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Infowars Bankruptcy Contends With Alex Jones’ Defamation Verdict

Aug. 8, 2022, 5:56 PM

Infowars’ parent company will likely face calls for greater scrutiny of its bankruptcy now that a Texas jury has ordered it and its founder, Alex Jones, to pay nearly $50 million in damages to the parents of a Sandy Hook victim for falsely claiming the school shooting was a hoax.

Heightened scrutiny may include expanded trustee powers, examining the validity of the debt owed by Jones’ company, and potentially forming a committee representing the victim families suing Jones.

The Texas jury last week ordered the conspiracy theorist and Free Speech Systems LLC, the parent company of his website InfoWars, to pay $45.2 million in punitive damages and $4.1 million in actual damages. The jury awarded parents Neil Heslin and Scarlett Lewis the damages years after Jones alleged that the 2012 massacre in Newtown, Conn., was fabricated. Their 6-year-old, Jesse Lewis, was killed in the shooting.

On July 29, in the middle of the two-week Texas trial, Free Speech Systems filed a petition for a special form of bankruptcy under Chapter 11—called Subchapter V—that gives those small business debtors several advantages over a typical Chapter 11 case.

Now that some of the Sandy Hook families have monetary judgments against bankrupt Free Speech Systems, the company is poised to face an aggressive deep dive into its financial disclosures pushed along by creditors, according to Nicholas Koffroth, an attorney with Fox Rothschild LLP.

Investigation

In some large, complex bankruptcies, the judge will appoint an independent examiner who is tasked with investigating the bankrupt entity’s finances and activities that preceded the Chapter 11 case. But in Subchapter V cases, an examiner generally isn’t appointed, according to Samir Parikh, a bankruptcy law professor at Lewis & Clark Law School.

Yet the Texas bankruptcy court in Free Speech System’s case may face a request to expand the powers of the Subchapter V trustee—which is appointed in every such small business bankruptcy—to give it similar tools to an examiner to look into the debtor’s financial disclosures. The powers of a Subchapter V trustee can be expanded for cause, according to bankruptcy attorney Alan Rosenberg of Markowitz Ringel Trusty & Hartog P.A.

The power to investigate a debtor can be given by a court as an alternative to removing the debtor altogether from operating the business, a power that was recently affirmed by a New York court in the small business bankruptcy of In Re: Corinthian Communications Inc.

The trustee in the case could be given the power by the court to investigate the “acts, conduct, assets, liabilities, and financial condition of the debtor,” Rosenberg said. That probe could also include the operation of Free Speech’s business “and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a [bankruptcy] plan,” he said.

While the bankruptcy case is still young, questions have already been raised about the validity of secured debt Free Speech Systems says it owes to PQPR Holdings Limited LLC, which is partially owned by Jones through several limited liabilities companies and managed by Jones’ father.

The validity of that debt is being challenged by Connecticut families in a pending fraudulent transfer case in a Texas state court, according to court records. Since that debt is secured, it could be first in line to get paid back.

“Given the allegations that have been made regarding the nature and validity of the PQPR debt, the litigation creditors may seek to expand the powers to allow the trustee to conduct an investigation,” Rosenberg said.

Avi Moshenberg, a lawyer in the Texas fraudulent transfer suit against Jones, said during an Aug. 1 Chapter 11 hearing for Free Speech Systems that he supported giving a trustee powers to investigate and the appointment of an unsecured creditors committee.

“We certainly are going to consider adding any protections and strengths necessary to allow for a transparent process to allow this debtor and Alex Jones and his shell entities to be fully investigated so there’s oversight and transparency and ultimately, so that the Sandy Hook families can bring Alex Jones and his company to justice by liquidating these claims, and by recovering on them,” Moshenberg said.

The bankruptcy court has given Free Speech until Aug. 29 to file more information about its financial affairs.

Committee appointment

Committees representing unsecured creditors are a very common element of large Chapter 11 cases. And while a committee generally isn’t appointed in small business bankruptcy cases, Free Speech Systems’ case is unique, said Donald L. Swanson, a bankruptcy attorney and shareholder at Koley Jessen.

An unsecured creditors committee, which would likely be made up of Sandy Hook victims’ parents suing Jones and Free Speech, would get an official role in the case. Official committees typically get their legal fees paid for by the debtor.

Ha Minh Nguyen, a lawyer for the US Trustee’s office, the Justice Department bankruptcy watchdog, already suggested in a Free Speech bankruptcy hearing this month that a committee of people suing Jones and Infowars may need to be formed.

A cause to appoint such a committee would have to be shown to the judge in order for it to be appointed, Rosenberg said.

“In this particular case, the unsecured creditors as a combined class have a lot at stake,” Rosenberg said. “Besides PQPR, they are the most significant creditor class by far. Given the scope of their claims and the sheer volume of members in the class, it may be advantageous in this case for the litigation creditors to seek the appointment of a committee to advocate for their collective interests.”

More to come

While there’s already a looming question over whether the punitive damages stemming out of defamation judgments can be discharged in a small business bankruptcy case, a battle may also be brewing over whether the Texas constitution allows the $45.2 million punitive award to be capped.

Andino Reynal, Jones’ attorney, told Bloomberg Law on Monday that punitive damages are capped at $1.5 million by Texas statute. But Mark Bankston, one of the plaintiffs’ attorneys, told Bloomberg Law his team doesn’t believe punitive damage caps are constitutional as applied to their case and they would litigate that issue “if necessary.”

Free Speech Systems is also facing a request for relief from the bankruptcy code’s automatic stay for Sandy Hook families to get their day in court in Connecticut. That issue will likely be heard later this month.

To contact the reporter on this story: James Nani in New York at jnani@bloombergindustry.com

To contact the editors responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com; Roger Yu at ryu@bloomberglaw.com