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Infowars Parent’s Bankruptcy Raises Debt, Willful Injury Questions

Aug. 3, 2022, 9:00 AM

The Chapter 11 bankruptcy filling of Infowars’ parent company highlights questions around the definition of willful and malicious injury and the validity of millions of dollars of debt the Alex Jones-led debtor says it owes to an associated business.

The July 29 petition by Free Speech Systems LLC in a Houston bankruptcy court came in the middle of a two-week trial in Texas to determine the amount of damages that should be awarded to families of Sandy Hook Elementary School shooting victims.

Those families have won defamation lawsuits against Jones, who falsely claimed that the 2012 shooting rampage never happened.

Free Speech Systems is aiming to take advantage of Chapter 11 provisions that allow small businesses to force bankruptcy plans on creditors under certain circumstances. The bankruptcy may allow the company to continue operating even if it can’t fully pay what could be large financial awards to what’s likely to be its biggest creditors—the families of the shooting victims.

“There’s going to be a fight over whether that’s legitimate or not,” said Donald L. Swanson, a bankruptcy attorney and shareholder at Koley Jessen.

“But that’s where they’re heading,” he added. “They’re saying: ‘We meet all the technicalities here for this entity. And we’re not trying to stop the litigation, we’re not trying to prevent people from getting their day in court, we’re just trying to find a way to let that all happen but still keep keep the business going.’”

Additionally, Free Speech Systems may argue that a section of bankruptcy law that precludes a discharge if a debt is based on willful and malicious injury caused by the debtor, only applies to individual debtors, not business entities, Samir Parikh, a bankruptcy law professor at Lewis & Clark Law School said.

Speaking on his Infowars show on Sunday, Jones said his companies “don’t have any extra money.” However, he said he would pursue appeals “for years.”

Attorneys for Free Speech didn’t immediately respond to a request for comment.

Willful and Malicious

A looming question over the bankruptcy is whether damages stemming out of defamation judgments can be discharged.

The US Court of Appeals for the Fourth Circuit in June reversed a bankruptcy court decision that sided with debtor Cleary Packing LLC, finding that claims for willful and malicious injury aren’t dischargeable for individual and business entities under bankruptcy code for small businesses.

But Texas is in the Fifth Circuit, leaving the issue of whether a limited liability company can discharge certain debts for willful and malicious injury under Subchapter V there unsettled, Swanson said. A finding that Free Speech Systems can’t discharge the debt “would be a very bad thing for its bankruptcy strategy,” Swanson said.

Even assuming the judgment isn’t dischargeable, and Free Speech Systems is liquidated, that likely won’t help victims—though they would still have recourse against Jones, Parikh said. If Jones transferred funds out of the debtor before the bankruptcy petition, as has been alleged in a Texas state court action, the bankruptcy court can also claw those funds back, he said.

But if the damages from the Texas and Connecticut cases can’t be discharged, the company will have to deal with any judgment regardless of how it exits bankruptcy, Parikh said.

That could keep those Sandy Hook families waiting for three to five years, according to Jarrod Martin, a Chamberlain, Hrdlicka, White, Williams & Aughtry attorney representing several Sandy Hook family members.

The validity of the debt owed to PQPR will also be a big focus in the case, said bankruptcy attorney Alan Rosenberg of Markowitz Ringel Trusty & Hartog P.A.. It’s already being challenged by Connecticut families in a pending fraudulent transfer case in a Texas state court, according to court records. That debt is also secured, meaning it could be first in line to get paid back.

Subchapter V?

Free Speech Systems is asking for protection under Subchapter V of Chapter 11 of the US Bankruptcy Code, a relatively new statute that gives a variety of special benefits to small businesses over the traditional Chapter 11 structure. Those benefits include the possibility that a debtor can keep its business and force a bankruptcy plan without creditor consent.

Businesses generally can only use Subchapter V if they have debts of less than $7.5 million.

But by filing its bankruptcy before Texas and Connecticut courts could decide how much it owes, the company has ensured that those potential damages are “unliquidated” under bankruptcy rules. Therefore, they don’t count towards the $7.5 million limit, Swanson said.

A lawyer for the families asked a Texas jury to award them $150 million. Free Speech Systems has reported total income in 2021 of nearly $65 million and profits of about $13 million, according to court filings.

The company, which produces and syndicates Jones’ radio and video talk shows, also lists more than $50 million of debt. Much of that secured debt is owed to PQPR Holdings Limited LLC, which markets and sells nutritional supplements on Jones’ show and website and contributes to most of Free Speech’s revenue, according to the debtor.

PQPR is partially owned by Jones through several limited liabilities companies and managed by Jones’ father, according to court papers.

While the amount of debt Free Speech Systems owes to PQPR is more than the $7.5 million threshold, the law excludes debts owed to “insiders or affiliates.” PQPR may fall under one of those definitions, Swanson said.

Business Advantages

Staying in Subchapter V offers the company several big advantages over a typical Chapter 11, including the appointment of a trustee with relatively limited powers. This allows Jones to maintain control of the case and his business, Parikh said.

Free Speech Systems’ reorganization plan also won’t need the consent of an impaired class of creditors—which is typically required in a Chapter 11 case—and its equity holders have a better chance of maintaining their value in the business, Parikh said. No one else can submit a competing reorganization plan, also helping Jones maintain control, he said.

The company can also override objections to a proposed plan by paying creditors its estimated “disposable income” for a period between three to five years.

“I think it’s clear that the debtor is hoping to pay as little as possible on the judgments that will soon be entered against it and Alex Jones,” Martin said.

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; Keith Perine at kperine@bloombergindustry.com