June 28, 2022

Volume XII, Number 179

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June 28, 2022

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June 27, 2022

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Bankruptcy Battle for InfoWars

A first day hearing was held on Friday, April 22 in the case In re InfoW LLC, Case No. 22-60020, in the United States Bankruptcy Court for the Southern District of Texas. More than seventy participants listened in on the phone to the proceeding. The reason for the interest? This is the bankruptcy case filed by Alex Jones, controversial founder and host of the radio show InfoWars, regarding judgments against Jones for defamation claims stemming from statements on his show claiming the Sandy Hook massacre to be a hoax. While the underlying factual basis for the case is certainly headline-worthy, the bankruptcy case itself could be instrumental in shaping the contours of Subchapter V of chapter 11 of the Bankruptcy Code, a statutory scheme still in its relative infancy.

At the first day hearing, multiple parties — including both plaintiffs’ counsel in the defamation lawsuits and the United States Trustee’s office — expressed opposition to the case. While some of the opposition understandably arose from the utilization of the bankruptcy process to facilitate the various judgments against Jones without Jones being a debtor in the bankruptcy cases, one particular objection stood out to me, as a bankruptcy practitioner: Do these debtors qualify for subchapter V status given the statements in the case-opening documents that the debtor-companies conduct no business and are solely comprised of money infused by Jones to fund settlement payments? While seemingly a dry question in the larger scope of the headline-grabbing facts swirling around this case, this question of procedure may be the nail in the coffin of these cases.

Under subchapter V, a debtor must meet certain eligibility requirements. One of these threshold requirements is that the debtor must be “engaged in commercial or business activities” under section 1182(1). It is this requirement that the objectors to the case claim that the debtors fail to meet. The arguments made at the hearing in opposition to the cases focused on language in the case-initiating documents that indicated that the companies did no business and were formed solely to fund the proposed trust that would pay out litigation claims. Specifically, the declaration attached to the petitions — which were filed by the proposed Chief Restructuring Officer prior to his appointment in the case — states:

I have learned that the Debtor’s [sic] have no purpose other than to hold assets which may be used by other entities. They undertake no business activities, they do not sell, rent or lease to others anything. Their assets do not generate any income for the. They have no bank accounts and do not pay money to anyone for any reason. They have no debt or liabilities other than those related to pending or potential litigation.

Based on these statements, the objecting parties rightly questioned whether these debtors are actually “engaged in commercial or business activities,” as required under the Bankruptcy Code.

At the hearing, the plaintiffs’ counsel made clear that motions to dismiss were forthcoming. True to their word, two motions seeking the dismissal of the bankruptcy case as a bad faith filing were filed on April 26 and 27. Critically, both motions challenge whether the debtors qualify for subchapter V debtor status, arguing that the debtors are not “engaged in commercial or business activities.” Based on these motions, the In re InfoW case could have significant implications for future subchapter V cases. The noteworthiness of the case, coupled with a unique question of law in a burgeoning area of bankruptcy practice, could have implications far beyond this case. A ruling on what constitutes being “engaged in commercial or business activities” could shape the outer contours of what debtors are, and are not, eligible for subchapter V relief.

This is not the first case where notorious celebrity actions could have major implications on the world of bankruptcy — just look at Anna Nicole Smith and Stern v. Marshall. Regardless of the outcome of the pending dismissal motions, it appears likely that Alex Jones and his bankruptcy case may become persuasive authority for what constitutes being “engaged in commercial or business activities” for years to come.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 125
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About this Author

John Baxter Bankruptcy Lawyer Nelson Mullins Tennessee Law Firm
Associate

John focuses his practice on bankruptcy law and consumer financial litigation. He has experience representing both debtors and creditors in chapter 11 proceedings touching on a diverse set of industries. John has represented clients in bankruptcy and commercial litigation matters in state, federal, and appellate courts across the state of Tennessee, in the United States Court of Appeals for the Sixth Circuit, and the Supreme Court of the United States.

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