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Infowars Bankruptcy Tactic Tips Scale Against Sandy Hook Victims

April 18, 2022, 4:58 PM

Relatives of children killed in the 2012 Sandy Hook massacre could have a harder time collecting from far-right radio host Alex Jones under the legal strategy being employed by the conspiracy theorist.

Companies tied to Jones filed for bankruptcy on Sunday seeking special rules reserved for small business owners who have fallen on hard times. Those rules would speed up proceedings and reduce the families’ influence on the reorganization by preventing them from forming a creditors committee.

“None of Mr. Jones’ ridiculous tricks have worked in the past, and this one will fare no better,” said Mark Bankston, lead counsel for the Sandy Hook parents in the Texas lawsuits.

Jones acknowledged in an internet broadcast that his Infowars empire is under heavy financial strain and asked listeners for money. The relatives of Sandy Hook victims won key court rulings against Jones after he called the shootings a hoax. A trial in Connecticut will eventually determine the size of the damages. He was also found liable in similar proceedings in Texas.

“I’ve told you we’re maxed out, and I don’t want to lay off our employees” Jones told listeners in a broadcast Monday, pleading for money. “I really need your financial support right now.”

Three entities, including one that holds the rights to website Infowars, sought Chapter 11 protection in Victoria, Texas. Each estimated liabilities of as much as $10 million, according to court filings. Chapter 11 filings allow a business to keep operating while working on a turnaround plan and pause pending civil litigation. Jones’ main holding company, Free Speech Systems LLC, didn’t file for bankruptcy.

Small Business Rules

Under small-business bankruptcy rules, known as Subchapter V, the Sandy Hook families won’t be able to join an official committee of creditors, which can have influence in major corporate cases but aren’t typically set up in Subchapter V filings. Small business rules also block creditors from proposing their own payout plan and allow owners to retain their business stakes, even if they don’t fully repay the company’s debts.

Subchapter V cases are limited to private companies that face only a few million dollars in debt, and rarely involve complicated legal disputes like whether a parent company can be shielded from lawsuits without filing for bankruptcy itself.

In the Infowars bankruptcy, lawyers set up a trust that would pay people suing the companies, and Jones handed over his equity in the entities to the trust. The units in bankruptcy “have no purpose other than to hold assets which may be used by other entities” and their only liabilities are the litigation claims, according to court papers.

By establishing a trust to settle legal claims in bankruptcy, Jones’s companies are following a controversial playbook used by other corporations facing significant lawsuits. Companies including opioid maker Purdue Pharma LP and youth organization Boy Scouts of America have sought Chapter 11 protection to settle thousands of cases and streamline payouts to victims claiming harm.

Jones put $725,000 of his own money into the trust to cover the costs of the Chapter 11 filings. Additional funds, including $2 million cash, could flow into the trust as a result of the bankruptcy, according to court papers. Two former bankruptcy judges -- Russell F. Nelms and Richard S. Schmidt -- are overseeing the trust.

The trust is a way to ensure litigation creditors can be paid in full, rather than get uneven payouts simply due to the timing of trials, lawyers for the companies said in court papers. Jury selection for the Texas trial is set to begin next week, while the Connecticut trial is still months away.

Read More: Alex Jones’s Businesses Tap Advisers, Weigh Possible Bankruptcy

Lawyers representing Jones and his businesses have said the Texas defamation lawsuit was strategically filed to silence their free speech on matters of public interest.

Judges in Connecticut and Texas issued default judgments against Jones after he failed to turn over documents including financial information. Lawyers representing Jones have argued the plaintiffs’ probe into the financial ties between Jones and his various entities is akin to a “collections action” and a “fishing expedition.”

In March, lawyers representing relatives of Sandy Hook shooting victims sought an arrest order for Jones after he skipped a court-ordered deposition, citing health reasons. Jones appeared for the deposition after facing hefty fines.

The main case is InfoW LLC, 22-60020, U.S. Bankruptcy Court, Southern District of Texas.

To contact the reporters on this story:
Jeremy Hill in New York at jhill273@bloomberg.net;
Rachel Butt in New York at rbutt4@bloomberg.net;
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story:
Claire Boston at cboston6@bloomberg.net

Dawn McCarty

© 2022 Bloomberg L.P. All rights reserved. Used with permission.