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Is the NRA Out of Bullets?

posted by Adam Levitin

The NRA's Gone to Texas bankruptcy just keeps getting wilder and wilder. First an NRA board member files a motion for an examiner. Then the NRA's largest creditor files a motion for the case to be dismissed as a bad faith filing (or in the alternative seeking a trustee). Then the NYAG also  files a motion seeking the dismissal of the case as a bad faith filing or in the alternative requesting a trustee be appointed. And then to top it off, the US Trustee files an objection to the retention of the NRA's counsel as not disinterested only to have one of the NRA's largest trade creditors file a motion for the Official Creditors' Committee set up by the US Trustee to be reconstituted (and basically alleging bias by the US Trustee's office against NRA management). This is turning in the bankruptcy version of the shoot out at the OK Corral. 

What on earth is the NRA thinking? Here's the big question: does the NRA have a plan? What is it possibly thinking with the bankruptcy filing? If there's a clear strategy, I cannot deduce it. Maybe I'm missing something and the NRA is crazy like a fox, but it really looks like a move done out of desperation and because the NRA is out of ammo—there are no other bullets left in the magazine. To wit, if the NRA really had a plan for what it was going to do with a bankruptcy filing:
  • Why didn't it file a prepackaged plan? It wouldn't have been especially hard if, as the NRA claims, it will leave all creditors unimpaired. 
  • Why didn't the NRA seek a section 105(a) injunction against the NYAG?  It's not self-evident that the automatic stay applies to the NYAG's lawsuit, which is not seeking money, but the dissolution of the NRA. If the goal was really to avoid the NYAG suit, a motion for a section 105(a) injunction would seem like the first order of business. Maybe the NRA hasn't filed such a motion because it can't win and if it loses, then what is it going to accomplish in bankruptcy? 

The only strategy I can see here is that the NRA is playing for time and maybe hoping for some bargaining leverage vis-à-vis the NYAG, but I am skeptical that it will work, much less the way the NRA hopes. I think there's a very good chance the case gets dismissed as a bad faith filing, which could open the NRA up to rule 9011 sanctions, which might include covering all of its creditors' attorneys fees. (This might be a good time to look at that malpractice policy....)

But even if the case is not dismissed outright, I don't see how the NRA avoids a trustee or at the very least an examiner that will likely result in a trustee being appointed. Given that the NYAG is after the NRA for allegations of serious corporate governance malfeasance, a trustee or examiner is the last thing that the NRA's leadership wants. I just don't see any way the NRA succeeds here.

All in all, it seems like the NRA has gone to Texas thinking that it would hole up in the Alamo. (Spoiler alert:  the Alamo wasn't a Texan victory. Davy Crockett and Jim Bowie and all the other Texans who were fleeing debts back east didn't, um, emerge, to use bankruptcy terminology.) 

Where does the NRA's board of directors fit in all this? I don't know if I have the most recent bylaws, but my read is that they are not meaningfully exculpated. The bylaws I have (from 2009) have an indemnification provision, but only to the extent allowed by NY law, and only if requested in writing by a director. I don't know if a retroactive request is allowed, but the key point is that NY nonprofit law does not allow a waiver of good faith, which at least one provision of NY nonprofit law unusually equates with duty of care. Is failure to supervise inconsistent with good faith? I don't know the case law on this, but at first blush, I would think that it could be. Those directors other than Judge Journey could find themselves in an uncomfortable position. 

What's with the US Trustee objection to the NRA's retention of counsel? Outside of bankruptcy a firm can choose whoever it wants as counsel: Dewey Cheatem & Howe, McKenzie Brackman, Lionel Hutz, etc. But things are different in bankruptcy. There is a requirement that the debtor's professionals be "disinterested" persons

The NRA has moved to retain Brewer, Attorneys & Counselors as "special counsel." Brewer has long served as the NRA's outside counsel and public relations firm. Here's the thing: the NRA's relationship with Brewer is a key part of the NYAG's allegations about governance malfeasance against the NRA. Plus there are a bunch of personal ties between Brewer and the NRA's largest creditor, Ackerman McQueen. Astoundingly, none of these issues were disclosed or address in the retention application: Brewer declared that it had no adverse interests and had thoroughly diligence the matter. 

So once again, I'm left with the "what on earth were they thinking" question. No bankruptcy professional looking at this situation could possibly have thought that Brewer would pass muster as a disinterested person given the possible fraudulent transfer claims the NRA has against it. This one isn't even close. Why even file the retention motion? The NRA shouldn't be paying for the time billed on the retention motion.

Once again, I'm left with the distinct impression that this is the gang that couldn't shoot straight and that the NRA's bankruptcy is a sort of last call at the buffet table for everyone who has been making money off of it for the past years. As one regular Slips commentator mentioned to me in an email, the way the NRA has conducted its bankruptcy so far doesn't give a lot of confidence in its gun safety courses. 

What's with the motion to reconstitute the Official Creditors' Committee? Official creditors' committees are constituted in the first instance by the US Trustee's office. "Ordinarily" they consist of the 7 largest creditors, but I'm not sure that "ordinarily" is really empirically correct, especially when dealing with larger bankruptcies. There are lots of reasons why parties decline to serve on OCCs—trading restrictions, hassle, etc. A committee of seven might be aspirational, but it's not mandatory. Indeed, the law on the constituting of an OCC is really pretty fuzzy, with the UST getting a lot of discretion and not being subject to things like the Administrative Procedures Act. 

Membership Marketing Partners LLC, the NRA's second largest creditor, is upset that the OCC in the case consists of only 5 members and that there isn't a majority of trade creditors, but instead a majority of non-trade:  two litigation claimants and the Pension Benefit Guaranty Corporation. MMP thinks this is a problem because it believes that these three entities have an axe to grind with NRA management. (I can see that being the case with the two litigation claimants, but there's zero evidence that the PBGC has any position on the management, and even if they did, that's hardly disqualifying.) MMP also seems miffed that it is not on the OCC, but it has volunteered two other trade creditors to serve in order to change the voting balance to favor trade creditors. 

The counter-argument here would seem to be that the trade creditors just want to keep the NRA alive because they want future business and given that the NRA says it is paying everyone in full, the trade creditors aren't really traditional creditors—they're going to be unimpaired. Instead, the only creditors who are likely to be impaired are those with disputed claims like the litigation claimants. Indeed, it's a little strange to be alleging UST office bias here: if the UST really had it in for the NRA, the UST would have moved for the case to be dismissed or for appointment of a trustee. [Note: I'm told to look at the address of the moving creditor: it's the same as the NRAs. 🤣🤦 Time to add that proverbial grain of salt to reading this motion.]

The Solomonic solution here would be two committees, but no one likes a plethora of committees (and the attendant billing). 

Any event, this case just keeps getting crazier and crazier. It's got the makings of a good Western.


Membership Marketing Partners isn't just a "trade creditor."


"...no one likes a plethora of committees (and the attendant billing). "

Except, perhaps, the attorneys doing the billing.

I don't really see anything mystifying here. In reasoning, I have heard that one can create a plausible narrative as long as it meets 3 conditions: that the narrative is realistic (not bizarre), that everyone's behavior is motivated by some incentive in their own interest, and that everyone is acting in-character.

I don't suppose it is defaming BAC to point out that they have an incentive to earn sticks.

And would it be so bizarre if BAC counseled their client that it would serve NRA well to seek bankruptcy, obtained its agreement, and then filed the necessary paperwork in the proper venue? Not bizarre. Not bizarre, like, saying extraterrestrials did all of that instead of BAC. But who knows which is true? I don't.

So...would it be in character for BAC to propose to its client a move that would benefit BAC but not necessarily the client? I don't know. Has anyone ever alleged that? Lemme guess...if anyone ever DID allege that, BAC sent some sort of cease & desist letter. I don't know that to be the case, I am just thinking that, in that situation, it would be BAC's most likely response.

"the way the NRA has conducted its bankruptcy so far doesn't give a lot of confidence in its gun safety courses."

Nothing but a cheap shot there Adam. The courses are taught on the local level by experts, mostly LEO or former military. I understand your hatred of the NRA and gun ownership in general, but don't make fun of the dedicated gun safety professionals employed by the corrupt NRA.

MK: You know absolutely nothing about me. I have expressed no opinion here or anywhere on record regarding firearms. Please don't make assumptions about my political views.

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