InfoWars and Sub V: Can Alex Jones’ Media Companies Use Small Business Reorganization to Curb Sandy Hook Defamation Liability?

Last week, three media sites affiliated with InfoWars and Alex Jones (InfoW LLC, IWHealth LLC and Prison Planet TV LLC – together, InfoWars), recently filed for Chapter 11 bankruptcy protection in the Untied States Bankruptcy Court for the Southern District of Texas. Notably, the InfoWars debtors elected to proceed under Subchapter V of Chapter 11 of the Bankruptcy Code (Sub V) which provides for “Small Business Reorganization.” What is unique about this approach to Chapter 11 reorganization? More importantly, what does this mean in terms of how the InfoWars case may proceed in bankruptcy?

How is Sub V Different from “Regular” Chapter 11?

The Small Business Reorganization Act of 2019 (SABRA) added Sub V to the Bankruptcy Code effective in February 2020. The Congressional intent behind Sub V was to allow small “mom and pop” businesses to more efficiently and affordably reorganize under Chapter 11 in the absence of many of Chapter 11’s more expensive and onerous requirements. Accordingly, the law originally limited debtors to no more than $2.725 million in aggregate debt to be eligible to file under Sub V. However, as part of the pandemic CARES Act, this threshold was increased to $7.5 million to permit more distressed businesses to proceed under Sub V. The increased availability of Sub V has proved so popular that, rather than permitting it to sunset after one year as originally intended, Congress extended the $7.5 million debt threshold through March 27, and bipartisan legislation has been introduced to make it permanent (as of this writing, the $7.5 million debt limit has expired, but on April 1, the limit was inflation-adjusted up to $3.024 million pursuant to the original terms of SABRA).   

The reasons for Sub V’s popularity are not difficult to discern. A number of burdensome requirements for debtors under traditional Chapter 11 are relaxed or eliminated entirely under Sub V:

• Creditor support is not required for a plan of reorganization to be confirmed. Traditional Chapter 11 debtors must solicit a proposed plan of reorganization to creditors, who are entitled to vote on whether the plan (and its proposed treatment of their claims) should be approved.  Under Sub V, the bankruptcy court can approve a debtor’s plan in the absence of creditor support (a “cramdown plan”), so long as the plan meets other confirmation requirements. 
• Administrative expenses can be paid over time. Ordinarily in Chapter 11, a debtor must be able to pay its administrative expenses (i.e. costs that arise after the filing of the bankruptcy petition) in full upon the plan of reorganization becoming effective. Debtors who are unable to pay these costs in full are considered “administratively insolvent” and often must dismiss or convert their cases to Chapter 7 liquidations rather than successfully reorganize. Sub V permits a debtor to pay these expenses over time, along with other creditor claims paid under the plan.
• Equity can be retained without paying creditors in full. The “Absolute Priority Rule” in Chapter 11 generally requires that a debtor’s owners may not keep any of their equity in the debtor unless all creditors above them in the debt stack are paid in full. However, the Absolute Priority Rule does not apply in Sub V, and equity may retain its interests so long as the plan meets a “fair and equitable” requirement for the treatment of affected creditors. 
• No Creditors’ Committee. Unless the bankruptcy court orders otherwise for “cause,” no official committee of unsecured creditors is permitted to be appointed in a Sub V case. Committees have substantial powers under Chapter 11 and serve as an important check on the debtor’s actions in bankruptcy case; however, they are also very costly to the debtor, as its estate must pay the expenses of the committee (including its legal fees) and the involvement of a committee is almost guaranteed to protract the debtor’s stay in Chapter 11. As such, committees are usually disfavored by Chapter 11 debtors. 
• Exclusivity and efficiency. Sub V requires that: (i) only the debtor can file a plan; and (ii) the debtor must file a plan within 90 days of filing its case. These means that the debtor does not have to worry about a competing party proposing its own plan for the debtor’s reorganization, and the 90-day requirement forces a debtor to propose a plan quickly, thereby reducing the length (and the cost) of its time in bankruptcy. The debtor is also generally relieved from the requirement to file and obtain court approval of a disclosure statement to accompany its plan, which further reduces time and costs.

Another key feature of Sub V is that, even while the debtor continues to exist as a debtor-in-possession of its estate and its business, a Sub V trustee is automatically appointed to perform a number of duties in the case. These duties include those performed by trustees appointed in cases under other chapters of the Bankruptcy Code, such as accounting for all of the estate’s property and examining and objecting to creditor claims, and but in a Sub V case, a trustee is uniquely required to “facilitate the development of a consensual plan of reorganization”– in essence, serving as a sort of mediator between the debtor and its creditors to arrive at a confirmable plan. 

What Does the Sub V Election Mean for InfoWars, Alex Jones and Their Creditors?

The only creditors named by the InfoWars debtors are the families of the children and school staff who were harmed or killed in the mass shooting at Sandy Hook Elementary School in Newtown, Connecticut in 2012.  The Sandy Hook creditors obtained a default judgment for defamation claims against Jones and InfoWars, who stated on-air that the Sandy Hook shooting was faked by actors in an attempt to discredit gun owners and push for gun control legislation. A trial to determine the amount of damages to award to the Sandy Hook creditors, set to begin this month in Austin, was stayed by the bankruptcy filing. Having elected Sub V, InfoWars can conceivably propose and confirm a plan without any support from the Sandy Hook creditors.

And indeed, that appears to be just what InfoWars intends to do, having already sought bankruptcy court appointment of two former bankruptcy judges to serve as litigation trustees to oversee a proposed trust that would be approved under a plan and would pay the Sandy Hook creditor claims with money provided by Jones and/or his other non-debtor businesses.    

Notably, neither Free Speech Systems LLC (the primary holding company of Jones’ businesses) nor Jones himself have sought bankruptcy protection. Jones assigned all of his equity in the three InfoWars debtors to the litigation trust prior to the bankruptcy filing. And while Free Speech Systems and Jones are co-liable with the InfoWars debtors to the Sandy Hook creditors, a confirmed plan that paid the Sandy Hook creditors from the trust (even in the absence of their support) would theoretically resolve the liabilities of Jones and Free Speech Systems, despite the fact that they did not file for bankruptcy or make the disclosures required of persons or entities who file for bankruptcy.  

Though Jones is apparently footing the bill for the administrative costs of the bankruptcy case, under Sub V he can pay the costs of the case over time, and in the absence of a committee, those costs are dramatically reduced.   

Parties, including the Sandy Hook creditors, the Office of the United States Trustee, as well as the Bankruptcy Court itself, have already raised a number of issues regarding the propriety of InfoWars proceeding under Sub V, including:

• Whether the InfoWars debtors are “engaged in commercial or business or activities” as required for debtors to be eligible to proceed under Sub V, given that they have minimal assets, no operations and no creditors other than the Sandy Hook creditors; 
• Why the court should entertain the appointment of the litigation trustees before a plan has been proposed and while there is already a Sub V trustee in place with statutory duties to perform – including the facilitation of a “consensual plan”; and
• Whether the court can appoint the litigation trustees at all, given that there is no mechanism in the Bankruptcy Code for doing so outside of a confirmed plan.

Furthermore, the essential question of whether a debtor may proceed under Sub V if the Sub V election is made in bad faith is not addressed by the Bankruptcy Code and has only limited, if any, review by courts given the relative youth of Sub V. It is possible we could see that question addressed by a bankruptcy court for the first time. Likewise, it is also possible that the Bankruptcy Court could find “cause” to appoint a committee or remove the Infowars debtors as debtors-in-possession, as is provided under Sub V. Regardless of the outcome, the InfoWars case will almost certainly play a role in defining the legal advantages and the limitations of electing to proceed as a small business debtor under Subchapter V of Chapter 11.