According to the NRA, its finances are sound. So, why would it file for bankruptcy?

The National Rifle Association boasted that it was financially sound when it filed for Chapter 11 bankruptcy protection.

The powerful gun lobbying group stated that “In fact, the move comes at a time when the NRA’s strongest financial condition in many years,” in an online Q&A. It filed its court petition on Jan. 15.

If everything is fine financially, then why is the company in bankruptcy?

Experts and watchdogs point to ulterior motives beyond what the U.S. Bankruptcy Code is intended to address. This code is for debtors who have experienced financial hardship and require legal assistance to reduce or repay creditors.

According to the NRA, a bankruptcy court is needed to rescue it from “a corrupt political or regulatory environment in New York,” Its attorney general has attempted to close down following corruption allegations.

However, it may not be necessary to file for Chapter 11 to move its nonprofit registration from New York City to Texas.

The bankruptcy court’s jurisdiction could decide whether the group can be exonerated from any alleged misappropriation by its executives.

Melissa Jacoby, a University of North Carolina bankruptcy lawyer following the case, says that bankruptcy is only for people and entities in financial distress and cannot pay their creditors. “The NRA has not attempted to categorize itself in this way. It doesn’t meet any criteria for insolvency, such as whether it pays its bills or not.

In court filings, the NRA made it clear that its revenue decreased by 7% in 2020 due to the COVID-19 pandemic. The group compensated for the decline in income by reducing expenses by 23%, including pay cuts.

It also reported that its assets exceed $153 million, and it has $203 million in liabilities. This includes $31 million of secured debt owed by Atlantic Union Bank.

Since its bankruptcy filing, the NRA has not replied to multiple requests for comment, including this story.

John Pottow, a University of Michigan bankruptcy law professor, said that it is clear that the group wants to use bankruptcy to delay consolidating or fend off legal problems, including the suit by Letitia James, the New York attorney general.

Despite being based in Fairfax, Virginia, the NRA is registered in New York as a 501 (c)(4) non-profit corporation. James filed a lawsuit to recover millions and close down the NRA. He accused the organization’s executives of using NRA funds to pay for their travel, including private jets or fancy meals.

Pottow states that “they’re trying to preempt the litigation.”

It might not work if that is the plan.

On Jan. 21, Judge Joel Cohen, New York County State Supreme Court, ordered the James case to proceed in Manhattan. NRA asked Judge Joel Cohen to allow the case to continue in Manhattan despite the bankruptcy filing.

James declined to comment through a spokesperson for this story. She said that the order “reaffirms what it has been known all along: The NRA doesn’t get to decide if and where they will be accountable for their actions.” We are grateful to the court for allowing us to proceed with our case and look forward to holding the NRA responsible.

Bankruptcy without any financial problems

There are many cases in which companies have filed for bankruptcy before they become financially distressed. This is to prevent disaster.

Purdue Pharma recently pleaded guilty in criminal cases for the distribution of the addictive opioid OxyContin. It was not in a cash crisis when it filed for bankruptcy. It was facing a flood of lawsuits that could lead to its demise.

The Boy Scouts of America didn’t have a severe cash shortage when filed for bankruptcy protection in 2020. The Boy Scouts of America was also amid a flurry of sexual assault lawsuits.

Jacoby of the University of North Carolina says that the NRA has not done anything to show its financial difficulties. It stated in court papers that they would pay their creditors in full. This is unusual in bankruptcy court, where debtors often receive less than what they owe.

Jacoby states that the idea that an entity declares bankruptcy and promises to pay all its creditors is contrary to why there is a federal bankruptcy system.

However, the group indicated that it intends to use bankruptcy court’s benefits to restructure certain elements of its operations.

On its website, the NRA stated that bankruptcy would be used to “streamline expenses and costs” and “proceed in pending litigation in an organized and coordinated manner” in pursuit “many financial or strategic advantages.”

It plans to move its headquarters from Virginia, Texas, or anywhere else. The group has expressed appreciation for Texas’ support of gun rights.

“The NRA initiated this chapter 11 restructuring proceeding to establish a centralized, neutral forum to streamline, resolve and address all outstanding claims, and preserve its constitutionally protected mission of a going concern,” the group stated in a court filing.

Are federal courts required to be involved?

Federal bankruptcy courts can be used to resolve state court litigation and provide a second chance for debtors.

Jacoby states that even if there is no financial reason to file for bankruptcy, America’s federalist systems would usually prevent a federal court from intervening in state legal disputes.

She says, “We have the bankruptcy power from Constitution.” It is not meant to override any state laws. A federal court should not intervene in a matter that isn’t within its purview unless there is financial distress.

Jacoby says it is important to remember that Jacoby’s objections to NRA bankruptcy do not relate to the Second Amendment mission.

She says, “They have nothing in common with the right to bear arms.” It all comes down to whether they are in financial distress.

There are risks associated with bankruptcy

Although bankruptcy filings can benefit the NRA’s goal of escaping New York City, they also pose risks. Creditors could use the bankruptcy case to sue Wayne LaPierre, the CEO, for wrongful conduct.

Pottow from the University of Michigan says, “If there are serious accusations of mismanagement, then you might have a creditor try to kick out the managers.” It’s a risk because everything is now out in the open.

 

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