A general view shows the National Rifle Association (NRA) headquarters, in Fairfax, Virginia, U.S., August 6, 2020. REUTERS/Jonathan Ernst
After suffering a resounding legal defeat in a Texas bankruptcy court and the possibility that one of its board members will appeal the decision, the National Rifle Association has some options moving forward, but bankruptcy experts are skeptical that many of them will turn out well for the gun rights organization.
In a 38-page decision issued on May 11, U.S. Bankruptcy Judge Harlin Hale made clear that he did not think the NRA’s January bankruptcy filing was made in good faith. He threw out the Chapter 11 case, saying the NRA was trying to use bankruptcy to gain an unfair advantage in a lawsuit brought by New York Attorney General Letitia James that aims to dissolve the organization.
Though the NRA itself has not indicated that it will appeal, a lawyer for one of its board members said during a virtual status conference before Hale on Friday that he was considering an appeal. A representative for the NRA declined to comment about a potential appeal.
But overturning Hale’s decision seems unlikely, said Anthony Casey, a bankruptcy and business law professor at the University of Chicago Law School.
An appeals court would have to consider “whether he abused his discretion in deciding to dismiss it rather than doing something else like appointing a trustee,” Casey said. “But that would be very high standard for someone to get the judge reversed on.”
The board member, Phillip Journey, who is also a Kansas state judge, had been critical of the manner in which the NRA filed for bankruptcy. The board and many top officials were unaware that CEO Wayne LaPierre was making the move until after the fact. Journey asked Hale to appoint an independent examiner to investigate management, but Hale denied that motion in conjunction with his dismissal of the bankruptcy.
Despite his dissatisfaction with the way the bankruptcy came to be, Journey said during the trial that he did not want the case dismissed.
In his decision, Hale left the door open for the NRA to file again, albeit with some notable caveats.
Those caveats, which include the likelihood that a Chapter 11 trustee would be appointed, may mean it’s not worth the cost and trouble of trying again. The appointment of a Chapter 11 trustee in a bankruptcy is a “drastic” move that effectively removes existing management from control of the entity and doesn’t occur often in large cases, Casey said.
“A trustee would be devastating for them. You’re being told if you file [for bankruptcy again] you’re going to lose control and you have zero control over who that trustee would be,” he said.
A trustee could force the NRA to settle with the New York attorney general, liquidate or disband, Casey said.
If the group were to try to file for bankruptcy in another court, it likely wouldn’t get far because James or another interested party would likely move to transfer the case back to Hale or have it dismissed, Casey said.
The NRA attempted to curtail donor and member concerns when it filed the bankruptcy by issuing a press release stating it was in a very strong financial condition and was only using bankruptcy to exit what it called a corrupt political and regulatory environment in New York by reincorporating in Texas.
But in trying to assuage concerns of its membership, it did itself no favors by prominently announcing that it had no financial issues when it sought bankruptcy protection. The organization would likely have to prove that it faces some sort of financial issue if it were to try again.
“It was creative and a good try, but I think the applicable law prevailed here based on the facts of the case,” Sklar Kirsh restructuring partner Robbin Itkin said.
In the meantime, the NRA must now turn back to the New York lawsuit, which accuses it and its top officials of financial misconduct. If James eventually prevails in that case as well, the NRA’s future could be on the line.
To make matters worse for the organization, filing for bankruptcy likely did more harm to the NRA’s reputation than if it had not bothered, because details of its internal troubles and allegations of wrongdoing were aired for all to hear during the trial.
“I think a lot more of that became public through the bankruptcy than it would’ve been,” Itkin said.
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