Friday, May 14, 2021
The Bankruptcy Court trial and the resulting decision dismissing the National Rifle Association's bankruptcy case revealed some interesting information about the NRA and its governance and financial situation. First, and as media coverage highlighted, the decision to file the bankruptcy case was made with little involvement of the board or senior officers beyond chief executive officer Wayne LaPierre (formal title: executive vice president) and "not . . . in good faith but instead . . . as an effort to gain an unfair litigation advantage in the NY AG Enforcement Action and as an effort to avoid a regulatory scheme." Second, testimony during the trial revealed a host of facts relating to governance and financial misconduct that even the NRA's counsel acknowledged were cringeworthy. But what may prove to be most important in the long run even though it garnered much less coverage was the court found that what the NRA has labeled a "course correction" has resolved a number of governance and financial concerns, perhaps enough to save the NRA from dissolution in the NY AG proceeding and from the financial hole it has dug for itself.
On the first point, the court stated:
What concerns the Court most though is the surreptitious manner in which Mr. LaPierre obtained and exercised authority to file bankruptcy for the NRA. Excluding so many people from the process of deciding to file for bankruptcy, including the vast majority of the board of directors, the chief financial officer, and the general counsel, is nothing less than shocking.
As for the filing motivation, after lengthy consideration of the various reasons asserted and testimony on this point, including particularly from Mr. LaPierre, the court stated:
The Court finds, based on the totality of the circumstances, that the NRA’s bankruptcy petition was not filed in good faith but instead was filed as an effort to gain an unfair litigation advantage in the NYAG Enforcement Action and as an effort to avoid a regulatory scheme. This constitutes cause for dismissal under section 1112(b)(1) of the Bankruptcy Code.
On the second point, others have documented how trial testimony revealed numerous governance and financial failures. For a detailed if not unbiased summary, see this opinion piece from the Washington Post. These failures included details of LaPierre's personal and family expenses paid for by the NRA, and attempts to conceal those payments.
But there is another point that may ultimately turn out to be the most significant, even though it has garnered the least coverage. In rejecting the appointment of a trustee or examiner, the court said the following (citations omitted):
While there is evidence of the NRA’s past and present misconduct, the NRA has made progress since 2017 with its course correction. Whether it is yet complete or not, there has been more disclosure and self-reporting since 2017. Both Ms. Rowling and Mr. Erstling, the NRA’s Director of Budget and Financial Analysis, testified that the concerns they expressed in the 2017 Whistleblower Memo are no longer concerns. Mr. Frazer testified regarding the compliance training program that the NRA now has for employees. Mr. Spray testified credibly that the change that has occurred within the NRA over the past few years could not have occurred without the active support of Mr. LaPierre. It is also an encouraging fact that Ms. Rowling has risen in the ranks of the NRA to become the acting chief financial officer, both because of her former status as a whistleblower and because of the Court’s impression of her from her testimony as a champion of compliance.
In short, the testimony of Ms. Rowling and several others suggests that the NRA now
understands the importance of compliance
Of course even if the NRA manages to eventually put its legal problems behind it, it will still have to deal with a slow burn financial crisis. As Brian Mittendorf detailed in 2019, the NRA has for years spent more than it brought in, creating a potential financial crisis. And that crisis is exacerbated by a point that came out during the trial and that Mittendorf highlighted on Twitter: of the NRA's approximately 5 million members, 2 million or 40% are life members who apparently have already paid all of the dues they will ever owe to the NRA. Whether course correction will be sufficient to right both the legal and financial aspects of the NRA remains to be seen.