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NRA Bankruptcy

posted by Adam Levitin

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. 

Venue. Right off the bat, there's a question of what the heck the NRA is doing filing in Dallas. The answer is that the NRA is engaged in one of the most blatant forum shopping maneuvers I've seen. The NRA is a New York non-profit corporation with its headquarters in Virginia. The NRA is claiming Dallas venue on the basis of an affiliate's previous filing in the district. In other words, venue is only proper for the NRA if the venue is proper for the affiliate.Therefore, the propriety of the affiliate's venue is what matters. 

The affiliate is a sole-member Texas LLC called Sea Girt LLC that was only created 52 days ago, on November 24, 2020. Sea Girt's bankruptcy petition indicates that it has less than 49 employees, under $50,000 in assets and between $50,000 and $100,000 in liabilities. Note that the petition form does not have an option of listing "zero" employees. Sea Girt's petition does not include a completed Form 204, which would list is largest non-insider unsecured creditors. But I'm going dollars to donuts that Sea Girt does not have any outside creditors other than perhaps its law firm, and that it does not actually carry on any business. 

Now the bankruptcy venue statute prescribes the appropriate venue as being the district in which the "domicile...of the entity that is the subject of such case [has] been located for one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile ... of such person were located in any other district." So even though Sea Girt LLC has not been in existence for 180 days, the statute still provides for a Texas venue. But the venue here is so obviously contrived and the NRA has no particular connect to Texas, so I expect there to be an attempt to have the case transferred to SDNY. 

Good faith filing. A second immediate issue seems to be whether the NRA (and Sea Girt) filed in good faith. 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.  

Notice, that's just about the NRA. What about I've never seen any case law looking at good faith filing on an entity-by-entity basis, but there's no reason that the doctrine shouldn't apply that way, and there's no obvious reason whatsoever for Sea Girt to have filed (or exist) other than to create a Texas venue for the NRA. But we don't actually know, which brings me to the next point, disclosure. 

Disclosure. Filing for bankruptcy is a bit like entering a fishbowl. Everything is on display. First, creditors are entitled to conduct an "examination of the debtor" under oath at the initial meeting of the creditors (the "341 meeting.") Additionally, an individual creditor may under Bankruptcy Rule 2004 undertake an examination of the debtor. (And that includes creditors who are creditors by virtue of by claims--that could include gun-control groups among others.) There's certainly room there for questions that get to the reasons for filing, namely whether there was any financial reason for filing.  

Automatic Stay? Another issue is whether the bankruptcy filing will in any way stop the NY AG's action to dissolve the NRA. At the very least, the automatic stay should not. There is an exception in section 362(b)(4) from the stay for regulatory actions that are not seeking money from the debtor, and the NYAG suit seems squarely in that exception. It's possible that the NRA will seek a supplementary injunction from the bankruptcy court, however. 

Trustee or Conversion. While I would expect a venue motion or a motion to dismiss the case, I would also expect a motion for appointment of a trustee or conversion to chapter 7 (which would trigger a trustee). The NRA seems like a classic case for this—there are credible allegations of serious financial impropriety involving the current management (namely executive VP Wayne LaPierre). That both fits into the "fraud, dishonesty, incompetence, or gross mismanagement" route for a trustee's appointment, or into the "best interests of the creditors" route.  Two key things if a trustee is appointed. First, the trustee will hold the NRA's attorney-client privilege, not Mr. LaPierre. Mr. LaPierre will not be able to claim privilege for any conversations he had with the NRA's attorneys. Second, a trustee has every incentive to pursue all of the NRA bankruptcy estate's claims, including against Mr. LaPierre. That brings us to the next topic, the debtor in possession's fiduciary duties. 

Fiduciary duties. The NRA as debtor in possession is a fiduciary for all of its creditors. That means, among other things, that if the NRA has potential claims against Mr. LaPierre or others, including fraudulent transfer claims, it must pursue them. Mr. LaPierre as EVP cannot decide whether to litigate against himself. If he's too conflicted, that will mean that the court will either have to appoint a trustee or let a creditors' committee pursue the claims.

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.  

Can the NRA actually reorganize?  It seems that the NRA's strategy is that it will propose a bankruptcy plan under which it will change from being a NY chartered non-profit corporation to a Texas one. The Bankruptcy Code requires a plan to provide for adequate means for its implementation including "amendment of the debtor’s charter," and it also authorizes inclusion in a plan of "any other appropriate provision" that is not inconsistent with bankruptcy law. And an order confirming a bankruptcy plan is a matter of federal law, which overrides state law. But that doesn't mean that states have no say in the matter. Texas would still have to charter the NRA, and it's not clear if Texas will do that for a non-profit if NY does not sign off. That's beyond my ken, but I do know this. The Bankruptcy Code has some often overlooked governance provisions. Most relevant is section 1129(a)(5), which provides that a plan must disclose the identity and compensation of anyone who is proposed to serve as an director or officer of the debtor and "the appointment to, or continuance in, such office of such individual, [must be] consistent with the interests of creditors and equity security holders and with public policy." That could be a problem for Mr. LaPierre in particular, but potentially for all of the NRA's current board. One possible outcome could be a Texas-based NRA, but with entirely new management. I don't think that's what the NRA has in mind, but for all of these reasons (and many others that I don't yet see), bankruptcy is unlikely to be a cakewalk for the organization. 

Comments

As always, you're in top of the major issues. Thanks for this. What about 1129(a)(16), which restricts assets transfers?

I assume an examiner is also on the table.

Matthew--yes on both. I totally forgot about 1129(a)(16).

There's also NYS Not-for-Profit Corporation Law Section 1002(d), which requires the approval of the NY Attorney General before dissolution.

Asher-- I assume that the NRA would be merged into a new Texas nonprofit. Would that constitute a dissolution?

I'm not an expert in corporation law, but I believe it would require dissolution. I think the logic goes that you cannot be incorporated in two states at once, and re-incorporating in Texas would therefore require dissolving their charter in NY.

I don't think so. I have taught corporate law for forty years but stopped paying attention to bankruptcy law thirty-five years ago.

Merger law does not require "dissolution" (a technical for final termination) because the old corporation IN EFFECT continues in the surviving entity. The vehicle used, within the Reorg, will be a statutory merger.

I have a question concerning us "Life (and higher contributory level)" members. Are we not, also, "creditors," with standing to ask the questions concerning the management of the Association which has been under a cloud of self-service/self-dealing and other corruption since perhaps 1996-1997? And does that not also entitle us to inquire as to the lack of fiduciary independence exercised, and malfeasance committed, by the Board of Directors as a body as well as individually?

David raises a good question: Where do the Members fit in all of this? Do we have any say? If not, is there a way we can get a seat at the table?
Also wonder how this would impact the Dell'Aquila suit against NRA? Would he be considered a creditor?
I believe the Board approved a new contract for LaPierre, which changes his diamond-studded, platinum parachute, with a more modest, gold-plated one. I believe it caps severance at $500k per year for 2 years, and only if LaPierre's services are actually used.
Regarding the "Fiduciary Duties" point you raised: Isn't that probably what NRA was trying to address with the creation of the Special Litigation Committee?
They make a point of noting that the members of that committee (President Meadows, 1st VP Cotton, and 2nd VP Lee) have no conflicts.
I'd like to see the NRA reorganized to a 13-member BoD, with a 50-member Advisory Board made up of presidents or representatives of the 50 state NRA affiliates. Is there an opening for pushing such a proposal?

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