The National Rifle Association of America (NRA) this morning embarked on its much-anticipated hearing on dismissal of its Chapter 11 case, or alternatively, appointment of a Chapter 11 trustee to replace existing NRA management, with opening arguments from counsel representing New York Attorney General Letitia James and Ackerman McQueen, the NRA’s largest creditor, about allegations of fraud and gross mismanagement.
The trial is expected to last six days, followed about a week later by a ruling from Judge Harlin Hale of the US Bankruptcy Court for the Northern District of Texas. New York Attorney General Letitia James, along with the District of Columbia’s attorney general and Ackerman, have called for the bankruptcy case to be dismissed or taken over by a Chapter 11 trustee, arguing that the bankruptcy filing was a bad-faith attempt to avoid legitimate regulatory oversight. Following arguments in support of dismissal this morning, the debtors will provide oral arguments against the relief this afternoon.
The NRA has argued that it properly sought the court’s protection to reorganize in a friendlier state – Texas, rather than New York – and continue as a going concern while paying its creditors. It further argued that the dismissal movants are asking the court to pre-judge the potential plan and decide the company cannot reorganize. They also accuse the movants of trying to destroy the NRA, rather than resolve disputes like typical interested parties in Chapter 11. Recently, 16 states filed a statement in support of the debtors, saying that James’ attempt to dismiss the case is “a politically motivated assault on free speech.” Those states are Arkansas, Alabama, Alaska, Georgia, Idaho, Kentucky, Louisiana, Mississippi, Missouri, Montana, Ohio, Oklahoma, South Carolina, South Dakota, Utah, and West Virginia.
At the outset of today’s hearing, Brian Mason of Dorsey Whitney gave an opening argument on behalf of Ackerman McQueen. He asserted that the case should be dismissed because NRA leaders didn’t file it in good faith. The organization’s financial condition had nothing to do with filing for bankruptcy, he said, as it is financially healthy and is just trying to escape New York’s oversight, including a pending dissolution lawsuit James filed in August 2020.
Mason said the Bankruptcy Code provides a process for debtors with “clean hands” to use for a good faith purpose, but it doesn’t allow solvent companies to manipulate the code for an “illicit” purpose.
Further, Mason said, the debtors formed an entity with no assets or operations (debtor Sea Girt LLC) before bankruptcy to manufacture jurisdiction to file for Chapter 11 in Texas rather than New York. He said testimony during the trial will provide evidence on how the NRA’s board has been defrauded, and how Executive Vice President Wayne LaPierre misled the board about the reason for the Chapter 11 filing.
The parties requesting dismissal of the case have alleged that LaPierre obtained authority to file for bankruptcy illicitly, sneaking it into an employment agreement before the board. Mason said LaPierre’s plan was always to “beg forgiveness” from the board instead of asking for permission.
Prior to today’s hearing, the parties conducted depositions, and Mason said when LaPierre was asked why he didn’t go to the board directly for approval of the bankruptcy filing, he testified that he was only concerned about one thing – getting out of New York before the NRA could be put into a receivership.
Mason argued that NRA leadership is asking the court to simply ignore New York law and shouldn’t be allowed to prevail in this type of “abusive scheme” against the bankruptcy process.
While Mason said Ackerman believes dismissal of the case is the best option, the court should appoint a Chapter 11 trustee if the judge doesn’t dismiss. He said Ackerman doesn’t request this lightly, but the debtors’ management has been relegated to “fraud, dishonesty, incompetence and gross mismanagement.”
And if the NRA is in compliance with New York law, Mason asked, “then why it is running?” If the organization’s “ducks are in a row,” he added, it shouldn’t fear a Chapter 11 trustee. But the trustee is necessary if the case isn’t dismissed because “business as usual “at LaPierre’s NRA is that “if he is no longer king of the castle, than the castle is coming down.”
New York Assistant AG Monica Connell gave arguments on behalf of James. She said LaPierre filed for bankruptcy in a way that “smacks” of bad faith and made that choice to evade regulation and gain a tactical advantage in the New York litigation against the NRA.
Before the petition date, Connell said LaPierre disregarded his fiduciary obligations to the NRA, accepted gifts from vendors for his benefit, allowed lucrative deals for insiders, and took money donated to the NRA to benefit himself and insiders.
LaPierre, a man facing charges that he looted the NRA along with other insiders, took it upon himself to obtain approval to file bankruptcy by deceit, Connell said. She asserted that he did not have the authority to file for bankruptcy under his employment agreement.
Connell said the NRA is almost three months into bankruptcy and the organization hasn’t shown how it can leave New York with its assets without violating New York law. By filing in Texas, she said the NRA is “forum shopping” and has no viable plan, which in itself is evidence of bad faith.
“The NRA has trotted out a boogeyman” that the NRA’s creditors would be left without recourse if there is dissolution as requested by James in the New York litigation, Connell said, but this is a “red herring.” If the court in New York finds evidence that meets the high standard for dissolution, it must follow a process similar to bankruptcy and first pay out creditors, then disperse the remaining assets to charities with a similar mission to the NRA, Connell said.
If this 150-year organization with five million dues paying members can’t survive without LaPierre, she said, or with a Chapter 11 trustee overseeing the case, that is evidence of poor leadership and mismanagement.
In addition to the dismissal requests, board member Phillip Journey, a Kansas family court judge, has also accused NRA management of misleading its board about the bankruptcy filing and wants an examiner to be appointed to review the case. Jermaine Watson of Bond Ellis, representing Journey, said today that he also represents other board members and a former board member, and they also recently filed a motion to appoint a committee of NRA members.
Watson said Journey filed the examiner motion because he is “terribly concerned” about the status of the NRA. He said the NRA’s existence is being challenged by James and other parties. While they raise important issues that need to be investigated, this isn’t the time to dismantle the NRA, he said. Watson said there are corporate governance issues, which along with transparency, must be improved, but that can be achieved with the help of an examiner.
The NRA filed for Chapter 11 protection in January, reporting approximately USD 203m in assets and USD 153m in liabilities. The organization said it intends to restructure as a Texas non-profit organization in order to leave what it calls a “hostile” regulatory environment in New York. The organization also intends to file a plan that would pay all creditors in full.