This news report has been corrected*
The bankruptcy petition filed by the National Rifle Association in January was dismissed Tuesday afternoon by a federal bankruptcy judge who declared the controversial petition as having been filed “not in good faith.”
Judge Harlin D. Hale dismissed the case without prejudice citing the secrecy, lack of disclosure and the fact that he 150-year-old organization is financially solvent.
The court said it was not dismissing the case with prejudice, which might allow the organization to refile, but if they did so, he warned, “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.”
That inquiry, he noted, could cause him to appoint a trustee to guide the affairs of the organization “out of a concern that the NRA could not fulfill the fiduciary duty required by the Bankruptcy Code for a debtor in possession.
The controversial bankruptcy, filed Jan. 15, has been the subject of month-long proceedings in Judge Hale’s court, during which NRA officials admitted that the purpose of the filing was to remove the organization from regulation in New York, which it currently faces an investigation by the New York Attorney General’s Office.
Judge Hale’s decision is a decisive victory for NRA critics, especially New York AG Letitia James and one of its creditors, Ackerman McQueen. Ackerman’s four-decade relationship ended in an acrimonious and ongoing lawsuit.
The New York AG was represented in court by Gerrit Pronske of Spencer Fane. Ackerman — one of the most vigorous proponents for dismissal — was represented by Michael Gruber and Brian Mason of Dorsey & Whitney. The bankruptcy filing had triggered an automatic stay in the Ackerman litigation, which had been set for a September trial in Dallas federal court.
Mason, who delivered a key summation in support of the bankruptcy dismissal, said Tuesday’s ruling was a “clear win for Ackerman,” and that he and Gruber would be filing the necessary motions to get the September trial back on track.
“But this is a real black eye for the NRA,” Mason said. “This was tough.”
For more than a month, creditors and critics had been sparring in Judge Hale’s court over the issue of venue. The NRA insisted that the filing was strategic, part of a long-contemplated plan to take the organization to Texas, where he maintained its actions best resonate with its members.
“This [Texas] is not only the state with the most members; this is the state with the most firearms,” Las Vegas attorney Gregory Garman told the court. “This is the state in which our work is done most effectively and efficiently.”
But in doing so, they admitted that the main concern was getting out of New York and the possibility of receivership over the mismanagement of NRA affairs.
“We needed to take receivership off the table and stay in control of our assets,” said Garman. “And we did, in fact, file because we believe there are legal ways to get out of New York.
Citing the NRA’s stealth surrounding the filing and the evolution of the NRA’s rationale, Judge Hale said he was buying none of that.
“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,” Judge Hale wrote.
“Reincorporating in Texas could be accomplished outside of bankruptcy pursuant to applicable regulations for New York not-for-profit organizations, which begs the question of what the Bankruptcy Code is being used for. If the goal is moving to Texas, the purpose of the bankruptcy would still appear to be avoidance of the regulatory scheme in New York that would be required for such a transition outside of bankruptcy, or at least avoidance of the New York regulators.”
That there was mismanagement and misconduct in the NRA’s financial affairs was, at least to some extent, unchallenged during the proceedings. The NRA’s lawyer acknowledged that the lack of proper financial safeguards that led to a number of well-documented profligacies were “cringe-worthy.” Judge Hale noted that the NRA’s former treasurer, when asked to testify, “asserted his rights under the Fifth Amendment during large swaths of his deposition.”
But once discovered, the NRA said it had aggressively changed both personnel and procedures to bring the organization into compliance with regulatory concerns.
Judge Hale said he is not so sure of that. Some of the conduct that gives the Court concern is still ongoing. And much of the continuing problem, he said, lies with the NRA’s controversial executive vice president Wayne LaPierre.
The NRA appears to have very recently violated its approval procedures for contracts in excess of $100,000. Mr. LaPierre is still making additional financial disclosures. There are also lingering issues of secrecy and a lack of transparency,” Judge Hale wrote.
Hale said that lack of transparency was what troubled him most, especially the secrecy attached the decision-making that led to the January filing. Much of the testimony during the 12-day trial was devoted to the lack of information afforded the NRA’s vast cadre of board members and officials, several of whom complained that they were unaware of the process, even if they later supported it. (For a more extensive view of the testimony that led to Tuesday’s ruling, please click here)
“What concerns the Court most though is the surreptitious manner in which Mr. LaPierre obtained and exercised authority to file bankruptcy for the NRA,” wrote Hale. “Excluding so many people from the process of deciding to file for bankruptcy, including the vast majority of the board of directors, the chief financial officer, and the general counsel, is nothing less than shocking.”
*This news report has been corrected to reflect that the grounds for dismissal was that the original filing was made “not in good faith” — not “bad faith” as originally reported.