In re Nat'l Rifle Ass'n of Am.

• Decision Date: 11 May 2021
• Docket Number: Case No. 21-30085 (HDH) (Jointly Administered)
• Citation: 628 B.R. 262
• Parties: IN RE: NATIONAL RIFLE ASSOCIATION OF AMERICA and Sea Girt LLC, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Texas

628 B.R. 262

IN RE: NATIONAL RIFLE ASSOCIATION OF AMERICA and Sea Girt LLC, Debtors.

Case No. 21-30085 (HDH) (Jointly Administered)

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed May 11, 2021

Ryan Blaine Bennett, Kirkland & Ellis LLP, Chicago, IL, Douglas James Buncher, Neligan LLP, Michael J. Collins, Brewer, Attorneys & Counselors, John D. Gaither, Patrick J. Neligan, Jr., Neligan LLP, Dallas, TX, Dylan Thomas Ciciliano, Gregory Eugene Garman, Talitha Beth Gray Kozlowski, Gabrielle Alicia Hamm, William McCarty Noall, Teresa M. Pilatowicz, Garman Turner Gordon LLP, Las Vegas, NV, Sarah Brooke Rogers, Brewer, Attorneys & Counselors, New York, NY, for Debtors.

Scott P. Drake, Norton Rose Fulbright US LLP, Kristian W. Gluck, Nick J. Hendrix, Laura Lynn Smith, Louis R. Strubeck, Jr., Norton Rose Fulbright US LLP, Dallas, TX, for Creditor Committee.

ORDER GRANTING MOTIONS TO DISMISS

Harlin DeWayne Hale, United States Bankrupty Judge

The National Rifle Association of America (the "NRA") is a 150-year-old organization with approximately five million members that is dedicated to the rights of Americans to own and safely use firearms for their personal protection and recreational use. The mission and function of the NRA is focused on gun safety, and the NRA asserts it is "the nation's foremost defender" of the Second Amendment of the United States Constitution. In recent years, however, it has become apparent that the NRA was suffering from inadequate governance and internal controls.

The attorney general for the state of New York conducted a fifteen-month-long investigation of the NRA that revealed, the New York attorney general claims, widespread misuse of assets by the NRA's executive vice president and his circle of insiders for their personal benefit. Nine months ago, the New York attorney general filed a lawsuit seeking dissolution of the NRA based on allegations that (1) the NRA has exceeded the authority conferred upon it by New York law and has conducted its business in a persistently illegal manner and abused its powers contrary to the public policy of the state of New York by operating without effective oversight or control by its officers and directors, and (2) the directors or members in control of the NRA 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 NRA filed this case seeking the protection of the Bankruptcy Code to preserve itself as a going concern in the face of litigation that, it argues, poses an existential threat. Debtors commonly file bankruptcy when faced with a judgment that has, or will, render them insolvent, but the threat against the NRA differs from the classic scenario in that dissolution would not be a collateral effect of litigation but rather the intended relief sought in a state's regulatory action. And in this instance, dissolution could only occur after judicial consideration of whether dissolution is in the best interest of the public.

The question the Court is faced with is whether the existential threat facing the NRA is the type of threat that the Bankruptcy Code is meant to protect against. The Court believes it is not. For the reasons stated herein, the Court finds there is cause to dismiss this bankruptcy case as not having been filed in good faith both because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme. The Court further finds the appointment of a trustee or examiner would, at this time, not be in the best interests of creditors and the estate.

I. Jurisdiction and Venue

This Court has jurisdiction to consider this matter under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is proper in this District under 28 U.S.C. §§ 1408 and 1409.

II. Relevant Background

The NRA is a charitable not-for-profit corporation chartered by special act of the New York State Legislature on November 17, 1871. The NRA has approximately five million members, almost 500 employees, and annual revenue of approximately $300 million. The NRA is primarily supported by dues from members and private contributions from donors.

Around the middle of 2017, NRA Board Member Tom King received a phone call from Eric Schneiderman, who at the time was the New York attorney general.¹ According to Mr. King, Mr. Schneiderman told him that investigations into the NRA were being opened and they should "prepare for the worst."² Mr. King shared this message with Wayne LaPierre,³ the NRA's executive vice president.⁴ In response to this warning, Mr. LaPierre testified that he decided the "NRA ought to take a look at everything, a 360-degree look to make sure we were in total compliance with New York State not-for-profit law, and if we weren't, we needed to fix things."⁵ This was the beginning of what the NRA now refers to as its course correction.⁶

As part of its course correction, the NRA hired the law firm Morgan, Lewis & Bockius LLP to provide advice regarding tax and nonprofit governance matters.⁷ The NRA also hired Brewer, Attorneys & Counselors (the "Brewer Firm") in early 2018 to aid with the course correction process and potential upcoming litigation.⁸ Since that time, in addition to becoming the NRA's primary litigation counsel, the Brewer Firm appears to have become involved in many aspects of the NRA.

In March 2018, the NRA hired Craig Spray as its new chief financial officer.⁹ Before joining the NRA, Mr. Spray served as the chief financial officer for two different companies, one of which was a publicly traded company valued at over $1 billion.

On April 19, 2018, the New York Department of Financial Services sent letters to insurers and financial institutions encouraging them to review their relationships with the NRA and consider whether such relationships harm their corporate reputations and jeopardize public safety (the "NY DFS Letter"). Less than a month later, the NRA, with the assistance of the Brewer Firm, filed a complaint in federal court in the Northern District of New York against the governor of New York and the New York Department of Financial Services regarding their alleged attempts "to deprive the NRA and its constituents of their First Amendment rights to speak freely about gun-related issues and defend their Second Amendment freedoms against encroachment."¹⁰

In July 2018, several whistleblowers came forward with the encouragement of Mr. Spray and presented a memo to the NRA Audit Committee regarding their top concerns (the "Whistleblower Memo").¹¹ That list included concerns related to (1) financial conflicts of interest of senior management and board members, (2) senior management override of internal controls relating to, among other things, accounts payable procedures, travel and expense reporting, and procurement/contracts policy, (3) management making decisions in the best interests of vendors instead of the NRA, (4) vague and deceptive billing practices of vendors, (5) improper reimbursement for apartments and living expenses of certain employees, and (6) lack of control over vehicle leases obtained by senior management.¹²

Following the presentation of the Whistleblower Memo to the Audit Committee, the NRA took several actions, including examining related party transactions and reviewing vendor contracts.¹³ As a result of this review process, the NRA required the inclusion of specific metrics in all contracts¹⁴ and improved documentation and recordkeeping.¹⁵ One of the more significant actions taken in response to the Whistleblower Memo was to send letters to the NRA's vendors notifying them of the rules regarding proper invoicing.¹⁶ While most vendors complied with these new measures, some did not.¹⁷ As a result, some contracts with vendors were re-negotiated, and some were terminated.¹⁸

This process caused a rift between the NRA and one of its most significant vendors, Ackerman McQueen, Inc. ("Ackerman"). Ackerman had very close ties with the NRA and had been the NRA's marketing and public relations firm for decades, but several of the concerns expressed in the Whistleblower Memo related to the NRA's relationship with Ackerman.¹⁹ The disagreements that came from discussions regarding billing practices and their business relationship escalated and have spawned four overlapping lawsuits—three in Virginia state court and one in federal court in the Northern District of Texas.

On August 6, 2020, following a fifteen-month investigation, the New York attorney general (the "NYAG") filed a complaint in New York state court against the NRA seeking, among other relief, dissolution of the NRA (the "NYAG Complaint" commencing the "NYAG Enforcement Action").²⁰ The NYAG Complaint also named four individual defendants: (1) Mr. LaPierre; (2) John Frazer, the NRA's general counsel; (3) the NRA's former treasurer and chief financial officer; and (4) the NRA's former chief of staff. The allegations in the 163-page NYAG Complaint are extensive but, in very general terms, accuse Mr. LaPierre of (i) exploiting the NRA for his financial benefit and the benefit of a close circle of NRA staff, board members, and vendors, (ii) intimidating, punishing, and expelling anyone at a senior level who raised concerns about his conduct, (iii) hiring and retaining individuals in senior positions at the NRA, or as NRA contractors, whom he believed would aid and enable him to control the organization, regardless of their skills, experience, integrity, or contribution to the charitable mission, and (iv) entering into post-employment agreements with departing officers and employees that provided excessive payments in exchange for little, if any, services and non-disclosure/non-disparagement agreements. Other of the individual defendants were accused of (i) ignoring, overriding, or otherwise violating the bylaws and internal policies and procedures they were...