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The National Rifle Association rolled the dice by filing for chapter 11 protection earlier this year, gambling that it could use the power of U.S. bankruptcy law to consolidate litigation and combat allegations of fraud and mismanagement brought by the New York attorney general.
The gun-rights group is about to find out how well that bet is playing out. A federal bankruptcy judge in Dallas has scheduled six days of virtual hearings starting Monday that are likely to determine the course of the bankruptcy and, potentially, of the NRA itself.
Among those whose fates are on the line is Wayne LaPierre, the chief executive who has led the not-for-profit group for three decades and become the public face of one of America’s most powerful advocacy organizations.
Mr. LaPierre and other top NRA officials are poised to testify in public for the first time on allegations of spending abuses at the group. New York’s attorney general is expected to call other witnesses, possibly including Mr. LaPierre’s longtime travel consultant, who arranged NRA-funded private jet flights for him and his relatives, and sat for a deposition last week.
“The legal issues here have nothing to do with the Second Amendment—the NRA could be selling shoes,” Adam Levitin, a bankruptcy-law professor at Georgetown University, noted. “This is about whether a major charitable organization has been looted by its managers.”
There are four possible outcomes to the hearings, bankruptcy specialists said. U.S. Bankruptcy Judge Harlin Hale could simply allow the NRA bankruptcy to continue rolling along. He could dismiss the case altogether. Or he could leave it in place, but appoint either an independent trustee or an examiner to probe the fraud allegations.
For Mr. LaPierre and the current NRA management, the most perilous possible outcome is if Judge Hale appoints a trustee, one remedy being sought by the New York attorney general’s office.
Although top NRA officials could remain in place, a trustee would essentially be their boss during the bankruptcy, with control over day-to-day operations and the power to investigate any past abuses and seek to claw back funds.
“If I lose this trial and a trustee is appointed, it very well might be the end of the National Rifle Association and its long history,” Greg Garman, a lawyer representing the organization said during a court hearing on Friday.
Chapter 11 specialists said the appointment of a trustee is rare, and something a bankruptcy judge normally would be reluctant to order for an advocacy group like the NRA.
If I lose this trial and a trustee is appointed, it very well might be the end of the National Rifle Association and its long history.— Greg Garman, lawyer for the NRA
“This is not a company that manufactures widgets,” said Troy McKenzie, a New York University bankruptcy-law professor. “It’s an entity that has a voice and a position and it represents membership.”
But, Prof. McKenzie said, under the law a bankruptcy judge might have little alternative but to appoint a trustee if there was a sufficient showing of fraud or mismanagement by the organization’s current executives.
In August, New York Attorney General Letitia James sued to dissolve the NRA, accusing its leadership of diverting tens of millions of dollars from the organization through excessive spending and contracts that benefited a close circle of insiders.
Mr. LaPierre was individually sued over allegations he exploited the NRA for his own benefit and that of family members, in part through unwarranted travel expenses, which he has denied.
In response, the NRA—a New York-registered not-for-profit organization since 1871—said when it filed for chapter 11 protection that it was seeking to exit the state’s “corrupt political and regulatory environment” and reincorporate in Texas, a friendlier jurisdiction. The group is headquartered in Fairfax, Va.
Despite the bankruptcy filing, the NRA has said during the chapter 11 case that it is financially sound and its membership has grown in recent months.
The NRA has said the bankruptcy will aid in the reincorporation effort, though legal experts have questioned whether chapter 11 is of any help against New York’s separate efforts to get a state court to approve the organization’s dissolution; New York’s efforts have been largely unimpeded by the bankruptcy proceedings.
The NRA travel consultant, in a confidential deposition last week, testified that Mr. LaPierre asked her to omit flight stops in Nebraska and the Bahamas from an invoice sent to the NRA for payment, citing security reasons, and that that wasn’t the only such request he made, according to a person familiar with the matter.
Some of Mr. LaPierre’s relatives live in Nebraska, and in an earlier bankruptcy filing, the attorney general’s office alleged that the chief executive and his family took NRA-funded private flights to and from the Bahamas, “often stopping in Nebraska on each leg of the trip to pick up and drop off his niece and her family. The NRA paid over half a million dollars for each of these flights.”
Mr. LaPierre has denied the allegations, but last year repaid the NRA $300,000 related to travel expenses. An NRA spokesman had no immediate comment on the travel consultant’s deposition.
The NRA’s preferred outcome—leaving current management in place to file a reorganization plan—is backed by Republican attorneys general from 16 states. They filed a brief on Wednesday arguing that New York’s action was politically motivated and “seeks to punish the NRA’s membership because of the alleged corporate malfeasance of a handful of executives.”
A dissident faction of the NRA’s board, led by a Kansas state judge, Phillip Journey, has urged the bankruptcy court to appoint an examiner to independently probe allegations of spending abuses. Unlike a trustee, NRA management wouldn’t have to report to an examiner if one were appointed.
“We need to find out what the truth really is” on the fraud allegations, Mr. Journey said in an interview. “Then we can address it appropriately and restore the trust of membership in the leadership.”
Mr. Journey said he expects to be called as a witness to a key question the hearings will explore: whether the NRA’s bankruptcy filing was properly authorized by its board of directors.
Mr. Journey last month in a publicly-filed deposition testified that the board was never informed of a possible bankruptcy filing; he only found out about it when his daughter texted him a news article, he said.
We need to find out what the truth really is. Then we can address it appropriately and restore the trust of membership in the leadership.— Phillip Journey, dissident NRA board member
Mr. LaPierre deliberately hid his intention to file for chapter 11 from his own board, an attorney representing the New York attorney general argued at a hearing this week, saying that was a reason to dismiss the bankruptcy filing outright.
NRA lawyers disputed that allegation and said the chapter 11 filing was handled properly, citing language in Mr. LaPierre’s new employment agreement that gave him authority to reorganize or restructure the affairs of the organization.
After questions about the bankruptcy filing were raised in court, the NRA convened a board meeting last Sunday at which directors passed a resolution endorsing the decision to enter chapter 11.
Although the resolution will bolster the NRA’s case that the board stands behind the bankruptcy filing, it also demonstrates the organization’s dysfunctional governance, some bankruptcy specialists said.
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