The bankruptcy in Texas of entities linked to conspiracy theorist Alex Jones’ Infowars empire could set a new precedent for how companies can — or can’t — use bankruptcy court against their legal opponents.
The context: It’s not uncommon for companies to file for bankruptcy to consolidate and settle expensive damages (think Purdue Pharma’s opioid-related liabilities and wildfire-related claims against PG&E).
Why is this important: Yet Infowars’ April bankruptcy — filed by three corporate entities connected to Jones and the publication — seeks to use a new section of the law in a way that could cross previously understood boundaries of what the code of bankruptcy is supposed to accomplish.
- The litigation Jones seeks to address is particularly timely and controversial. The claims are brought by the families of Sandy Hook against Jones for calling America’s deadliest school hoaxing – putting the families at the mercy of harassment from Jones supporters.
- This comes at a time when Texas, where Jones is based and where part of the litigation has been filed, has just emerged from a mass shooting at a school within its borders that has already spawned misinformation about false flag operations.
The impact: The Justice Department is seeking to dismiss the bankruptcy case altogether. In April, its bankruptcy watchdog wrote that “the strategy employed here … is a new and dangerous tactic that is abusive and undermines the integrity of the bankruptcy system.”
- Meanwhile, some of the major creditors are walking away from the case – more details below.
State of play: Jones has been found liable in multiple defamation lawsuits brought by the Sandy Hook families against him and his businesses. The lawsuit for damages was set to continue when the three small Jones affiliates filed for Chapter 11 bankruptcy, using a relatively new “sub-chapter” intended to help struggling small businesses reorganize rather than to deal with liquidation.
- This is where it gets technical: the so-called “Subchapter V” offers a streamlined process. There are no creditors’ committees with tons of expensive advisers, and most importantly, creditors don’t have the right to vote to accept or reject the bankruptcy deal.
- The key: To qualify, a company’s indebtedness cannot exceed $3 million and it must also be engaged in commercial activities.
- Since the companies that Jones has bankrupted hold few assets themselves, the idea was for Jones to inject money into them, for the bankruptcy court to decide damages, to force creditors (that’s i.e. Sandy Hook claimants) to accept them – and viola! He can move on.
So how is it different of Purdue, PG&E and others?
- First, these others did not use subchapter V. Jones chose to separate some smaller entities and file for bankruptcy, rather than personally filing or putting the main operating company that owns his bankrupt business. As such, he used the new small business sub-chapter and the accompanying absence of creditors’ rights.
- Purdue and PG&E may have used the bankruptcy process as a way to deal with sprawling litigation — but in normal Chapter 11, they ultimately had to come to an agreement that plaintiffs would vote to accept.
- And critics of Jones’ strategy point to another difficulty: the law requires companies that file for bankruptcy to be “engaged in commercial activities” — which the bankrupt Infowars entities arguably are not.
“I think it’s fair to say that the drafters of sub-chapter V did not envisage this type of deposit. Subchapter V is intended to rehabilitate small businesses,” Ryan Preston Dahl, a partner in Ropes & Gray’s corporate restructuring group, who is not involved in the case, told Axios.
Where is it : The Sandy Hook plaintiffs, in response, also have a few tricks up their sleeve.
- They are in the process of dismissing the debtors from their lawsuits, in an effort to completely clear themselves of the bankruptcy case, so they can continue to seek damages from Jones himself.
And after: A Texas bankruptcy judge is set to hear the DoJ’s motion to dismiss the bankruptcy case next week.