Infowars’ Alex Jones Seeks to Leverage Small-Business Bankruptcy Law
A bankruptcy process designed to save mom-and-pop businesses is being used by the far-right radio host and at least a few other alleged wrongdoers to resolve lawsuits and investigations
Alex Jones protesting Covid-related shutdowns in Texas in 2020.
By Jonathan Randles and Akiko Matsuda
April 21, 2022 6 13 pm ET
Conspiracy theorist Alex Jones is attempting to take advantage of a new bankruptcy law that has saved many small businesses during the pandemic in a bid to end costly defamation lawsuits against him and his far-right website, Infowars.
He isn’t alone in leveraging the small-business bankruptcy option to try to weather allegations of wrongdoing or enterprise-threatening lawsuits. A national coin-dealing business and a
medical cost-sharing nonprofit have also used the special chapter 11 process when faced with investigations into their practices by state authorities.
But bankruptcy specialists who helped craft the small-business law, known as Subchapter V, have said it was meant for cash-strapped mom-and-pop businesses, not companies or people seeking to leverage its protections to settle litigation for less than what they could be forced to pay in the civil justice system.
Subchapter V has bipartisan support in Congress and is generally viewed by bankruptcy specialists as helping small businesses to restructure debt, get a fresh start and keep their owners in control. It also lowers the costs of the chapter 11 process, which can be prohibitively expensive for small businesses to even attempt.
The efficiency of Subchapter V, however, has also raised concerns it could be abused by bad actors. Joe Pack, a lawyer experienced in Subchapter V cases, said it makes some of the safeguards for creditors less effective than in traditional chapter 11 cases.
“What you effectively have now is an opportunity for anybody who ever gets sued to be able to simply file for Subchapter V, and they can value the damages themselves based on what they think they’re willing to pay,” Mr. Pack said.
Small-business cases lower costs by excusing companies from footing the legal fees for an official committee of creditors, who traditionally have a big say at the negotiating table in chapter 11. Creditors in Subchapter V must pay their own legal costs unless a judge orders otherwise, which can make enforcing their rights more difficult.
The law also gives equity holders like Mr. Jones, who are usually wiped out in bankruptcy, the ability to maintain their ownership interest, even if creditors aren’t fully paid.
More than 3,600 cases have been filed under Subchapter V, otherwise known as the Small Business Reorganization Act, since it went into effect in February 2020, according to the Justice Department.
Lawyers for families of Sandy Hook shooting victims who have sued Mr. Jones said they believe his use of Subchapter V is inappropriate and they intend to challenge his legal strategy. If they succeed, they could resume state-court lawsuits against Mr. Jones and his businesses that have been delayed by the bankruptcy filing.
Courts in Texas and Connecticut found Mr. Jones liable by default last year for defamation and intentional infliction of emotional distress for falsely claiming the school shooting was a hoax. His lawyers have denied liability and cast the lawsuits as politically-motivated attacks on Mr. Jones’s free-speech rights.
A Subchapter V case for the trademark- and web-domain rights to Infowars was filed days before a judge in Austin, Texas, was scheduled to go to trial to establish the damages owed by Mr. Jones and his businesses.
“This bankruptcy is filled with all sorts of red flags,” Avi Moshenberg, a lawyer for some of the Sandy Hook families said. “We’ve gone from false flags from Alex Jones to red flags with this filing and we plan to bring that to light in the bankruptcy court.”
Last month, gold- and silver-coin dealer Lear Capital Inc. filed a small-business case after paying $8.75 million in settlements with Los Angeles and New York authorities to resolve lawsuits alleging the company breached state consumer-protection laws.
Lear, which didn’t admit wrongdoing, has indicated in court papers that it believes customers or other government agencies may take additional legal actions in the future. The bankruptcy gives the company a path to resolving those future claims.
Three customers filed court papers Wednesday requesting the appointment of a creditors committee, funded by Lear, to “provide a voice to the true victims.” Lear is opposing the customers’ request.
Last July another organization, Sharity Ministries Inc., filed a Subchapter V case amid allegations by state authorities that it deceived consumers by running a sham health-insurance business. Sharity entered Subchapter V with hopes of reorganizing its business but within weeks of filing chapter 11 opted to liquidate following scrutiny from the Justice Department’s bankruptcy watchdog.
University of North Carolina School of Law Professor Melissa Jacoby said while courts and creditors need to be vigilant, the bankruptcy system is equipped to sort out bad actors and has safeguards to protect the integrity of the chapter 11 system.
Mr. Jones’s lawyer Norm Pattis told The Wall Street Journal earlier this week that he tried to settle the litigation but the Sandy Hook families “persist in trying to destroy Alex and his companies.”
“We’re turning to bankruptcy court to compel the plaintiffs to estimate the value of their claims in open court by discernible evidentiary standards,” Mr. Pattis said.
University of Illinois College of Law Professor Robert Lawless, who reviewed Mr. Pattis’s statement, said the justification he provided for filing the chapter 11 case doesn’t seem to offer a valid purpose under the law for seeking bankruptcy protection.
Ironically, Mr. Jones’s use of Subchapter V reflects how effective it has been in reviving troubled small businesses, said Robert Keach, a lawyer who co-chaired an influential commission that
introduced chapter 11 reforms later incorporated in Subchapter V.
“It was kind of a compliment,” Mr. Keach said of the bankruptcy filing. “I just don’t think it’ll work.”
Write to Jonathan Randles at Jonathan.Randles@wsj.com and Akiko Matsuda at firstname.lastname@example.org