Last Friday, the National Rifle Association announced its plans to file for Chapter 11 bankruptcy protection and reincorporate in Texas. Laypeople, myself included, looked with some degree of skepticism on the plan. While I am not a lawyer, a law professor at Georgetown University has written a story outlining a long list of daunting hurdles the NRA now faces.
Adam Levitin wrote a mini-dissertation at Credit Slips Blog outlining the obstacles to Wayne LaPierre and crew pulling off their grand strategy. Here are the opening paragraphs from Professor Adam Levitin at Credit Slips:
The National Rifle Association filed for bankruptcy in the Northern District of Texas (Dallas). The NRA’s press release says that the purpose of the bankruptcy is to enable the NRA to change from being a New York corporation to a Texas corporation. This is critical to the NRA because the NY Attorney General, who regulates NY non-profits, is seeking to have the NRA dissolved for financial malfeasance. Notably, the NRA states that it “will propose a plan that provides for payment in full of all valid creditors’ claims. The Association expects to uphold commitments to employees, vendors, members, and other community stakeholders.” In other words, the NRA’s petition is not driven by financial exigencies, but to avoid the reach of the New York Attorney General. As the press release boasts, the NRA is “dumping New York.”
This is going to be one heck of an interesting case. There are already so many glaring issues (or should I say “targets”?): venue, good faith filing, disclosures, the automatic stay the trustee question, fiduciary duties to pursue claims against insiders, executory employment contracts, the fate of Wayne LaPierre, and the generally overlooked governance provisions of the Bankruptcy Code. I’ll take quick aim at these all below.
Any one of these areas could easily derail the NRA’s plans as outlined at their NRAForward.org website. Read the whole thing for a more complete picture.
The nation’s oldest civil rights org isn’t the only one with liabilities and difficulties to surmount under this plan. The NRA’s very persistent leader Wayne LaPierre has a basket full of his own liabilities, too. Here are a couple of issues affecting LaPierre’s continued well-compensated employment…or any employment in the world of non-profits.
Executory contracts. The NRA will have to decide whether to assume or reject any on-going (“executory”) contracts, and court approval is required either way. That means, among other things, submitting those contracts to the court. Among those executory contracts is Mr. LaPierre’s employment contract, which the NY AG alleges includes a “a secret “poison pill contract,” his employment even after removal and ensuring NRA income for life“. It’s hard to see how the court can approve assumption of such a contract. If it’s rejected, remember that the Bankruptcy Code caps employment termination claims at one year of salary and there’s still a duty of mitigation.
The fate of Wayne LaPierre. Putting aside Mr. LaPierre’s employment contract, he’s got another problem. The NY AG suit isn’t just against the NRA. It’s also against Mr. LaPierre and some of his lieutenants. LaPierre and his lieutenants have not filed for bankruptcy, and even if the NRA is able to convert to a Texas corporation, the NYAG’s suit against Mr. LaPierre can still proceed. The NYAG is seeking restitution from LaPierre as well as a bar from his ever soliciting funds for a nonprofit in NY (not just for a NY nonprofit). Moreover, if NY is successful, it might well create problems for LaPierre serving as an officer of a nonprofit in another state. All of which is to say that the NRA fleeing to Texas doesn’t address Mr. LaPierre’s problems.
No doubt the NRA hopes to have things more or less completed prior to this year’s fall meeting and convention in September. It will be held in Houston at the George Brown Convention Center. The organization gains a huge amount of funding at the annual meetings and convention.
However, reading Professor Levitin’s piece should make all of us wonder if this move by the NRA may be doomed from the start.