By Jonathan Randles 

A Dallas judge has thrown the National Rifle Association out of bankruptcy court, calling into question the gun-rights group's plan to reincorporate in Texas as it faces allegations of spending abuses and mismanagement in New York.

Judge Harlin Hale of the U.S. Bankruptcy Court in Dallas dismissed the NRA's chapter 11 case, ruling that NRA CEO Wayne LaPierre filed the January bankruptcy "to gain an unfair litigation advantage" and "to avoid a state regulatory scheme."

Tuesday's ruling follows arguments by New York Attorney General Letitia James and the NRA's former ad agency Ackerman McQueen Inc. that the bankruptcy was filed in bad faith and didn't have a valid purpose.

Ms. James sued to dissolve the NRA in August, accusing Mr. LaPierre and other executives of corruption and financial mismanagement, which Mr. LaPierre and the NRA have denied. The New York lawsuit has continued while the NRA has been in chapter 11. Ms. James has oversight of the NRA, which has its headquarters in Virginia but was founded in New York in 1871 and is officially domiciled there.

Ms. James said in a press conference after Tuesday's ruling that her office continues to pursue its enforcement action against the NRA and that the group can't reorganize in Texas without approval of the New York state attorney general.

In his ruling, Judge Hale said, "The NRA is a solvent and growing organization using this bankruptcy as a tool to win its dissolution lawsuit, and that is not an appropriate use of bankruptcy."

Mr. LaPierre said that while the NRA is disappointed in some aspects of the ruling, the organization will continue its mission defending the Second Amendment.

"We remain an independent organization that can chart its own course, even as we remain in New York to confront our adversaries," Mr. LaPierre said.

The NRA said when it filed for bankruptcy that it was doing so to "to exit what it believes is a corrupt political and regulatory environment in New York." The NRA said it intended to use bankruptcy to reincorporate in the friendlier jurisdiction of Texas.

Judge Hale's dismissal of the NRA's chapter 11 case, which has cost the organization millions of dollars in legal fees, puts in jeopardy the group's strategy to battle the New York attorney general lawsuit and litigation with its former ad agency.

In dismissing the case, Judge Hale didn't prohibit the NRA from filing for bankruptcy a second time. But he said if the NRA did refile, he could appoint an independent trustee to oversee the group, which essentially would strip Mr. LaPierre and other managers of control.

The judge's ruling comes after a trial that scrutinized Mr. LaPierre's decision to put the 150-year-old gun-rights group into chapter 11 bankruptcy in January. A lawyer for the NRA said before the trial that an unfavorable ruling disrupting Mr. LaPierre's leadership could spell the end of the organization. The NRA has defended Mr. LaPierre and argued that his fundraising is the group's most valuable asset.

Testimony by NRA employees pointed to internal problems at the nonprofit, including a failure of Mr. LaPierre to disclose conflicts of interest with top vendors. Testimony also revealed that the NRA's leader kept his decision to file the bankruptcy case from top executives and the group's board of directors.

Mr. LaPierre, some board members and lawyers for the NRA said in bankruptcy court that the organization has strengthened its compliance controls in recent years and largely blamed past internal failures on former Chief Financial Officer Wilson "Woody" Philips, who left that position in 2018. Mr. Phillips has denied wrongdoing. He declined to testify during a deposition related to the NRA's chapter 11, invoking the Fifth Amendment. The NRA submitted a proposed reorganization plan last week that would open a new position for a chief compliance officer.

Lawyers for the New York attorney general's office and the NRA's former ad agency Ackerman McQueen challenged claims that the group corrected its problems during cross-examination and documents presented at trial. In closing arguments, a U.S. Justice Department bankruptcy lawyer said Mr. LaPierre failed to provide the NRA with adequate oversight.

Among the key testimony during the trial was Mr. LaPierre's concession that he made mistakes by not disclosing on NRA conflict-of-interest forms repeated stays on a 108-foot-yacht owned by one of the NRA's largest vendors.

The trial also included testimony from Mr. LaPierre's former travel consultant, who said she was instructed by Mr. LaPierre to omit certain of his flight stops in invoices sent to the NRA for his private jet travel. The omitted destinations included flights to the Bahamas and to airports in Nebraska, where NRA-paid jets frequently landed to pick up or drop off Mr. LaPierre's relatives, testimony showed.

Mr. LaPierre also testified that he didn't inform the full NRA board, the organization's top lawyer or then CFO Craig Spray before he put the NRA into chapter 11. Mr. Spray also testified that he wasn't comfortable signing the NRA's tax filing for 2019, because he wasn't provided materials for certain key disclosures. The filing was ultimately signed by Mr. LaPierre. Mr. Spray left the NRA shortly after it filed for chapter 11.

Judge Hale also heard from an NRA board member who had sought the appointment of an independent examiner to investigate the New York attorney general's allegations. Phillip Journey, a sitting Kansas state judge who was elected to the NRA board last year, said he was shocked when he learned the organization had filed for bankruptcy and said the New York complaint indicated the checks and balances within the group were nonexistent.

On the witness stand, Mr. Journey described the NRA as "Wayne's kingdom" and said the NRA membership deserves to know if the allegations brought in New York are true.

Mark Maremont contributed to this article.

Write to Jonathan Randles at Jonathan.Randles@wsj.com

 

(END) Dow Jones Newswires

May 11, 2021 18:02 ET (22:02 GMT)

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