(Bloomberg) -- The National Rifle Association is about to find out what happens when its no-holds-barred embrace of the Second Amendment comes up against the U.S. Bankruptcy Code.
The group is seeking to sidestep New York’s regulators and the state’s fraud lawsuit by filing for bankruptcy in Dallas and moving to gun-friendly Texas, citing support for the right to bear arms. But the case filed last week may face a load of legal challenges at an initial court hearing Wednesday that could undermine the NRA’s plan or even add to its woes.
Opponents could ask that the case be thrown out entirely, since the NRA says it’s not really bankrupt. If the case does move forward, the customary disclosures could expose more of the NRA’s internal affairs to scrutiny from critics including Letitia James, New York’s attorney general. James has been suing to dissolve the organization and accusing leader Wayne LaPierre and three others of fleecing it.
“I looked at this and I just laughed,” said Thomas J. Salerno, a Phoenix-based partner specializing in corporate bankruptcies with the law firm Stinson LLP. Texas may have a pro-gun reputation, but the bankruptcy judges there are federal appointees who will follow the law, not local politics, Salerno said. At best, the NRA can only slow the New York investigation, he said.
The NRA will be in court today before U.S. Bankruptcy Judge Harlin D. Hale in Dallas. While he’s unlikely to make any final rulings during the hearing, the judge could decide to reject the case, since the NRA has said it isn’t insolvent or bankrupt and told members the group is in “its strongest financial condition in years.”
Court papers show assets of about $203 million -- mostly in cash, investments, receivables and its headquarters -- against liabilities of $153 million. Revenue in 2020 was down 7% from a year earlier; the NRA said it cut expenses 23% and asked employees who remained on the job to take pay cuts.
Political Environment
Representatives for the NRA and the New York attorney general didn’t immediately provide comments. LaPierre has disputed New York’s allegations.
In a statement announcing the filing, the NRA said it filed bankruptcy to escape “the toxic political environment of New York” and regroup in Texas, while allowing it to “streamline costs and expenses.”
“If you take what the NRA is saying at face value, it presents a strong argument for the case to be dismissed for a lack of good faith,” said Robert Lawless, a professor at the University of Illinois College of Law. “They’re going to have to come up with some financial reasons for doing this.”
The NRA gave a somewhat different explanation in court papers. “To be clear: the NRA is not seeking to escape regulatory oversight,” the group said. “However, it cannot allow its constitutional rights to be trampled or its existence destroyed by a political vendetta.” It said the Constitution guarantees people the right to free speech, to bear arms for self-defense “and seek a fresh start in bankruptcy court where appropriate. The NRA’s successful reorganization in Texas will affirm and advance all of these rights.”
Under the U.S. Bankruptcy Code, a company that reorganizes can leave behind legal liabilities tied to a civil lawsuit. That would require Hale to approve a reorganization plan that releases the newly reorganized NRA and its executives from the legal claims New York is making in its lawsuit. Such findings can be challenged by creditors and appealed to a higher court.
One possibility is that the judge could send the case to another state where the NRA has more substantive business ties. The organization filed for bankruptcy in Dallas -- despite being headquartered in Virginia and incorporated in New York -- citing a small Texas-based subsidiary that was created in November. It’s a common maneuver in Chapter 11 cases, but one that can still be challenged by creditors or the judge.
“The NRA’s filings have most of the hallmarks of a bad-faith filing and present almost textbook grounds for transfer of venue,” said Bruce Markell, a former judge and current bankruptcy professor at Northwestern Pritzker School of Law.
Still, dismissals of large corporate bankruptcies are exceedingly rare. And, unusual as it may seem, the NRA’s claim that it is “not insolvent” doesn’t invalidate its bankruptcy, according to Kevin Carey, a retired Delaware bankruptcy judge who is now a partner at Hogan Lovells. The bankruptcy code “is designed to help companies relieve financial distress” regardless of what caused it, he said.
Whether bankruptcy will help the NRA resolve pending lawsuits and investigations is a separate problem. Typically, a bankruptcy filing halts most lawsuits, but there is an exception for regulatory and police powers. If the lawsuit does get put on hold by the so-called automatic stay, the New York case would simply become part of the bankruptcy -- which may give James new legal tools to extract information, Salerno said.
More Data
That’s because under Bankruptcy Rule 2004, creditors or other parties can often get access to more information than they would in another forum, Salerno said. In that sense, the NRA bankruptcy could turn out to be a self-inflicted wound, he said.
“Honestly, I just shook my head,” Salerno said. “It may be like the NRA pointing a gun to its own head and saying, ‘Stop me before I shoot again.”’
The case is National Rifle Association of America, 21-30085-11, U.S. Bankruptcy Court for the Northern District of Texas (Dallas).
(Michael R. Bloomberg, founder of Bloomberg News parent Bloomberg LP, is a donor to candidates and groups that support gun control, including Everytown for Gun Safety.)