Thoughts and prayers.
In August 2020, New York Attorney General Letitia James (D) filed an audacious lawsuit against the nation’s largest and most powerful gun rights group.
The suit alleges that several top leaders of the National Rifle Association (NRA) — including its CEO, Wayne LaPierre — engaged in a ridiculous amount of self-dealing with the organization. Among other things, the lawsuit accuses LaPierre of spending hundreds of thousands of dollars on private charter planes for himself and his extended family, accepting lavish gifts from NRA vendors, and spending $1.2 million in NRA funds on “personal expenses,” the list of which includes his golf club membership.
Although the NRA initially denied the allegations, it filed a tax document with the IRS in November admitting it “became aware during 2019 of a significant diversion of its assets.” The tax return also says LaPierre reimbursed the NRA for $300,000 in travel expenses.
James’s lawsuit asks the court to impose several steep penalties on the NRA, including dissolving its corporate charter — a sanction NRA’s attorneys have characterized as akin to the “death penalty” for a corporation.
Needless to say, the NRA wants to avoid this outcome and has engaged in some fairly audacious legal maneuverings of its own to strip the state of New York of much of its power over the organization. Although the NRA is, by its own accounts, in strong financial shape and fully capable of paying off its creditors, the organization declared bankruptcy last January.
The primary purpose of the NRA’s declaration, many outsiders surmised, is to cut many of its formal ties with New York and reincorporate it in the state of Texas, thus stripping James of much of her authority over the organization. On Tuesday, a federal bankruptcy judge agreed.
Texas-based Judge Harlin Hale formally rejected the NRA’s attempt to use the bankruptcy courts in this way, ruling that “the NRA did not file the bankruptcy petition in good faith because this filing was not for a purpose intended or sanctioned by the Bankruptcy Code.”
If you’re confused by this complicated web of corporate and bankruptcy law, fear not. It is arcane and convoluted, and I will explain what the law has to say about all of these legal maneuvers. The bottom line is the NRA lost the first round of what is likely to be years of litigation over whether it can declare bankruptcy and what sanctions New York’s courts can impose on the group.
There is a very small chance that this all ends with the dissolution of the NRA. That could mean the NRA’s current leadership would lose control of all the organization’s assets, including its valuable donor lists.
Meanwhile, there’s a larger possibility that New York’s courts will allow the NRA to continue operating but will also impose significant sanctions on LaPierre and other top NRA leaders. Those sanctions could include requiring reimbursing the NRA for their own alleged self-dealing, or even removing them from the NRA’s leadership.
And there’s an even greater possibility these lawsuits reveal humiliating information about LaPierre and other top officials. The NRA faced several unexpected policy defeats during the Trump administration, and it is caught up in another round of litigation with one of its former vendors. More embarrassing news about the gun rights group may discourage people from giving to the NRA in the future. NRA supporters, after all, typically give to the organization because they agree with its political views, not because they want to help pay for one of LaPierre’s trips to the Bahamas.
Why does New York get to decide whether the NRA can continue?
There is something a little odd about the fact that just one state, New York, may have so much authority over a major interest group such as the NRA. Not long after James filed her suit, the usual suspects denounced it as a power grab: Former President Donald Trump accused the “Radical Left New York” of “trying to destroy the NRA.”
New York’s power over the NRA arises from an unusual quirk of American corporate law. Although corporations can do business in all 50 states or in foreign countries, new companies are typically chartered by states and are thus bound by the state’s corporate laws, not the federal government’s.
The fact that corporations typically get to choose which state to incorporate in often benefits the companies themselves. More than 60 percent of Fortune 500 companies, for example, are incorporated in Delaware. That’s because Delaware laws are particularly favorable to these corporations; also, many corporate lawyers are familiar with Delaware law and Delaware’s courts.
But this system also places a disproportionate amount of power in the hands of some states’ courts. The large number of companies incorporated in Delaware means that multibillion-dollar corporate cases of national importance are often decided by judges appointed by the governor of a tiny state with fewer than a million residents.
It’s not unusual, in other words, for a single state to wield the type of power New York now does over the NRA.
The NRA is 150 years old. Indeed, it is so old that it was formed in an era when corporations were often created by special acts of the state legislature — New York’s legislature granted the NRA a corporate charter in 1871, and the organization continues to operate under the charter to this day.
That means the NRA is subject to a wide array of New York laws governing corporations formed in the state, including one that permits the state attorney general to bring a lawsuit seeking to “annul the corporate existence or dissolve a corporation that has acted beyond its capacity or power.”
Under certain circumstances, a New York corporation may also be dissolved if “the directors or members in control of the corporation have looted or wasted the corporate assets, have perpetuated the corporation solely for their personal benefit, or have otherwise acted in an illegal, oppressive or fraudulent manner.”
The crux of James’s lawsuit against the NRA is that LaPierre “exploited the organization for his financial benefit, and the benefit of a close circle of NRA staff, board members, and vendors,” and that he did so in violation of his legal “duties of care, loyalty and obedience to the mission of the charity.” The suit also claims several other senior NRA leaders “regularly ignored, overrode or otherwise violated the bylaws and internal policies and procedures that they were charged with enforcing” in order to divert assets to “insiders and favored vendors.”
Thus, James claims the NRA has “acted beyond its capacity or power” by operating not as a legitimate nonprofit corporation that serves its stated mission but as a kind of personal enrichment machine for a handful of the organization’s senior leaders.
What are the allegations against the NRA?
Realistically, James’s office faces a tough road if it hopes to dissolve the NRA. New York courts have likened this remedy to a “judgment … of corporate death,” and they place a very high burden on state officials seeking to dissolve a corporation. The state often must show that the corporation committed “some sin against the law of its being” that is “material and serious … such as to harm or menace the public welfare.”
Yet, while it’s far from clear James can convince a court to impose a “corporate death penalty” on the NRA, her complaint does describe some very serious allegations against the NRA’s senior leadership, which stretch for more than 100 pages of James’s filing. They claim the NRA misused as much as $64 million over just three years, and they include some genuinely shocking claims of self-dealing.
LaPierre, for example, is accused of chartering a private flight, priced at more than $26,995, for his niece and her daughter after they were unable to catch a commercial flight to an NRA event. The NRA allegedly paid more than $500,000 to fly LaPierre and his family to the Bahamas on at least eight different occasions, where LaPierre often stayed on a 108-foot yacht owned by one of the NRA’s largest vendors, as well as nearly $600,000 over five years for “consulting services” provided by LaPierre’s wife’s “executive assistant.”
The NRA also purportedly agreed to pay LaPierre a simply enormous amount of money if he retired or was not reappointed as the organization’s CEO — so much money, in fact, that his annual compensation would have increased. One version of LaPierre’s “post-employment” contract specified he would be paid more than a million dollars a year through 2030 if he left his job.
And then there’s the NRA’s relationship with certain favored vendors. According to James’s complaint, for many years the NRA’s largest vendor was the public relations firm Ackerman McQueen. The NRA allegedly paid Ackerman nearly $32 million in 2018 alone — and that’s on top of the fees the NRA paid to the Mercury Group, a wholly owned subsidiary of Ackerman.
According to the complaint, however, the NRA’s arrangement with Ackerman appeared designed to hide what all that money actually paid for. LaPierre, who reportedly had a very close relationship with a late co-founder of Ackerman whom he would often speak to daily, allegedly “requested that invoices from Ackerman … contain very little detail about the work performed or services rendered.”
To be clear, it’s not like the NRA received nothing at all from Ackerman — among other things, the PR firm built the NRA’s now-defunct video streaming network NRATV. But the relationship between the NRA and Ackerman has also turned sour. Among other things, the NRA sued Ackerman in 2019, claiming the firm misled it into wasting millions of dollars on NRATV and produced content even many NRA leaders viewed as “distasteful and racist.”
In any event, these are just a few of the accusations in James’s complaint, which paints a picture of an organization that allowed LaPierre to spend lavishly on himself, his family, and his personal friends and close associates, with little oversight from within the NRA.
The NRA’s response to James’s allegations has also evolved over time. In August, the organization put out a statement claiming it was “well governed, financially solvent, and committed to good governance,” but then admitted in its November IRS filing that it discovered “a significant diversion of its assets” in 2019.
In October, the NRA filed a lawsuit against James, claiming her investigation of the NRA and subsequent lawsuit violate the Constitution because James intends to “obstruct, chill, deter, and retaliate against the NRA’s core political speech, which is protected by the First Amendment.” The NRA states in the suit that it “has undertaken efforts to improve its internal governance functions up to the present day.”
Regardless, even if James’s allegations are proven, they may not be enough to justify dissolving the NRA in its entirety. But they do suggest the organization is deeply corrupt and may need new management.
What does bankruptcy law have to do with all of this?
The purpose of bankruptcy, as the Supreme Court explained many years ago, is to “relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.”
The idea is that an organization sometimes takes on debts it cannot afford to pay, whether because of poor business decisions, bad luck, or court decisions ordering it to pay large sums of money. When this happens, it is normally better to allow the organization to pay off as many of these debts as possible, and continue to exist and employ some of its workers, than to have it simply collapse under the weight of its financial obligations.
Given that bankruptcy exists to relieve debtors from unpayable debts, the NRA’s decision to file bankruptcy is more than a little odd. As Hale explained in his opinion dismissing the NRA’s filing, “The NRA has consistently represented to the Court and to its members” that it is “in its strongest financial condition in years.” Like most large organizations, the NRA does have debts, but there is no indication it can’t pay those debts, or that it needs a federal bankruptcy court to step in and help manage its finances.
Rather, as the NRA itself admitted in a court filing, the organization hoped to use the bankruptcy process to implement “a plan of reorganization that provides for the reorganized NRA to emerge from these chapter 11 cases as a Texas nonprofit entity.” The NRA, in other words, hoped a bankruptcy court would allow it to reincorporate in Texas, thus stripping New York state of much of its power over the NRA.
Yet, while bankruptcy courts sometimes have significant power to restructure a bankrupt corporation, Hale refused to play along with the NRA’s scheme.
While debtors often file bankruptcy because they lose a lawsuit and, as a result, cannot afford to pay what they owe, multiple courts have held that, in Hale’s words, “a bankruptcy case filed for the purpose of avoiding a regulatory scheme is not filed in good faith and should be dismissed.”
So, after determining that the purpose of the NRA’s bankruptcy filing was to frustrate James’s effort to enforce New York’s corporate law, Hale dismissed it, ultimately agreeing with James that “the NRA is using this bankruptcy case to address a regulatory enforcement problem, not a financial one.” And that is not something federal bankruptcy law permits.
Is the NRA actually going down?
So, the NRA lost the first round in its fight against NY regulators.
Hale, however, is unlikely to have the final word on whether the NRA’s attempt to reorganize as a Texas corporation through bankruptcy will prevail.
For one thing, the NRA may appeal Hale’s decision, and it is likely their appeals will ultimately be heard by the United States Court of Appeals for the Fifth Circuit, an extremely conservative court dominated by Bush and Trump appointees. So it’s possible the NRA will argue its appeal in front of a panel of judges who are very sympathetic to the NRA’s mission — and equally unsympathetic to Democratic attorneys general from New York.
Meanwhile, the NRA’s general counsel testified that he does not expect New York’s courts to try James’s lawsuit against the NRA until early next year. So even if the NRA’s attempt to file bankruptcy in order to reincorporate in Texas ultimately fails, it will be a long time before any New York judge weighs in on James’s allegations against the gun rights group — and even if James prevails at trial, the NRA will likely appeal that decision.
What’s more, Hale wrote in his opinion that he was “not dismissing this case with prejudice,” meaning the NRA could potentially refile for bankruptcy in Hale’s court — though it’s unlikely a second filing would accomplish much, unless its circumstances change.
All of which is a long way of saying that dissolution of the NRA remains unlikely and is certainly not imminent. Nevertheless, the organization did suffer a significant loss in Hale’s court, and James’s allegations against it are very serious. Even if James’s lawsuit does not end in the NRA’s destruction, it could end with significant sanctions against LaPierre and his inner circle.
Author: Ian Millhiser