The NRA bankruptcy gamble could backfire

In a recent court filing, the National Rifle Association cited three of the rights guaranteed by the US Constitution that it deemed imperative. The first two mentioned – freedom of speech and the right to bear arms – were not surprising as they are popular in America.

The third, the right to “seek a fresh start in bankruptcy” is more obscure, although the concept of bankruptcy is, indeed, enshrined in America’s founding document.

As it turns out, the referral to bankruptcy was no coincidence. RNA deposit for Chapter 11 protection late Friday, Jan.15, a move that surprised observers of both the gun advocacy group and the bankruptcy world.

In a January information statement submitted to Federal Bankruptcy Court in Dallas, the NRA wrote that it wanted “to establish a centralized and neutral forum in which it can streamline, resolve and process all outstanding claims.” The group admitted that they had no financial problem. Rather, her biggest problem is that New York Attorney General Letitia James filed a lawsuit last year aimed at potentially dissolving the NRA as a charity, alleging that the organization’s leadership for purpose nonprofit had looted the organization for personal gain.

The US bankruptcy system generally helps overindebted companies restructure their balance sheets. Yet in some unique cases, companies have skillfully used the tools available in bankruptcy court to effectively resolve unorthodox issues that go beyond financial debt. Still, the NRA case has left experts scratching their heads. This was not only because of questions about the rationale for electing the NRA in bankruptcy, but also because the process itself created headaches that could make the situation worse for the NRA. ‘organization.

In one public letterTo members of the NRA announcing bankruptcy, longtime NRA chief Wayne LaPierre wrote, “The plan can be summed up quite simply: we are DUMPING New York, and we are pursuing plans to re-enter the NRA in Texas. LaPierre later noted that the NRA was “as strong financially as we have ever been in years.”

In subsequent court documents, the NRA said its assets exceeded its liabilities by $ 50 million and that revenues had declined only slightly in 2020. While LaPierre said the NRA was “not looking to escape the regulatory oversight, ”it seemed obvious that the New York State lawsuit had pushed the NRA down the road of bankruptcy.

Jacques had accused LaPierre and his close-knit group of executives use NRA assets for private jet flights, yacht trips and safaris. She alleged that as a result, the group’s mission of gun safety, education and training had been undermined. The complaint filed by James’ office also seeks to remove LaPierre from the leadership of the NRA.

An often used feature of bankruptcy is the so-called automatic stay which ends litigation against a debtor. This is supposed to then help foster a consensual restructuring plan. In the bankruptcies of the PG&E utility, various opioid manufacturers and several dioceses of Catholic churches, bankruptcy has been used to settle ruinous claims for personal damages.

However, Georgetown law professor Adam Levitin says the automatic stay generally does not apply to regulatory actions that do not seek monetary damages. “The NRA bankruptcy looks like a game for time and bargaining leverage against the New York attorney general, but there is no obvious light at the end of the tunnel for the NRA,” he said.

Separately, the NRA has also attempted to consolidate all of its major litigation in Texas. But, for now, the case has apparently descended into chaos with factions using bankruptcy to fight back.

New York State has moved cancel the bankruptcy, calling it a bad faith filing.

Other actions emerged: a supplier to the NRA, which has already been sued separately by the organization, requested the rejection of Chapter 11; a member of the NRA board of directors called for a third party investigation into the allegations of wrongdoing; and a federal bankruptcy watchdog challenged the NRA’s continuation of a particular law firm in the case.

When the constituencies of the Chapter 11 process are not aligned early on or even aware of the bankruptcy petition itself, it can lead stakeholders to make their case in court over their pet problem. While the NRA was hoping that bankruptcy could get it out of its difficulties, almost the exact opposite has happened.

sujeet.indap@ft.com

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