Alex Jones is unquestionably a controversial figure. His Infowars media platform has been accused of spreading conspiracy theories that include suggesting that the Sandy Hook massacre was a staged event to ruminations that chemicals in our water supply were turning frogs gay. For a while – and even now – his business amassed millions of followers and made him rich. That didn’t last. Infowars, to the relief of many, is facing bankruptcy. But, no surprise, Jones is creating even more controversy. He’s doing this by attempting to subvert new bankruptcy laws that were enacted to help small businesses.
The new bankruptcy law is commonly referred to as “subchapter V” because of its place under the chapter 11 rules of the US bankruptcy code. It was enacted by Congress as part of the Small Business Reorganization Act of 2019 and went into effect in February 2020. The purpose of the law was to make it easier for struggling businesses to get more affordable protection while reorganizing themselves. It applies to business owners who have debts of up to $2.75m (excluding debts owed to affiliates or insiders, a consideration that will be important to this story) and where less than 50% of the debts arose because of the commercial or business activities of the debtor, or business owner.
If your business falls into this category, then the cost of filing for bankruptcy under the new subchapter V rules is much less and the process is much easier than doing so under the more onerous chapter 11 rules. You don’t have to form an official committee of unsecured creditors. You don’t have to pay a quarterly US trustee fee. You can take advantage of a reduced period (90 days) to file a reorganization plan. You can spread the payment for administrative services (including attorney’s fees) over the life of the plan, which can be as long as five years. You can also create a reorganization plan that doesn’t need the approval of all your creditors. There are other features of this new law but by now you probably get that it’s designed to help small businesses deal with the pain of bankruptcy and give them a chance to restructure themselves with fewer administrative challenges.
Alex Jones decided to take advantage of subchapter V. Here’s what he did.
Jones and his company Freedom Speech Systems (FSS) were being sued by the parents of the children murdered in the Sandy Hook school shootings. Jones didn’t want his or his company’s assets exposed to the lawsuit. So he decided to take advantage of subchapter V of the chapter 11 bankruptcy code.
According to a report in Fortune, he did this by taking three non-operating entities, including his website Infowars, and filed for protection, naming the Sandy Hook plaintiffs as his creditors. He spread the estimated liabilities to be in compliance with subchapter V so the litigation would be delayed and averting the requirement of creditor approval to restructure. By doing so he attempted to protect Freedom Speech Systems and himself from liability.
According to a report in Axios, Jones tried “to hive off some smaller entities and file those for bankruptcy, rather than filing personally or putting the main operating company that holds his business in bankruptcy.” He siphoned away assets from his smaller entities and then claimed them as creditors of Infowars, even though he owned them. Even though the Small Business Reorganization Act of 2019 made it easier to file for bankruptcy, it still requires the companies that file for bankruptcy to be “engaged in business activities”. It was obvious to many that these smaller entities were not.
Attorneys from the Department of Justice were not cowed. “It appears that Jones intends to leverage the bankruptcy filings of his holding companies to extend the automatic stays of pending litigation against Debtors to him and FSS, while he maintains full control of FSS and its assets going forward,” they wrote in their objection. A judge agreed and stopped the action.
Let’s hope that your small business never has to file for bankruptcy. But if you’re forced to do so, and you choose to do so under the new subchapter V bankruptcy rules, make sure that you follow the rules. You can’t avoid other creditors by creating new entities that you own and spreading the assets. Your debtors can’t be yourself – or other entities you own. And they better be real, operating businesses too. This isn’t a conspiracy. It’s the law.