From calls for trustee appointment, NRA faces tough post-bankruptcy scenarios
After suffering a resounding legal defeat in a Texas bankruptcy court and the possibility that one of its board members would appeal the decision, the National Rifle Association has a few options for moving forward, but bankruptcy experts are skeptical that many of them will do well for the gun rights organization.
In one 38-page decision Issued on May 11, U.S. bankruptcy judge Harlin Hale made it clear he did not believe the NRA’s January filing for bankruptcy was made in good faith. He dismissed the Chapter 11 case, saying the NRA was trying to use bankruptcy to gain an unfair advantage in a lawsuit brought by New York Attorney General Letitia James to dissolve the organization.
Although the NRA itself has not indicated it will appeal, a lawyer for one of its board members told a virtual status conference in front of Hale on Friday that he was considering to appeal. An NRA representative declined to comment on a potential appeal.
But overturning Hale’s decision seems unlikely, said Anthony Casey, professor of business and bankruptcy law at the University of Chicago Law School.
An appeals court should consider “whether he abused his discretion by deciding to dismiss it rather than doing something else like appointing a trustee,” Casey said. “But it would be a very high standard for someone to have the judge overturned.”
Board member Phillip Journey, who is also a Kansas state judge, had criticized the way the NRA filed for bankruptcy. The board and many senior officials did not know CEO Wayne LaPierre was making the move until after the fact. Journey asked Hale to appoint an independent reviewer to investigate the leadership, but Hale denied that request along with his bankruptcy rejection.
Despite his dissatisfaction with the way the bankruptcy happened, Journey said during the trial that he did not want the case to be dismissed.
In his decision, Hale left the door open for the NRA to re-file, but with some notable caveats.
These caveats, which include the likelihood of a Chapter 11 administrator being appointed, may mean it’s not worth the cost and worth trying again. Appointing a Chapter 11 trustee in bankruptcy is a “drastic” move that effectively removes existing direction from control of the entity and does not happen often in large cases, Casey said.
“A trustee would be devastating for them. You are told if you drop [for bankruptcy again] you are going to lose control and you have no control over who that trustee would be, ”he said.
A trustee could force the NRA to settle with the New York attorney general, liquidate or dissolve, Casey said.
If the group tried to file for bankruptcy in another court, it probably wouldn’t go far as James or another interested party would likely move out to either refer the case to Hale or have it dismissed, Casey said.
The NRA tried to alleviate concerns from donors and members when it filed for bankruptcy by issuing a press release saying it was in very good financial shape and was only using bankruptcy to get out of bankruptcy. what she called a corrupt political and regulatory environment in New York City by reincorporating in Texas.
But in trying to allay the concerns of his members, he did himself no favor by making it clear that he had no financial problems when he filed for bankruptcy protection. The organization would probably have to prove that they were facing some kind of financial problem if they tried again.
“It was creative and a good try, but I think the applicable law prevailed here based on the facts of the case,” said Robbin Itkin, restructuring partner at Sklar Kirsh.
In the meantime, the NRA must now reverse the New York trial, which accuses it and its senior officials of financial misconduct. If James ends up winning in this case as well, the future of the NRA could be on the line.
To make matters worse for the organization, the bankruptcy filing probably did more damage to the reputation of the NRA than if it hadn’t bothered it, as details of its internal issues and allegations of wrongdoing have aired for all to hear during the trial.
“I think a lot more of this became public through bankruptcy than it would have been,” Itkin said.
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