Alex Jones is unquestionably a controversial figure. Its Infowars media platform has been accused to spread conspiracy theories that suggest the Sandy Hook Massacre was a staged event to ruminate that chemicals in our water supply were making frogs gay. For a while – and even now – his business garnered millions of followers and made him rich. It didn’t last. Infowars, to the relief of many, is on the verge of bankruptcy. But, unsurprisingly, Jones creates even more controversy. It does this by attempting to overturn 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 in the rules of Chapter 11 of the US Bankruptcy Code. It was signed into law by Congress as part of the Small Business Reorganization Act of 2019 and took effect in February 2020. The purpose of the law was to make it easier for struggling businesses to obtain protection. more affordable while reorganizing. It applies to business owners who have debts of up to $2.75 million (excluding debts to affiliates or insiders, a consideration that will be important for this story) and where less than 50% of debts are due to business or commercial activities of the debtor or the business owner.
If your business falls into this category, the cost of filing for bankruptcy under the new Subchapter V rules is much less and the process is much easier than filing for bankruptcy under the more onerous Chapter 11 rules. you don’t have to form an official committee of unsecured creditors. You do not have to pay quarterly trust fees in the United States. 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 term of the plan, which can be up to five years. You can also create a reorganization plan that does not require approval from all of your creditors. There are other features of this new law, but you probably now understand that it is designed to help small businesses deal with the pain of bankruptcy and give them a chance to restructure 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 parents of children murdered in the Sandy Hook school shooting. Jones did not want his or his company’s assets exposed at trial. He therefore decided to avail himself of sub-chapter V of chapter 11 of the bankruptcy code.
According to a Fortune report, he did so by taking three non-operating entities, including his Infowars website, and filing for protection, naming the Sandy Hook plaintiffs as his creditors. It allocated estimated liabilities to be in compliance with subchapter V so that litigation is delayed and avoids the requirement of creditors’ approval to restructure. In doing so, he attempted to protect Freedom Speech Systems and himself from liability.
According to a report in Axios, Jones tried “to separate some smaller entities and file them for bankruptcy, rather than personally filing or putting the main operating company that owns his business into bankruptcy.” He siphoned off the assets of his small entities and then claimed them as creditors of Infowars, even though he owned them. Even though the Small Business Reorganization Act 2019 made it easier to file for bankruptcy, it still requires companies filing for bankruptcy to be “engaged in business”. It was obvious to many that these small entities were not.
Justice Department lawyers were not intimidated. “It appears that Jones intends to leverage his holding companies’ bankruptcy filings to extend the automatic stay of pending litigation against him and FSS, while retaining full control of FSS and its assets going forward. “, they wrote in their objection. A judge agreed and stopped the action.
Hopefully your small business never has to file for bankruptcy. But if you are forced to do so and choose to do so under the new Subchapter V bankruptcy rules, be sure to follow the rules. You cannot avoid other creditors by creating new entities that you own and distributing assets. Your debtors cannot be you – or other entities you own. And it is better that they are also real businesses. It’s not a conspiracy. It’s the law.