Judge dismisses NRA's bankruptcy petition, allowing New York AG lawsuit to move forward

A federal judge has dismissed the National Rifle Association's petition for bankruptcy, saying it was filed in "bad faith" in order to avoid litigation by the New York Attorney General's Office, which has sued to dissolve the NRA for allegedly misusing charitable funds. NRA CEO Wayne LaPierre is shown here at the National Rifle Association Annual Meeting at Lucas Oil Stadium in Indianapolis, Indiana, April 26, 2019. By Sonia Moghe, CNN

(CNN) -- A federal judge has dismissed the National Rifle Association's petition for bankruptcy, saying it was filed in "bad faith" in order to avoid litigation by the New York Attorney General's Office, which has sued to dissolve the NRA for allegedly misusing charitable funds.

Tuesday's decision means the NRA will not have bankruptcy protections, which it has said is needed to protect against a "barrage of litigation" the organization is facing.

The decision from Judge Harlin Hale, of the Northern District of Texas, came after a month-long trial in which NRA attorneys and officials argued that their bankruptcy case should move forward in Texas. New York Attorney General Letitia James' office intervened in the case and asked to dismiss the petition, saying the NRA's decision to file for bankruptcy in Texas and ask to be reincorporated there was a way to "remove the NRA from regulatory oversight."

Hale agreed with James' office's argument in his ruling issued Tuesday.

"The Court finds there is cause to dismiss this bankruptcy case as not having been filed in good faith both because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme," Hale wrote in his decision.

Hale also declined to appoint a trustee or examiner to oversee the NRA's finances.

CNN has reached out to a spokesman for the NRA for comment.

"Today's order reaffirms that the NRA does not get to dictate if and where it will answer for its actions," James said in a statement. "The rot runs deep, which is why we will now refocus on and continue our case in New York court. No one is above the law, not even one of the most powerful lobbying organizations in the country."

Hale declined to dismiss the case with prejudice, meaning the NRA could still decide to file a bankruptcy petition in another venue, but Hale warned that if the NRA choses to file a new bankruptcy case, his court would immediately take up some of its concerns about "disclosure, transparency, secrecy, conflicts of interest of litigation counsel," among others, which could lead to the appointment of a trustee to oversee the organization's affairs. A spokesman for the NRA has not responded to CNN's request for comment on if the organization plans to file for bankruptcy elsewhere.

Brian Mittendorf, a professor of accounting at Ohio State University who has followed the NRA's finances for several years, said the ruling has implications for the various lawsuits the NRA is facing, as well as its financial future.

"In many ways it was a high-risk gambit to think that a bankruptcy court would allow them to bypass some of that litigation," Mittendorf told CNN. "The ruling just clears up that fact that that litigation is going to continue and that there isn't this remedy that entailed a third-party effectively running the organization in the meantime."

Allegations of financial misconduct

The virtual trial in a North Texas bankruptcy court included testimony from top current and former NRA officials, including Chief Executive Officer Wayne LaPierre, who testified on April 7 that he had kept news of the impending bankruptcy filing from the NRA's own general counsel, chief financial officer and other salaried NRA officials.

Hale called LaPierre's decision to file for bankruptcy without notifying the NRA's board and others "troubling" in his decision.

"The Court agrees with the NYAG that the NRA is using this bankruptcy case to address a regulatory enforcement problem, not a financial one," Hale wrote.

Texas attorney Gerrit Pronske, who is representing James' office in court, argued during closing arguments on May 3 that the bankruptcy filing should be dismissed for being filed in "bad faith," pointing to a public letter to NRA members on the day the organization filed for bankruptcy in which LaPierre wrote: "The NRA is not 'bankrupt' or 'going out of business.' "

"We are as financially strong as we have been in years," the letter signed by LaPierre read.

Gregory Garman, an attorney for the NRA, argued last week that the organization has $40 million in "unfunded future litigation." But Pronske countered that financial statements showed the NRA has "plenty of cash on hand."

"I would submit, as a part of a good faith filing, you have to have some problems with your financial condition and you have to have debt issues either now or in the foreseeable future," Pronske said. "The NRA does not have a debt problem ... it has a regulatory problem."

The NRA's headquarters is in Fairfax, Virginia, but it's been incorporated in the state of New York since shortly after the Civil War.

In January, the NRA filed for bankruptcy and as part of its petition sought to be reincorporated in Texas, a move that came five months after James' office filed a suit seeking to dissolve the organization.

James' office alleged the organization violated New York laws governing nonprofits by routinely going around the organization's internal controls to take part in spending that was "inappropriate and wasteful use of charitable assets."

The suit alleges NRA leadership used millions from the group's reserves to fund lavish trips on private jets, meals and other personal expenses and that money was diverted to benefit NRA insiders and favored vendors, that LaPierre handpicked associates to "facilitate his misuse of charitable assets" and that the NRA board did not follow an appropriate process to determine "reasonable" compensation for NRA executives, including LaPierre.

LaPierre testified during the 12-day bankruptcy trial that he currently makes $1.3 million after taking a 20% pay reduction "voluntarily" when the organization had to make cuts to other employees' salaries last year.

"I think my compensation has always been reasonable," LaPierre testified last month.

He also testified that he believes the NRA "is in a much better place today."

"I think it's stronger. I think the controls are stronger," LaPierre testified. "I think the possibility of any overrides of controls are not going to happen. The protections are in place. I feel very good about where we are."

This story has been updated with additional details and background.

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