A trial court in New York has dismissed a complaint brought by New York Attorney General Letitia James seeking to dissolve the National Rifle Association for its failure to oversee top executives and prevent the loss of millions of dollars improperly spent by its leaders.  But the Court has allowed the AG to continue to prosecute various claims against the individual defendants for breach of fiduciary duty and other offenses.

“The Attorney General’s allegations in this case, if proven,” the Court said at the beginning of its opinion, “tell a grim story of greed, self-dealing, and lax financial oversight at the highest levels of the National Rifle Association.  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 Complaint’s boldest claims target the NRA itself,” the Court wrote.  “Despite elsewhere casting the organization as the victim of its executives’ schemes, the Attorney general seeks an order dissolving the NRA and directing that its remaining assets and any future assets be applied to charitable uses consistent with the mission.”

The claim, the Court said, must be dismissed.  “Her allegations 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 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.”

Not a current Nonprofit Issues subscriber? Start an introductory subscription for 3 months of full access for just $17.95.

The opinion recites at length many of the allegations of the complaint and the history of the case prior to its decision, including recognition of the Bankruptcy Court’s dismissal of the NRA’s claim in bankruptcy and its effort to stay the state court action for dissolution.  (See Nonprofit Issues^®, Vol. XXXI, No. 2.)

On the dispositive issue of dissolution, the Court traced the standard back to state litigation in the 1890s.  The “paramount importance” in granting dissolution is the “public interest” and dissolution is not to be mechanically imposed even if the statutory standards are met, it said.  The final determination must be with the Court, and “there must be a grave, substantial and continuing abuse, involving a public rather than a private right, by the corporation.”

It concluded that the Attorney General had ‘failed 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.”  The allegations ignore 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 Court wrote.

The Court refused to dismiss claims for breach of fiduciary duty and removal from office as requested by two of the individual defendants, President Wayne LaPierre, and Counsel John Frazier.  It also permitted a number of other claims for failure to follow statutory requirements.  (The People v. The National Rifle Association of America, Supreme Ct., New York County, NY, No. 451625/2020, 3/2/22.)

YOU NEED TO KNOW

The Court takes little notice of the allegations that the Board was so asleep at the wheel that it failed to curtail the multiple abuses of individual wrongdoing by the defendants and seems to lump those charges into the conclusion that the wrongs were private wrongs within the corporation and not public wrongs hurting the general public.  It will be interesting to see whether the Attorney General appeals on this issue, or whether she just goes after the individuals, who have already restored at least some of the allegedly wrongful payments.  Banning them from serving on the board of a New York charity (the NRA is a 501(c)(4) social welfare organization for federal tax purposes) may not have much impact if the NRA completes its effort to reincorporate in the state of Texas.  Mr. LaPierre was recently reelected as President of the Association.