Infowars Bankruptcy May Be Abuse of Court System, Justice Department Says
Infowars Bankruptcy May Be Abuse of Court System, Justice Department Says
(Bloomberg) -- An arm of the U.S. Justice Department cast doubt on far-right radio host Alex Jones’s use of bankruptcy as three companies he once owned prepare for their first day in court Friday.
The agency’s bankruptcy watchdog, the U.S. Trustee, said the Chapter 11 filing “raises numerous questions -- the answers to which may demonstrate these cases are an abuse of the bankruptcy system,” according to court papers filed Thursday. The U.S. Trustee urged a federal judge in Texas to reject a request to appoint former judges to oversee a proposed victim compensation fund.
Three small entities affiliated with Jones’s Infowars website are seeking to use bankruptcy to set up a trust to pay damages that may be won in court by relatives of children killed in the 2012 Sandy Hook massacre. The relatives of Sandy Hook victims won key court rulings in Connecticut and Texas against Jones after he called the shootings a hoax, and future trials will determine the size of the damages.
“This Motion to appoint the trustees for the Litigation Settlement Trust seems to be just the first step for Debtors to carry out Jones’s and FSS’s scheme of avoiding the burdens of bankruptcy while reaping its benefits,” the U.S. Trustee said in court papers.
Settlement Trust
The three units, including one that holds the rights to website Infowars, sought court protection in Victoria, Texas on Sunday. Chapter 11 filings allow a business to keep operating while working on a turnaround plan and pause pending civil litigation. Jones’ main holding company, Free Speech Systems LLC, didn’t file for bankruptcy.
In the Infowars bankruptcy, lawyers set up a trust that would pay people suing the companies, and Jones handed over his equity in the entities to the trust. The units in bankruptcy “have no purpose other than to hold assets which may be used by other entities” and their only liabilities are the litigation claims, according to court papers.
The bankruptcy filing could hurt efforts by the Sandy Hook families to collect from Jones, said Patrick Jackson, a restructuring lawyer based in Delaware who has handled cases with similar legal disputes. The three units may try to force the families into negotiating with Jones in bankruptcy instead of allowing them to fight for a higher payout in court, he said.
“If I’m a plaintiff, I don’t trust any of this,” Jackson, with Faegre Drinker Biddle & Reath. “There is a good argument here that these companies don’t have any business in bankruptcy.”
Disputed Tactic
By establishing a trust to settle legal claims in bankruptcy, Jones’s companies are following a controversial playbook used by other corporations facing significant lawsuits. Companies including opioid maker Purdue Pharma LP and youth organization Boy Scouts of America have sought Chapter 11 protection to settle thousands of cases and streamline payouts to victims claiming harm.
On Tuesday, the judge overseeing a lawsuit against Jones in Connecticut state court said the case would be put on hold temporarily. The ruling appears to stop the case against Jones himself along with the three bankrupt units. Lawyers for Jones did not respond to requests for comment.
Jones put $725,000 of his own money into the trust to cover the costs of the Chapter 11 filings. Additional funds, including $2 million cash, could flow into the trust as a result of the bankruptcy, according to court papers.
Should a judge approve the trusts, two former bankruptcy judges -- Russell F. Nelms and Richard S. Schmidt -- would be overseeing the fund. The U.S. Trustee argues that it’s too early in the case to appoint Nelms and Schmidt or to approve the trust.
Lawyers representing Jones and his businesses have said the Texas defamation lawsuit was strategically filed to silence their free speech on matters of public interest. They didn’t immediately return a call for comment about the U.S. Trustee’s filing.
Judges in Connecticut and Texas issued default judgments against Jones after he failed to turn over documents including financial information. Lawyers representing Jones have argued the plaintiffs’ probe into the financial ties between Jones and his various entities is akin to a “collections action” and a “fishing expedition.”
The main case is InfoW LLC, 22-60020, U.S. Bankruptcy Court, Southern District of Texas.
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