Shot Down

The New York Appellate Division for the First Judicial Department affirmed the dismissal of counterclaims brought by the National Rifle Association against the New York Attorney General

Allegations

This appeal arises from a suit commenced by plaintiff People of the State of New York, by Attorney General Letitia James (NYAG), in August 2020, against defendant The National Rifle Association of America (NRA), a New York-domiciled not-for-profit corporation, and four of its executives and directors — Wayne LaPierre, Wilson Phillips, John Frazier, and Joshua Powell. NYAG’s second amended complaint extensively details, among other things, widespread and longstanding executive malfeasance. For example, the complaint alleges that the NRA regularly paid for enormous expenses incurred by LaPierre and his family members for personal travel to the Bahamas, often via private jet, and to other destinations. The NYAG alleges that the NRA utilized a pass-through arrangement whereby millions of dollars in entertainment and travel expenses incurred by NRA executives were billed to the NRA as purported disbursements paid to the advertising firm Ackerman McQueen for advertising and public relations services. This arrangement allegedly allowed the NRA to evade its own accounting and expense-reimbursement procedures, as well as IRS requirements.

Additionally, defendants and other NRA officers and directors failed properly to disclose alleged conflicts of interest and related party transactions to the NRA’s Board of Directors, and failed to secure the Board’s approval for those conflicts and transactions. In one instance, the NYAG alleges that the NRA paid $1.4 million to an information technology company, HomeTelos, whose chief executive had a longstanding personal relationship with Phillips. Another alleged unlawful related party transaction involved a highly lucrative agreement between the NRA and LaPierre wherein the former guaranteed the latter income for years after he leaves the NRA at a rate exceeding his employee compensation, enabling LaPierre to retain influence over the NRA even if he were removed from office.

Another type of malfeasance alleged in the complaint is that the NRA and the individual defendants retaliated against whistleblowers who attempted to raise concerns about financial misconduct within the NRA. Also, according to the complaint, between 2015 and 2019, the NRA, LaPierre, Phillips, and Frazer made materially false and misleading statements and omissions in the NRA’s yearly CHAR500 filing with the NYAG. Based on its investigation, the NYAG asserted claims against defendants [*2]for violations of provisions applicable to not-for-profit charitable corporations under the Estates, Powers and Trusts Law, the Not-for-Profit Corporation Law, and the Executive Law.

Merits of NRA counterclaims

On this issue of first impression, we hold that the proper legal standard applicable to First Amendment retaliation claims in civil enforcement proceedings such as this one is the no probable cause standard articulated in Hartman and Nieves (see generally DeMartini v Town of Gulf Stream, 942 F3d 1277, 1304-1306 [11th Cir 2019], cert denied — US &mdash, 141 S Ct 660 [2020]; McBeth v Himes, 598 F3d 708, 717-720 [10th Cir 2010]). Civil enforcement proceedings involve many of the same factors considered by the Supreme Court when it adopted the no probable [*4]cause standard applicable to alleged retaliatory criminal prosecutions and arrests. These factors include: the involvement of legal counsel whose decisions are subject to a presumption of regularity; sometimes multiple decisionmakers; a complex chain of causation involving investigation, recommendation, and filing of an enforcement proceeding; and the universal availability of probable cause evidence (see Nieves, 139 S Ct at 1723-1725; Hartman, 547 US at 259-265; DeMartini, 942 F3d at 1304-1306; McBeth, 598 F3d at 717-720; see also Altamore v Barrios-Paoli, 90 NY2d 378, 386 [1997]; Matter of American Dental Coop. v Attorney General of the State of NY, 127 AD2d 274, 280 [1st Dept 1987][presumption of regularity and good faith attaching to official acts, including issuance of investigatory subpoenas]).

Applying the no probable cause standard here, theNRA’s First Amendment retaliation counterclaims were properly dismissed for lack of causation (see generally Dolan, 794 F3d at 294). That is, the NYAG showed as a matter of law that it had probable cause to investigate and sue the NRA (see Nieves, 139 S Ct at 1726 [holding that the “presence of probable cause should generally defeat a First Amendment retaliatory [] claim”]). First, the NYAG has statutory authority to enforce New York’s charities laws (see N-PCL 706[d], 715[f], 1101[a]; EPTL 8-1.4[i], [m]). Second, public reports of malfeasance at the NRA predated the investigation, and other indicators of malfeasance surfaced after the investigation was opened. Third, the NYAG’s own investigation uncovered ample evidence of malfeasance, as evidenced by the lengthy, detailed complaint.

Tellingly, the NRA does not affirmatively argue that the NYAG lacked probable cause for this enforcement action. Instead, it simply posits that the no probable cause standard is the incorrect one. In a footnote, the NRA states that even if the Hartman and Nieves standard applied, the NRA’s counterclaims are sufficient because it pleaded “that the NYAG did not seek dissolution against [other] entities that were victims of similar alleged conduct by executives.” This argument merely restates the NRA’s personal animus and selective enforcement argument and does not illustrate an absence of probable cause.

Further, contrary to the NRA’s assertion, Hartman and Nieves did not draw a distinction between cases involving direct and indirect evidence of retaliatory animus. In fact, Hartman specifically declined to do so (see 547 US at 264-266, 264 n 10).

Finally, the exception to the no probable cause requirement in the case of an official retaliatory policy is not applicable here (see Lozman v City of Riviera Beach, 585 US &mdash, &mdash, 138 S Ct 1945, 1952 [2018]). This exception was applied in the retaliatory arrest (not prosecution) context and should be limited to that context (see id. at 1953-1955; O’Boyle v Commerce Group, Inc., 2023 WL 2579134, *5, 2023 US App LEXIS 6665, *14-15 [11th Cir Mar. 21, 2023, No. 22-10865]). The NRA’s allegations were, at any rate, insufficient to raise an inference that the state officials outside the NYAG’s office who are alleged to have had animus toward the NRA had any role in the decision to investigate or bring an enforcement action against it.

The court held that the NRA waived attorney-client privilege with respect to an outside accounting audit and found the work product privilege inapplicable as to an internal investigation by Jacob S. Frenkel, the NRA’s outside counsel, “which set forth findings and recommendations pertaining to certain transactions that were charged to an NRA corporate credit card.” (Mike Frisch)