Infowars bankruptcy faces Alex Jones defamation verdict
Infowars’ parent company will likely face calls for a deeper review of its bankruptcy now that a Texas jury has ordered it and its founder, Alex Jones, to pay nearly $50 million in damages and interests to parents of a Sandy Hook victim for falsely claiming the school shooting was a hoax.
A thorough review may include expanded fiduciary powers, reviewing the validity of the debt owed by Jones’ company, and the possible formation of a committee representing the families of the victims suing Jones.
The Texas jury last week ordered the conspiracy theorist and Free Speech Systems LLC, the parent company of his InfoWars website, to pay $45.2 million in punitive damages and $4.1 million in actual damage. The jury awarded parents Neil Heslin and Scarlett Lewis damages years after Jones alleged the 2012 massacre in Newtown, Connecticut was fabricated. Their 6-year-old son, Jesse Lewis, was killed in the shooting.
On July 29, in the middle of the two-week trial in Texas, Free Speech Systems filed for a special form of Chapter 11 bankruptcy — called subchapter V — that gives these small business debtors several advantages over to a typical case in Chapter 11.
Now that some of the Sandy Hook families have money judgments against the bankrupt Free Speech Systems, the company is set to face an aggressive deep dive into its financial disclosures pushed by creditors, according to Nicholas Koffroth, attorney at Fox Rothschild LLP.
In some large, complex bankruptcies, the judge will appoint an independent examiner to investigate the finances and activities of the bankrupt entity that preceded the Chapter 11 case. But in Subchapter V cases, an examiner is usually not named, according to Samir Parikh, professor of bankruptcy law at Lewis & Clark Law School.
Yet the Texas bankruptcy court in the Free Speech System case may face a request to expand the powers of the Subchapter V trustee – who is appointed in every small business bankruptcy – to give him similar tools. to a reviewer to review the debtor’s financial disclosures. The powers of a Subchapter V trustee can be extended for cause, says bankruptcy attorney Alan Rosenberg of Markowitz Ringel Trusty & Hartog PA
The power to investigate a debtor may be conferred by a court instead of completely excluding the debtor from operating the business, a power that was recently upheld by a New York court in the bankruptcy of a small business In Re: Corinthian Communications Inc.
The trustee in the case could be empowered by the court to investigate “the actions, conduct, assets, liabilities and financial condition of the debtor,” Rosenberg said. This investigation could also include the operation of the activities of Free Speech “and the appropriateness of the continuation of these activities, and any other questions relevant to the case or the formulation of a [bankruptcy] plan,” he said.
While the bankruptcy filing is still young, questions have already been raised about the validity of the secured debt that Free Speech Systems says it owes to PQPR Holdings Limited LLC, which is partly owned by Jones through several limited liability companies and managed by Jones’ father.
The validity of that debt is being challenged by Connecticut families in a pending fraudulent conveyance case in Texas state court, according to court records. Since this debt is secured, it could be first in line to be repaid.
“Given the allegations that have been made regarding the nature and validity of PQPR’s debt, litigation creditors may seek to expand powers to allow the trustee to conduct an investigation,” Rosenberg said.
Avi Moshenberg, an attorney in the Texas fraudulent conveyance lawsuit against Jones, told an Aug. 1 Chapter 11 hearing for Free Speech Systems that he supports granting a trustee investigative powers. and the appointment of an unsecured creditors’ committee.
“We will certainly consider adding all the necessary protections and forces to allow a transparent process for this debtor and Alex Jones and his fictitious entities to be thoroughly investigated so that there is oversight. and transparency and ultimately so that the Sandy Hook families can bring Alex Jones and company to justice by liquidating these claims and recovering them,” Moshenberg said.
The bankruptcy court gave Free Speech until Aug. 29 to file more information about his financial affairs.
Committees representing unsecured creditors are a very common feature of large Chapter 11 cases. And while a committee is not usually appointed in small business bankruptcy cases, the case of Free Speech Systems is unique, a said Donald L. Swanson, bankruptcy attorney and shareholder of Koley Jessen.
A committee of unsecured creditors, which would likely be made up of the parents of Sandy Hook victims suing Jones and Free Speech, would have an official role in the case. Official commissions usually get their legal fees paid by the debtor.
Ha Minh Nguyen, a lawyer with the Office of the United States Trustee, the Justice Department’s bankruptcy watchdog, previously suggested during a free speech bankruptcy hearing this month that a committee of people suing Jones and Infowars might need to be trained.
A cause to appoint such a committee should be shown to the judge for it to be appointed, Rosenberg said.
“In this particular case, unsecured creditors as a combined class have a lot at stake,” Rosenberg said. “Besides the PQPR, they are by far the largest class of creditors. Given the scope of their claims and the large number of class members, it may be advantageous in this case for the litigation creditors to request the appointment of a committee to defend their collective interests.
While there is already a looming question over whether punitive damages resulting from libel judgments can be overturned in a small business bankruptcy case, a battle could also be brewing over whether the Texas constitution allows for the capping the punitive indemnity of $45.2 million.
Andino Reynal, Jones’ attorney, told Bloomberg Law on Monday that punitive damages are capped at $1.5 million by Texas law. But Mark Bankston, one of the plaintiffs’ attorneys, told Bloomberg Law that his team did not believe the punitive damages caps were constitutional as they applied to their case and that they would litigate that issue. “if necessary”.
Free Speech Systems is also facing a request for relief from the automatic bankruptcy code stay for Sandy Hook families so they can spend their day in Connecticut courts. This question will likely be heard later this month.