Infowars Bankruptcy Tests Small Business Provisions: Explained

Infowars’ bankruptcy spotlights a relatively new part of Chapter 11 bankruptcy law—Subchapter V— intended to help small businesses reorganize at less cost.

Right-wing radio host Alex Jones, who controlled the conspiracy theory site, and his companies were found liable for defamation and emotional distress in lawsuits by relatives of the 2012 Sandy Hook Elementary School and other shooting victims. Jones had said the shootings were a hoax.

Companies that had ties to Jones filed for bankruptcy protection under Subchapter V as a way to cap his liability before state courts can determine damages.

What is Subchapter V?

Under Subchapter V of Chapter 11 of the U.S. Bankruptcy Code, enacted in February 2020, small businesses can seek bankruptcy relief without the higher costs associated with a Chapter 11 reorganization.

Subchapter V debtors are required to submit a reorganization plan within 90 days of the filing. But other Chapter 11 debtors have 120 days or more to file a plan.

Unlike ordinary Chapter 11, there’s no requirement to file a disclosure statement—containing details about company operation, structure and other information—in support of the plan.

Subchapter V debtors also don’t have to pay a quarterly fee to the U.S. Trustee’s Office, the Justice Department’s bankruptcy arm. Such fees range from $30,000 to $250,000 a quarter.

An independent trustee is appointed in every case but generally doesn’t take over the debtor company’s business operations.

The trustee often works with Subchapter V debtors to provide more information on business metrics and structure.

Who’s Eligible?

To be eligible for Subchapter V filing, a company or businessperson must be “engaged in commercial or business activities.” Only privately held companies can file a Subchapter V case.

To qualify under the subchapter when the option was first available, a debtor couldn’t have more than about $2.7 million in both secured and unsecured debt. But in March 2020 Congress upped the limit to $7.5 million as part of broad legislation to help businesses during the Covid-19 pandemic.

The higher debt limit expired March 29, so the current debt limit, after adjustments for inflation, is just over $3 million.

Why Is Infowars Using Subchapter V?

Sandy Hook victim families asked a court to toss the bankruptcy case, arguing the debtors don’t undertake business activities. They say the bankruptcies are to shield Jones and his solely owned company, Free Speech Systems LLC, from having to pay adequate damages.

The Infowars debtors said that Congress intended family-owned companies like them to have access to Subchapter V. One lawyer for the entities described it as a good-faith effort to set up a way to compensate the Sandy Hook families.

The creditors say the three debtor companies aren’t eligible as small businesses because none is engaged in any commercial or business activities.

The U.S. Trustee has also raised questions about whether the three companies should be allowed bankruptcy protection. The Texas bankruptcy court is likely to decide the question in the coming weeks.

What’s Next?

Although the temporarily increased $7.5 million debt limit for Subchapter V expired, lawmakers are trying to reinstate it.

On April 11, the U.S. Senate passed a bill (S. 3823) that would maintain the $7.5 million limit for another two years. The measure is currently being considered by the U.S. House of Representatives.

Read more:

— From Bloomberg Law:

InfoWars Bankruptcy Should Be Tossed, Sandy Hook Families Say

ANALYSIS: Expanded Subchapter V Access Rides Off Into the Sunset

— From Bloomberg News:

Infowars Bankruptcy Deal ‘Not Perfect’ But Fair, Lawyer Says

Infowars Bankruptcy May Be ‘Abuse’ of Court Rules, DOJ Warns