Infowars’ Alex Jones is back in bankruptcy court ... again.
Why it matters: For the second time this year, the right-wing provocateur is testing the boundaries of how the U.S. bankruptcy code can be used by companies — and their owners — to limit the cost of litigation damages.
Catch up fast: Jones and his Infowars empire are in the midst of a damages trial — they've already been found liable in defamation cases brought by families of the victims of the Sandy Hook school shooting. Jones has repeatedly referred to the shooting as a hoax.
- Companies utilize Chapter 11 bankruptcy when they owe creditors more money than they actually have, and need to work out a settlement and payment plan.
- Creditors can take the form of bondholders, or litigation claimants like the Sandy Hook families. Typically, the company needs approval from those creditors for a bankruptcy plan to be consummated.
State of play: Jones’ earlier bankruptcy gambit involved using — or, misusing — a special subchapter of the code intended only for small businesses.
- That debtor-friendly process curtails many of the rights that creditors receive in a regular Chapter 11 case — most importantly the ability to form creditors committees with legal representation, and to have more of a voice in accepting or rejecting a bankruptcy plan.
- In April, Jones put three Infowars-linked shell companies into subchapter V, companies he'd isolated in order to limit the amount of money that would go toward the bankruptcy settlement with the Sandy Hook families.
- But in June, Jones withdrew those bankruptcy petitions. In a motion seeking to dismiss that case, the Justice Department’s bankruptcy watchdog had called the strategy "novel and dangerous," arguing it would have undermined the integrity of the system.
But Jones apparently hasn’t given up his desire to use subchapter V, and its potential to force a settlement on creditors.
- This time around, he filed the parent company of his Infowars business — at first blush a seemingly more legitimate move.
The catch: He's still using the small biz-focused subchapter V, for which a business can have no more than $7.5 million in "qualifying debts" in order to be eligible.
- But Jones' bankrupt company, Free Speech Systems (FSS), owes a lot more than that — $54 million to an affiliate controlled by Jones and his family, on top of the likely tens of millions it owes the Sandy Hook claimants.
So, what gives? There are a few technicalities ... for one, debt to insiders (like the $54 million) isn't considered "qualifying debt."
- Ditto for "unliquidated" debt — a legal term for liabilities that haven't yet been formally quantified, like pending litigation damages.
That's the rub. Jones filed FSS for subchapter V bankruptcy in order to deal with litigation damages, but the amount of those damages would almost certainly render the company ineligible to actually use subchapter V.
💭 Our thought bubble: Timing is everything. FSS (conveniently) filed in the middle of the damages trial that could imminently put a number on the Sandy Hook liabilities.
- The bankruptcy court could either allow the subchapter V case to proceed, based on the notion that eligibility is determined by a financial snapshot at the time of filing — or it could decide that the damages award changes the game.
Worth noting: Bankruptcy disclosures show that over the last few years, while the Sandy Hook litigation was ongoing, about $62 million flowed out of FSS in the form of "member draws."
- It implies draws by Jones, the company's sole owner, says Avi Moshenberg, a lawyer for the Sandy Hook families.
What to watch: Moshenberg says that even if the case remains in subchapter V, creditors could ask the judge for extra oversight and transparency.
- "It's unacceptable to us to do the normal subchapter V with no transparency, oversight or investigation. That's a huge central issue to this bankruptcy," Moshenberg tells Axios.
