DOJ Trustee Calls on Court to Dismiss NRA Bankruptcy Filing Or Appoint an Outside Monitor

The hearing into the bankruptcy filing by the National Rifle Association concluded yesterday. The NRA filed for Chapter 11 protection in January in a Texas Fifth Circuit court. Why would a New York-chartered organization that’s headquartered in Virginia file for reorganization in a Texas court? That’s a large part of the matter that Judge Harlin Hale will be ruling on as soon as next week.

When the NRA filed in January, it claimed in an announcement that it is “not insolvent” and even that the Association is “as financially strong as we have been in years.”

Why, then, file for bankruptcy protection? The NRA made no bones about that. They were trying to escape the lawsuits filed against the Association and some of its officers by New York Attorney General Letitia James. The New York AG, who called the NRA a terrorist organization, has been clear that her intent is to destroy the NRA.

From the NRA’s announcement . . .

We are leaving the state of an attorney general who, just a few months ago, vowed to put us out of business through an abuse of legal and regulatory power. …

Under this plan, we seek protection from New York officials who illegally abused and weaponized the powers they wield against the NRA and its members. You can be assured the Association will continue the fight to protect your interests in New York – and all forums where the NRA is unlawfully singled out for its Second Amendment advocacy.

In short, in LaPierre’s letter to members regarding the bankruptcy filing, he claimed both financial solvency and an intent to dodge the pending litigation. Did anyone in the NRA’s PR department run a draft past its (extremely well-paid) attorneys?

As Georgetown Law Professor Adam Levitin noted at the time . . .

Every circuit including the 5th) has a good faith filing doctrine. The doctrine in a nutshell is that if a bankruptcy case does not have a “valid reorganizational purpose,” it should be dismissed “for cause.” Attempting to evade liability in litigation is not a “valid reorganizational purpose,” and the NRA’s press release seemed to me a version of the press release in SGL Carbon, the leading 3rd Circuit good faith filing doctrine case. In SGL Carbon, the debtor foolishly said that it was filing for bankruptcy just to stiff a competitor that had an antitrust suit against it and assured its other creditors that they would be paid in full. That sounds an awful lot like “dumping New York” while saying that all valid claims will be paid in full. (My students might recall me cautioning them that a debtor’s attorneys should insist that they get to sign off on all press releases and communications related to the bankruptcy for just this reason…) Now, the NRA isn’t looking to avoid paying NY. Instead, it is looking to escape NY’s jurisdiction. But that seems a distinction without a difference. It isn’t hoping to use bankruptcy to reorganize its finances, but to get out of the lion cage.  

Because of the NRA’s own loose lips, not to mention questions surrounding the rationale for the venue where the case was filed, and using the case as part of its strategy to move its charter from New York to Texas, the case has all kinds of legitimate questions surrounding it. Read Levitin’s full write-up about those here.

The New York Attorney General, naturally, sought to have the case dismissed, hence the hearing that concluded yesterday, during which eye-popping spending, misappropriated funds and gross financial mismanagement were revealed under oath.

Then, however, in a rare move during closing arguments, the United States Trustee, part of the Department of Justice, called on the court to either dismiss the case entirely or appoint an outside monitor to oversee the NRA’s finances.

From the New York Times . . .

Lisa L. Lambert, a lawyer in the United States Trustee’s office, which is part of the Justice Department, said the “evidentiary record clearly and convincingly establishes” that Wayne LaPierre, the longtime N.R.A. chief executive, “has failed to provide the proper oversight.” For a number of years, she added, “the record is unrefuted that Wayne LaPierre’s personal expenses were made to look like business expenses.” …

Ms. Lambert, [cited] episodes of alleged corruption by Mr. LaPierre and other N.R.A. officials, a number of which were not disputed during the trial. She cited spending by the N.R.A. or its contractors on tailored Zegna suits for Mr. LaPierre, meals at a fancy Tuscan restaurant in Northern Virginia, and charter flights for him and his family, as well as a plan that was drawn up to buy a multimillion-dollar house for the use of Mr. LaPierre and his wife that was ultimately abandoned.

Regarding the charter flights, she said: “LaPierre says these are for security, but the evidence says he picked up family. The evidence says that extra stops were not to be noted in the booking records. And the testimony is unrefuted that no N.R.A. policy authorizes charter plane flights.”

Experts see this as a very bad sign for the NRA’s case.

Bankruptcy experts said the U.S. Trustee’s move was a rare one.

“The N.R.A. is in real trouble,” said Adam J. Levitin, a professor specializing in bankruptcy at Georgetown University. “The U.S. Trustee rarely gets involved in this sort of motion, much less urges dismissal, a trustee or an examiner. I cannot see an outcome where the N.R.A. comes out unscathed. I think the real issue is what remedy the judge grants.”

In other words, the NRA’s case — and possibly even its management — is in serious jeopardy here. One of the closing arguments yesterday was presented by a group of dissident NRA board members who favor the appointment of an examiner to perform a full independent audit of the Association. It’s hard to even imagine what that might turn up.

Whatever Judge Hale decides, it’s increasingly looking like it won’t be what LaPierre and the brain trust that helped him devise this Hail Mary strategy had it mind. And they’ll have no one to blame but themselves.