Why the NRA is Up in Arms over Receivership

The bankruptcy filing of the National Rifle Association (NRA) has drawn lots of attention due to allegations of potentially improper and salacious activities that enriched NRA President Wayne LaPierre, such as frequent stays on a 108-foot yacht owned by a major NRA vendor and his personal assistant diverting $40,000 to pay for her son’s wedding and other personal expenses.

From a lawyer and judge’s perspective, what is of most interest is the NRA’s race to file a bankruptcy petition before the State of New York could initiate a receivership proceeding.  

Why would the NRA prefer bankruptcy instead of a receivership?  

The answer: a receivership comes with a court-appointed independent receiver who acts as a trustee, making decisions on behalf of the debtor in selling or liquidating its assets.  By contrast, in many bankruptcies, the debtor’s existing management stays in charge of the organization, and no independent third party is inserted into daily operations.

Needless to say, many of the NRA’s board members are none too pleased with the idea of receivership (“It would be disastrous,” board member retired Lt. Col. Willes Lee testified during the ongoing trial.)

The rules regarding receiverships predate the modern bankruptcy code and vary state by state, and sometimes county by county.  While bankruptcy can be filed voluntarily by a debtor, receiverships are involuntary judicial proceedings brought by creditors and regulators, with the goal of appointing a receiver to preserve, manage, and dispose of any assets the debtor located within the state.

Given the many accusations of financial improprieties the NRA is loathe to allow an independent third party to more deeply examine its practices and affairs — hence the push for bankruptcy before New York can institute a receivership.

Alas for the NRA, its attempt to beat New York to the punch by filing federal bankruptcy may not save the NRA from independent scrutiny.  In bankruptcies where there are sufficient allegations and evidence of malfeasance by managers of the debtor, the bankruptcy court can appoint an independent examiner, who reports directly to the bankruptcy court, to conduct an investigation of the debtor.  

In more extreme cases, the bankruptcy court can appoint a trustee to administer the debtor during the bankruptcy proceeding, akin to how a receiver might administer a debtor during a receivership.

Not surprisingly, the state of New York has requested that the Bankruptcy Court appoint an examiner in the NRA case.  And, given the proferred evidence and arguments of the New York Attorney General of "years of illegal self-dealing" at the NRA that funded a "lavish lifestyle" for its officers, it would not be surprising to see the bankruptcy court appoint an independent examiner to investigate.  The result could be akin to what the NRA sought to avoid in the receivership: a third party taking a deep dive into the organization’s practices and accounting.