COURT: NRA board member says governance lapses prior to Chapter 11 left him ‘distraught,’ may prompt criminal investigation of LaPierre's 'kingdom' - Debtwire

COURT: NRA board member says governance lapses prior to Chapter 11 left him ‘distraught,’ may prompt criminal investigation of LaPierre’s ‘kingdom’

13 April 2021 - 12:00 am

National Rifle Association board member said today that he became increasingly concerned about the organization’s governance practices after reviewing an August lawsuit in which New York Attorney General Letitia James sought to dissolve the organization over allegations of financial mismanagement.


Phillip Journey, a Kansas state court judge who joined the NRA’s board in October after an earlier stint serving as a board member in the 1990s, testified today in the US Bankruptcy Court for the Northern District of Texas. His testimony came amid the fifth day of trial before Judge Harlin Hale, who is considering motions to dismiss the NRA’s Chapter 11 case or appoint a trustee to manage the organization during the bankruptcy.


Journey focused much of his testimony on the NRA’s governance practices, saying his worries about the organization’s management have grown in the wake of the New York AG’s lawsuit. Journey also cited as cause for concern a set of admissions the NRA made to the Internal Revenue Service in the organization’s 2019 tax filing, which indicated that current and former executives—including its long-running executive vice president Wayne LaPierre—used NRA funds for personal benefit.


“It appears to me that the debtor in possession is in survival mode right now,” Journey said of the NRA during his testimony today. He went on to suggest that the NRA may soon face the prospect of criminal liability, given already pending civil litigation that has elicited scrutiny of the organization’s financial affairs. “It’s obvious to me that the next step is criminal investigation.”


Under questioning from one of his own lawyers, Jermaine Watson of Bonds Ellis Eppich Schafer Jones, Journey described feeling “physically sick,” “distraught,” and “aghast” as he reviewed the New York AG’s lawsuit shortly after it was filed in August. In that suit, the AG’s office accused LaPierre of looting NRA assets for his own benefit.


The NRA board member said the lawsuit’s allegations, in his view, raised serious questions surrounding governance practices that seemed to be supported by documentary evidence and interviews with organization insiders.  In essence, Journey said, he came away from his review of the New York AG’s allegations with the sense that the NRA had given LaPierre and those in his circle an unjustified amount of control over the organization.


“It essentially operated as a kingdom, rather than a corporation,” said Journey. “Wayne’s kingdom.”


Journey is expected to continue testifying this afternoon as the trial proceeds; when the trial resumes after a lunch break, Journey will face cross-examination questioning from an NRA lawyer, William Noall of Garman Turner Gordon.


The push for dismissal of the case or the appointment of a Chapter 11 trustee to replace existing management comes from James, the New York AG, and Ackerman McQueen, a public relations agency that is the NRA’s largest creditor. Journey, meanwhile, has filed his own motion in the Chapter 11 case looking to have an examiner appointed, as opposed to installing a trustee or dismissing the bankruptcy altogether. Generally, proponents of dismissing the Chapter 11 case allege that NRA management engaged in fraud and gross mismanagement, and that LaPierre placed the NRA into bankruptcy in bad faith, attempting to skirt regulatory oversight and lawsuits.


The NRA has rejected those allegations, arguing instead that it properly sought the bankruptcy court protection to reorganize in Texas. The organization has further argued that the dismissal proponents are asking the court to pre-judge a potential Chapter 11 plan and decide it cannot reorganize.


Today, in addition to expressing his concerns over the NRA’s governance practices, Journey testified about communication that the NRA’s management and advisors had with him and other board members prior to the Chapter 11 filing in January.


Specifically, Journey said that during a January board meeting, he voted in support of a resolution that approved an employment agreement with LaPierre. Although Journey believed the employment contract contained standard, “ordinary course” provisions, he said he now understands that LaPierre and others at the NPR have pointed to parts of the employment contract to suggest that it gave LaPierre authority to pursue a Chapter 11 filing.


LaPierre, who testified during the dismissal proceedings last week, has confirmed that he did not warn the NRA’s board of directors before filing the Chapter 11 petition.


The NRA filed for Chapter 11 protection in January, reporting approximately USD 203m in assets and USD 153m in liabilities. The 150-year-old organization said at the time of the bankruptcy filing that it hoped to use the process to reincorporate as a Texas non-profit and escape a “hostile” regulatory environment in New York, where the NRA has been incorporated as a non-profit.


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by Scott Flaherty