Is gun rights group really eligible for Chapter 11?

On the same day it filed for Chapter 11 bankruptcy protection, the National Rifle Association bragged that it was on solid financial footing.

“In fact, this move comes at a time when the NRA is in its strongest financial condition in years,” the powerful gun lobbying group said in an online Q&A after it filed its court petition on Jan. 15.

So if everything’s fine from a financial standpoint, why is the organization in bankruptcy?

Experts and watchdogs are pointing to ulterior motives that extend beyond the purposes of the U.S. bankruptcy code, which is designed for debtors that have fallen on hard times financially and need legal assistance to reduce their debts or pay back creditors over time.

The NRA says it needs bankruptcy court to help it escape what it calls “a corrupt political and regulatory environment in New York,” whose attorney general is trying to shut down the organization following accusations of corruption.

But filing for Chapter 11 may not be necessary for the group to change its nonprofit registration from New York to Texas as it intends to do. 

And whether or not the group belongs in bankruptcy court could determine whether it can escape culpability for alleged misspending by its executives.

“Bankruptcy is for individuals and entities in financial stress who cannot pay their creditors,” says Melissa Jacoby, a University of North Carolina bankruptcy law professor who is tracking the case. “The NRA has made no effort to categorize itself that way. In terms of whether it’s paying its bills and any definition of insolvency – it doesn’t meet it.”

To be sure, the NRA disclosed in a court filing that its revenue fell by 7% in 2020 as the COVID-19 pandemic took a toll on member dues. But the group offset that decline in income with a 23% reduction in expenses, including pay cuts.

It also reported that it has $203 million in assets, exceeding its $153 million in liabilities, which include $31 million in secured debt owed to Atlantic Union Bank

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The NRA has not responded to multiple requests for comment since its bankruptcy filing, including for this story.

It’s evident that the organization is attempting to use bankruptcy to delay, consolidate or fend off legal challenges, including the lawsuit by New York attorney general Letitia James, says John Pottow, a bankruptcy law professor at the University of Michigan.

Although headquartered in Fairfax, Virginia, the NRA is registered as a 501(c)(4) not-for-profit corporation in New York. In a lawsuit seeking to recoup millions and close the NRA for good, James has accused the organization of enabling executives to use NRA funds for personal travel spending, including private jets and swanky meals.

“They’re definitely trying to preempt the litigation,” Pottow says.

If that’s the plan, it might not work.

In a hearing on the James lawsuit on Jan. 21, Judge Joel Cohen of the New York County State Supreme Court ordered that the case be allowed to continue in Manhattan. The NRA had asked the judge to stay, or indefinitely delay, the case due to the bankruptcy filing.

James, through a spokesperson, declined to comment for this story. But she said in a statement that the “order reaffirms what we’ve known all along: the NRA does not get to dictate if and where they will answer for their actions. We thank the court for allowing our case to move forward and look forward to holding the NRA accountable.”

Bankruptcy without financial problems

In the pantheon of bankruptcy cases, there are many instances in which organizations have filed for bankruptcy before they run into existential financial distress in a bid to avoid disaster.

For example, Purdue Pharma, which recently pled guilty to criminal charges for its role in distributing the addictive opioid OxyContin, was not facing a cash crunch when it filed for bankruptcy in 2019. But it was staring down a deluge of lawsuits that threatened to lead to its downfall.

Similarly, the Boy Scouts of America weren’t facing a serious operational cash shortage when it filed for bankruptcy protection in early 2020. But the group was also facing a firestorm of lawsuits over sexual assault allegations.

By contrast, the NRA has “done nothing” to provide evidence of its financial challenges, says Jacoby of the University of North Carolina. Indeed, it said in court papers that it plans to pay its creditors “in full,” which is extremely unusual in bankruptcy court, where people owed money by the debtor often get less than they were due.

“The idea that an enterprise comes into bankruptcy announcing that it’s going to pay all creditors in full goes against the very idea of why we have a federal bankruptcy system,” Jacoby says.

The group has, however, sent signals that it plans to use the benefits of bankruptcy court to restructure elements of its operations.

The NRA said on its website that it would use bankruptcy to “streamline costs and expenses” and “proceed with pending litigation in a coordinated and structured manner” in pursuit of “many financial and strategic advantages.”

Among its plans is a potential shift of its physical headquarters from Virginia to Texas or elsewhere. The organization has hailed Texas’ friendliness to gun rights.

“The NRA instituted this chapter 11 reorganization proceeding to establish a centralized, neutral forum in which it can streamline, resolve, and address all outstanding claims and preserve its ability to pursue its constitutionally protected mission as a going concern,” the group said in a court filing.

Should Federal courts be involved?

There are certainly cases where federal bankruptcy courts have helped resolve state court litigation as a mechanism for providing the debtor a second chance at life.

But if there’s no financial reason for bankruptcy, America’s federalist system would typically prevent a federal court from intervening in a state legal dispute, Jacoby says.

“We have this bankruptcy power from the Constitution,” she says. “It is not supposed to override all state laws. Unless there’s some financial distress, it’s inappropriate for a federal court to step in on a matter that doesn’t really fall within the purview of that power.”

Jacoby says it’s important to note that her objections to the NRA bankruptcy are not related to the group’s Second Amendment mission.

“They have nothing to do with the right to bear arms,” she says. “It all has to do with whether they’re in financial distress.”

Bankruptcy poses risks

While the bankruptcy filing could be advantageous for the NRA’s agenda of escaping New York, it also poses risks. For example, creditors could use the case to pursue the ouster of officials accused of misspending, including CEO Wayne LaPierre, who has denied wrongdoing.

“If there are serious allegations of mismanagement then you might see a creditor seek to kick out the management,” says Pottow of the University of Michigan. “It’s a risk because now everything’s out in the open.”

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.