses of money the NRA received as donations.
In short, the NRA registered as a 501(c)(4) not-for-profit charitable organization. The lawsuit alleged mismanagement led to the waste and loss of millions of assets and contributed to the NRA reaching a deteriorated financial state.
The lawsuit also alleged that the NRA’s board’s audit committee was negligent in its duty to ensure appropriate, competent and judicious stewardship of assets by the NRA leadership. Part of the lawsuit alleged that four men “overrode and evaded internal controls to allow themselves, favored board members, employees, and vendors to benefit through reimbursed expenses, related to party transactions, excess compensation, side deals, and waste of charitable assets without regard to the NRA’s best interests.”
The four men named in the lawsuit were: Executive Vice-President Wayne LaPierre, Former Treasurer and Chief Financial Officer Wilson “Woody” Phillips, Former Chief of Staff and Executive Director of General Operations Joshua Powell, and Corporate Secretary and General Counsel John Frazer. The NRA’s Public Relations and Advertising Firm Ackerman McQueen was also named.
New York Attorney General Letitia James sought to dissolve the NRA and asked the court to order LaPierre, Phillips, Powell, and Frazer to make full restitution for funds they unlawfully profited and salaries earned while employees; recover illegal and unauthorized payments from the four individuals, and remove LaPierre from the NRA’s leadership. In addition, Attorney General Letitia James wanted the court “to ensure that the four defendants can never again serve on the board of a charity in New York.”
Also on August 6, 2020, Fox News reported that (then) President Trump called Attorney General Letitia James’s lawsuit against the NRA “a very terrible thing.” Fox News reported this quote from (then) President Trump: “I think the NRA should move to Texas and lead a very good and beautiful life. And I’ve told them that for a long time. I think they should move to Texas – Texas would be a great state or to another state of their choosing – but I would say that Texas would be a great place and an appropriate place for the NRA.”
On August 14, 2020, Bloomberg reported that U.S. District Judge Mae D’Agostino in Albany, New York, ruled that the NRA did not have legal standing to sue on behalf of its members. The judge also denied the NRA’s request to once again amend its complaint to try to show it had been injured by Cuomo’s actions because it had to answer phone calls about the closure of gun shops in the state.
On November 18, 2020, DFS Superintendent of Financial Services Linda A. Lacewell announced that the New York State Department of Financial Services had entered into a consent order with the NRA. The NRA’s case was resolved by a consent order that included a monetary penalty of $2.5 million for violations of New York Laws.
In addition, the NRA was banned from marketing insurance in the state of New York or receiving compensation in connection with any newly issued New York insurance policies for five years – irrespective of if the NRA obtains a license. DFS Superintendent Linda A. Lacewell noted that this brought to a close a three year investigation.
On November 25, 2020, The Wall Street Journal reported that the NRA disclosed that current and former top executives received at least $1.4 million in improper or excessive benefits from the organization in violation of its nonprofit rules, the first time the group has publicly admitted the lapses.
The Wall Street Journal also reported: “…Wayne LaPierre, the NRA’s chief executive, repaid the NRA $300,000 related to travel expenses from 2015 to 2019 that the nonprofit group originally paid for him but now has determined to be an ‘excess benefit” under tax rules, according to the filing.” Mr. LaPierre is estimated to owe a special excise tax of about $75,000 on the extra income, the NRA said.
On December 22, 2020, The Hill (and other news sites) reported that a coalition of 16 Republican attorneys general were backing the NRA in its legal challenge against New York Attorney General Letitia James. The group of attorneys general was led by Arkansas Attorney General Leslie Rutledge. He filed an amicus brief supporting the NRA in the District Court for the Northern District of New York. Republican attorneys general from Alaska, Georgia, Ohio, South Carolina, South Dakota, Texas, Utah, and West Virginia joined the amicus brief.
The group of attorneys general also asked the court to dismiss New York Attorney General James’s lawsuit against the NRA.
On January 15, 2021, the Associated Press reported that the National Rifle Association announced that it had filed for bankruptcy protection and would seek to incorporate in Texas. The Associated Press also reported that the NRA filed for Chapter 11 bankruptcy in federal court in Dallas and said it planned to incorporate in Texas, where records show it formed a limited liability corporation, Sea Girt LLC, in November of 2020. Sea Girt LLC made a separate bankruptcy filing, listing a few assets and fewer than $100,000 in liabilities.
Also on January 15, 2021, the NRA posted a press release titled: “NRA Leaves New York To Reincorporate in Texas, Announces New Strategic Plan”. The NRA website has since taken down that press release. Some of it said:
“The National Rifle Association of America (“NRA”) today announced it will restructure the Association as a Texas nonprofit to exit what it believes is a corrupt political and regulatory environment in New York. The move will enable long-term, sustainable growth and ensure the NRA’s continued success as the nation’s leading advocate for constitutional freedom – free from the toxic political environment of New York.
“The NRA plan, which involves the protection of the bankruptcy court, has the Association dumping New York and organizing its legal and regulatory matters in an efficient forum. The move comes at a time when the NRA is in its strongest financial condition in years…”
In response, on January 15, 2021, New York Attorney General Letitia James posted a press release titled: “NRA’s Financial Status Finally Matches Moral Status: Bankrupt”. From the press release:
“New York Attorney General Letitia James today released the following statement after the National Rifle Association (NRA) declared it would seek bankruptcy protections in federal court, as well as to reincorporate its nonprofit status in the state of Texas:
“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.”
Key Points From Judge Harlin Hale’s Ruling
Judge Harlin Hale heard the National Rifle Association of America and Sea Girt LLC case in the United States Bankruptcy Court Northern Division of Texas Dallas Division on May 11, 2021. The NRA asked the judge to dismiss New York Attorney General James’s investigation against them. Here are some key parts of Judge Harlin Hale’s ruling:
ORDER GRANTING MOTIONS TO DISMISS
“The National Rifle Association of America (the “NRA”) is a 150-year-old organization with approximately five million members that is dedicated to the rights of Americans to own and safely use firearms for their personal protection and recreational use. The mission and function of the NRA is focused on gun safety, and the NRA asserts it is “the nations foremost defender” of the Second Amendment of the United States Constitution. In recent years, however, it has become apparent that the NRA was suffering from inadequate governance and internal controls.
“The attorney general for the state of New York conducted a fifteen-month-long investigation of the NRA that revealed, the New York attorney general claims, widespread misuse of assets by the NRA’s executive vice president and his circle of insiders for their personal benefit. Nine months ago, the New York attorney general filed a lawsuit seeking dissolution of the NRA based on allegations that (1) the NRA has exceeded the authority conferred upon it by New York law and has conducted its business in a persistently illegal manner and abused its powers contrary to the public policy of the state of New York by operating without effective oversight or control by its officers and directors, and (2) the directors or members in control of the NRA have looted or wasted the corporate assets, have perpetuated the corporation solely for their personal benefit, or have otherwise acted in an illegal, oppressive, or fraudulent manner.
“The NRA filed this case seeking the protection of the Bankruptcy Code to preserve itself as a going concern in the face of litigation that, it argues, poses an existential threat. Debtors commonly file bankruptcy when faced with a judgment that has, or will, render them insolvent, but the threat against the NRA differs from the classic scenario in that dissolution would not be a collateral effect of litigation but rather the intended relief sought in a state’s regulatory action. And in this instance, dissolution could only occur after judicial consideration of whether dissolution is in the best interest of the public.
“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. The Court believes it is not. For the reasons stated herein, the Court finds there is cause to dismiss this bankruptcy case as not having been filed in good faith both because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme. The Court further finds the appointment of a trustee or examiner would, at this time, not be in the best interests of creditors and the estate.”
The Court continues with a history of what happened that caused the NRA to, in short, file for bankruptcy. The judge then took the time to explain a little bit about how bankruptcy cases are supposed to work. I will briefly describe the key points from that here:
- Those who file for bankruptcy generally seek three forms of relief: dismissal of the bankruptcy case, the appointment of a Chapter 11 trustee, or the appointment of an examiner.
- The Court shall dismiss a bankruptcy case for cause unless the court determines that the appointment of a trustee or an examiner is in the best interests of creditors and the estate.
- The Fifth Circuit Court of Appeals has held that the term “cause” affords flexibility to the bankruptcy courts and can include a finding that the debtor’s filing for relief is not in good cause.
- If so, the burden of showing good faith shifts to the debtor.
- If the Court finds cause for dismissal, it must dismiss the case unless the court determines that the appointment of a trustee or an examiner is in the best interest of the creditors and the estate.
- At any time after the commencement of the case but before the confirmation of a plan, on request of a party in interest or the United States Trustee, and after notice and a hearing, the court shall order the appointment of a trustee (1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets of liabilities of the debtor…
The Court provided information about the NRA’s stated reasons for filing bankruptcy:
“…The evidence does not support a finding that the purpose of the NRA’s bankruptcy filing was to reduce operating costs, to address burdensome executory contracts and unexpired leases, to modernize the NRA’s charter and organization structure, or to obtain a breathing spell. While some of these could be added benefits of going through a bankruptcy process, they do not appear to have been significant considerations for the NRA.
“There was some evidence that the NRA wants to streamline litigation and control litigation costs, but this does not appear to have been the real purpose behind filing bankruptcy. Ms. Rowling testified that she believes the NRA is in bankruptcy because of potential litigation losses, but this concern did not appear to be shared by Mr. LaPierre or supported by other evidence. The testimony regarding the cost of litigation was that the NRA is currently able to afford to pay its legal fees and that there has not been an analysis of the cost of proceeding with litigation outside of bankruptcy versus the cost of bankruptcy and proceeding with the litigation in the bankruptcy case. Furthermore, Mr. LaPierre testified that but for the NYAG Enforcement Action, it would not have been necessary to file for bankruptcy.
“Whether the NRA’s desire to leave New York and reincorporate in Texas was a true reason for filing bankruptcy is a closer call, but the evidence weighs in favor of a finding that it was not the real purpose for filing for bankruptcy. Several witnesses testified that New York is a hostile environment for the NRA, but the testimony was that individuals within the organization had been interested in leaving New York and reincorporating in Texas for a long time. The choice to attempt to do so now – and to do so through a bankruptcy reorganization – appears to have been a means of achieving the more specific purpose of avoiding dissolution in the NYAG Enforcement Action…
“…In closing arguments at the conclusion of trial, there was a suggestion that part of the desire to move to Texas, and therefore part of the reason for filing bankruptcy, was due to the NRA having increasing difficulty with its relationships with financial institutions because of the NY DFS Letter. The specific evidence came from Mr Spray, who testified … that the NRA’s relationships with banks when Mr. Spray joined the NRA were tenuous and he had to find more enthusiastic banking support…. Mr. Spray also testified that it was becoming difficult to get insurance when he joined the NRA and that problem has only become worse…
“…Counsel for the NRA characterized this as an existential threat that the NRA was facing before the NYAG Enforcement Action was pending and a reason for filing bankruptcy to move to Texas. There are a few reasons why the Court is skeptical of this argument…
“…Though articulated slightly differently, the remaining reasons for filing bankruptcy, such as preserving the NRA as a going concern, can be grouped under the general reason of avoiding dissolution in the NYAG Enforcement Action. Based on the statements of counsel and the evidence in the record, the Court finds that the primary purpose of the bankruptcy filing was to avoid potential dissolution in the NYAG Enforcement Action.”
CONCLUSION
“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. The Court agrees with the NYAG that the NRA is using the bankruptcy case to address to a regulatory enforcement problem, not a financial one.
“The Court finds that the NRA did not file the bankruptcy petition in good faith because this filing was not for a purpose intended or sanctioned by the Bankruptcy Code. Therefore, cause exists under 1112(b) to dismiss this case, which the Court finds is in the best interests of creditors and the estate.
“The Court is not dismissing this case with prejudice, but should the NRA file a new bankruptcy case, this 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 by the Bankruptcy Code for a debtor in possession.
IT IS THEREFORE ORDERED that the Motions to Dismiss are GRANTED and the above-captioned cases are dismissed without prejudice…
New York Attorney General Leticia James posted a press release on May 11, 2021, titled: “Attorney General James Wins Dismissal of NRA’s Fraudulent Bankruptcy, Fight for Dissolution to Continue in New York”. From the press release:
New York Attorney General Letitia James today scored a major victory in her case against the National Rifle Association (NRA) when a federal bankruptcy court in Texas rejected the organizations claims of bankruptcy after the NRA sought to reorganize in Texas, stating “that the NRA did not file the bankruptcy petition in good faith.” Despite its attempts to escape New York’s jurisdiction, Attorney General James will now continue to pursue her enforcement action against the NRA, in addition to seeking a number of other forms of relief she requested when initially filing her lawsuit last summer.
“Weeks of testimony have demonstrated that the NRA and Wayne LaPierre simply filed chapter 11 bankruptcy to avoid accountability,” said Attorney General James. “The trial underscored that the NRA’s fraud and abuse continued long after we filed our lawsuit. Without a doubt, the board was deceived when 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. The rot runs deep, which is why we will now refocus and continue on our case in New York court. No one is above the law, not even one of the most powerful lobbying organizations in the country.”…
CNBC reported: During a news conference after the ruling, James said she read transcripts of LaPierre’s testimony, which was “filled with contradictions.” She reiterated that she intends to see the NRA dissolved, which ultimately would be decided by a judge, not the attorney general. The discovery process in her lawsuit is ongoing, James said, and she expects a trial to happen sometime in 2022.
In short, the NRA attempted to deceive the Court about its real reasons for filing for bankruptcy. The Court saw right through it. New York Attorney General Letitia James is now able to continue her enforcement action against the NRA – and to dissolve it.
Judge Dismissed NRA Bankruptcy Case is a post written by Jen Thorpe on Book of Jen and is not allowed to be copied to other sites. If you enjoyed this blog post, please consider supporting me on Ko-Fi. Thank you!