New York Judge Spares NRA “Corporate Death Penalty”
March 07, 2022
The National Rifle Association has long been a politically charged topic for its fans and critics. For those of you more interested in the politics of the NRA’s ongoing battle with New York’s Attorney General Letitia James, you probably want to look elsewhere. For those of you interested in the AG’s legal basis for seeking judicial dissolution of the NRA under New York’s Not-For-Profit Corporation Law (N-PCL), and in Manhattan Commercial Division Justice Joel Cohen’s reasoning behind his 42-page decision last week dismissing the AG’s dissolution claim, make yourself comfortable.
The NRA of today hardly resembles the organization at its birth in 1871 as a New York not-for-profit corporation, initially funded with a $25,000 legislative grant, whose stated purpose was “the improvement of its members in marksmanship, and to promote the introduction of a system of army drill and rifle practice . . . and for those purposes to provide a suitable range in the vicinity of the City of New York.” The NRA’s vastly expanded mission as stated in its current bylaws includes protecting the American citizen’s constitutionally guaranteed and “God-given inalienable right” to keep and bear arms. Since the 1970s the NRA has been best known to the public as a politically potent gun rights advocacy group with a powerful lobbying arm. As of a few years ago its membership surpassed 5.5 million.
Many years ago the NRA relocated its headquarters to Fairfax, Virginia, but it remains legally domiciled in New York as a Section 501 tax-exempt, not-for-profit corporation and charitable organization subject to the New York AG’s oversight.
The AG Sues to Dissolve the NRA and Oust its Leadership
In August 2020, AG James filed suit in Manhattan Supreme Court against the NRA and several members of its leadership team including Wayne LaPierre, its top executive and the public face of the NRA. As Justice Cohen commented in the opening sentence of his decision, the allegations in the AG’s 184-page Amended Complaint,
if proven, tell a grim story of greed, self-dealing, and lax financial oversight at the highest levels of the [NRA]. They describe in detail a pattern of exorbitant spending and expense reimbursement for the personal benefit of senior management, along with conflicts of interest, related party transactions, cover-ups, negligence, and retaliation against dissidents and whistleblowers who dared to investigate or complain, which siphoned millions of dollars away from the NRA’s legitimate operations.
The main target of the complaint’s allegations of wrongdoing is LaPierre. As summarized in the decision,
The NYAG alleges that LaPierre routinely abused his authority as Executive Vice President of the NRA to cause the NRA to improperly incur and reimburse LaPierre for expenses that were for LaPierre’s personal benefit and violated NRA policy, including private jet travel for purely personal reasons; trips to the Bahamas to vacation on a yacht owned by the principal of numerous NRA vendors; use of a travel consultant for costly black car services; gifts for favored friends and vendors; lucrative consulting contracts for ex-employees and board members; and excessive security costs.
A second major target of the complaint is NRA General Counsel John Frazer who allegedly failed to ensure compliance with corporate governance requirements imposed by New York on not-for-profit corporations including failing to make necessary changes to board governance procedures; failing to ensure that related-party transactions were being addressed in accordance with N-PCL § 715; failing to enforce compliance with the NRA’s conflict-of-interest policy; and failing to ensure compliance with laws and policies governing whistleblowers.
The complaint demands judicial dissolution of the NRA under two separate provisions of the N-PCL. First, the AG invokes the authority explicitly given her under N-PCL § 1101(a)(2) to seek dissolution when “the corporation has exceeded the authority conferred upon it by law, or has . . . carried on, conducted or transacted its business in a persistently fraudulent or illegal manner, or by the abuse of its powers contrary to public policy of the state has become liable to be dissolved.”
Second, the AG acting under N-PCL § 112(a)(7) in her deemed status as a member, director, or officer of the NRA alternatively demands dissolution under N-PCL § 1102(a)(2) where the “directors or members in control of the corporation 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.” (NB: New York business divorce practitioners should recognize that language as tracking the grounds for dissolution of closely held corporations under § 1104-a(a)(1) and (a)(2) of the Business Corporation Law.)
As to LaPierre, Fraser, and two other individual defendants, the complaint demands their removal from office, that they account and pay restitution for waste and misuse of charitable assets, and various other remedies for their alleged violations of the N-PCL and other New York laws governing the NRA’s activities.
The NRA’s Short-Lived Foray Into Bankruptcy
Amidst the AG’s suit, in January 2021, the NRA filed a voluntary Chapter 11 petition for bankruptcy in the Northern District of Texas. The AG’s later-amended complaint quotes NRA public statements that the bankruptcy filing was part of a plan to “dump New York” and to “organiz[e] its legal and regulatory matters in an efficient forum.” LaPierre issued a letter to NRA members similarly stating that the NRA “seeks protection from New York officials who illegally abused and weaponized the powers they wield against the NRA and its members.” He later testified that the NRA filed Chapter 11 “because the New York State attorney general is seeking dissolution of the NRA . . . and we believe it’s not a fair, level playing field.”
In May 2021, the Bankruptcy Court dismissed the NRA’s petition, finding that the filing was not made in good faith and improperly sought to use the bankruptcy process to stymie the AG’s New York lawsuit. The court’s decision was highly critical of the way in which LaPierre filed for bankruptcy and, alluding to “cringeworthy facts” regarding financial improprieties, warned the NRA of sterner action by the court should it refile for bankruptcy.
The NRA Moves to Dismiss the AG’s Lawsuit
In September 2021, the NRA filed a motion to dismiss all claims against it. The NRA’s legal brief, after characterizing the AG’s suit as a “political vendetta” seeking to “to silence the constitutionally guaranteed political speech of its 5 million members,” argued that, even assuming the truth of the complaint’s allegations of financial abuse by its leadership, the AG failed to allege any misconduct by the NRA’s Board of Directors and that “the NRA and its Board would be the victims of the alleged wrongdoing—not perpetrators” and “[t]hus, no provision of New York law justifies punishing the NRA or its members” with the extreme remedy of dissolution. The NRA also argued that the findings of the Bankruptcy Court are binding on and collaterally estop the AG from pursuing dissolution claims.
The AG’s opposing brief defended her position that the amended complaint’s allegations adequately pleaded grounds for dissolution and that dissolution is an available and appropriate remedy:
The Complaint comprehensively lays out the Attorney General’s factual findings of pervasive and persistent illegality on the part of the NRA and egregious waste of charitable assets on the part of its entrenched leadership. Among other allegations, the Complaint sets forth, in meticulous detail, facts establishing that the NRA and its Board permitted the diversion of tens of millions of dollars away from the NRA’s charitable mission, imposing substantial reductions in its expenditures for core program services. The Complaint contains numerous allegations demonstrating the NRA’s systemic misconduct, illegality, mismanagement of charitable assets, and abuse of its charitable status. . . .
The NRA’s claim that the remedy of dissolution “is reserved for non-profit organizations that themselves are deemed to be a sham,” finds no support in New York law. Neither N-PCL § 1101(a)(2) nor N-PCL § 1102(a)(2)(D) contain a requirement that the Attorney General prove that an entity is a sham to seek dissolution. The fact that a charity is completely fraudulent—or a “sham”—is a sufficient, but not a necessary, condition for dissolution under the N-PCL. The term “sham”—or its equivalent—does not appear in these statutes and is not the relevant legal standard against which the Attorney General’s causes of action should be evaluated. Moreover, the law does not require allegations of insolvency or a complete inability to conduct mission-advancing activities to state a claim for judicial dissolution.
Finding No Public Harm, Justice Cohen Dismisses the AG’s Dissolution Claims
Justice Cohen’s legal analysis of the AG’s dissolution claims, starting at page 16 of his opinion, initially casts aside the NRA’s collateral estoppel argument, concluding that the dissolution claim was not litigated, addressed, or decided in bankruptcy court. “Indeed,” Justice Cohen wrote, “it would undermine the bankruptcy court’s core finding that the NRA improperly sought to use the bankruptcy proceedings to frustrate the Attorney General’s action in this case.”
Turning next to the AG’s statutory dissolution claims, Justice Cohen concluded that the allegations of misconduct by LaPierre and other NRA executives fail to establish that the extreme sanction of dissolution is an appropriate remedy. As Justice Cohen explained in his opinion’s introductory section, the AG’s allegations of misconduct
concern primarily private harm to the NRA and its members and donors, which if proven can be addressed by the targeted, less intrusive relief she seeks through other claims in her Complaint. The Complaint does not allege that any financial misconduct benefited the NRA, or that the NRA exists primarily to carry out such activity, or that the NRA is incapable of continuing its legitimate activities on behalf of its millions of members. In short, the Complaint does not allege the type of public harm that is the legal linchpin for imposing the “corporate death penalty.” Moreover, dissolving the NRA could impinge, at least indirectly, on the free speech and assembly rights of its millions of members. While that alone would not preclude statutory dissolution if circumstances otherwise clearly warranted it, the Court believes it is a relevant factor that counsels against State-imposed dissolution, which should be the last option, not the first.
In his more granular analysis of the statutory standards for dissolution of not-for-profit corporations under N-PCL §§ 1101 and 1102 at pages 19-27 of the opinion, Justice Cohen noted that, in contrast to purely private actions under those statutes in which the benefit to the members of a dissolution is of paramount importance, in actions brought by the Attorney General, N-PCL § 1109(b)(1) expressly provides that the interest of the public is of paramount importance. “The statute’s emphasis on public (rather than private) interest in assessing government-initiated dissolution proceedings echoes case law in this State going back more than one hundred years,” he wrote. Under the case precedent, he further commented, “before the Attorney-General can obtain judicial dissolution of a corporation, there must be a grave, substantial and continuing abuse, involving a public rather than a private right, by the corporation” (emphasis in original).
“Held up against these rigorous standards,” the opinion concluded, “the NYAG’s claim for dissolution of the NRA cannot be sustained.” Following are some of the highlights of the court’s as-applied analysis:
- “The malfeasance alleged in the Complaint – if proven – is undoubtedly troubling, but the Attorney General does not allege that the NRA’s mismanagement under LaPierre and others ‘has produced, or tends to produce, injury to the public.’”
- “The main victim of the NRA’s alleged dysfunction has been, according to the Complaint, the NRA and its members. . . . The Complaint does not allege that the misconduct ascribed to the Individual Defendants benefited the NRA, or that the NRA exists primarily to carry out such illegal activity, or that the NRA is incapable of continuing its core charitable mission if the Individual Defendants are removed from their positions.”
- “In arguing for dissolution, the Attorney General’s allegations fail to delineate between the NRA, on the one hand, and its leaders on the other, who acted ‘without regard to the NRA’s best interests.’”
- “Conflating the Individual Defendants with the NRA writ large for purposes of dissolution is inappropriate here for the reasons discussed supra. It also ignores the allegations that the wrongdoers in control of the NRA do not necessarily speak for other NRA members, some of whom have tried to instigate reform within the organization but have been met with resistance from entrenched leadership.”
- “The remedy of dissolution is, in the Court’s view, disproportionate and not narrowly tailored to address the financial malfeasance alleged in the Complaint, which is amply covered by the Attorney General’s other claims.”
What’s Left of the Case?
With the AG’s existential threat against the NRA off the table — so much for LaPierre’s stated fear of an un-level playing field in the New York courts — the case nonetheless continues with other, lesser claims against the NRA for failing to implement required corporate governance concerning unauthorized related-party transactions, for violating statutory whistleblower protections, and for filing annual reports with the Attorney General containing false information.
The case also continues with a multitude of statutory and common-law claims for alleged financial abuses against the individual defendants including LaPierre and Frazer, both of whose separate dismissal motions Justice Cohen denied in large part. The AG’s demand for LaPierre’s removal from office remains in play.
Under the court’s most recent pretrial scheduling order, fact and expert discovery is due to be completed by May 20 and the case certified as ready for trial by May 27.
Whatever the outcome, Justice Cohen’s opinion in the NRA case is an important and welcome contribution to the relatively small and ancient body of case law — most of the significant cases cited in the opinion are around 60 to 130 years old — concerning judicial dissolution of New York not-for-profit corporations.