The Chapter 11 case of Infowars affiliates draws attention to the question of who is eligible for a relatively new type of bankruptcy filing that promises to be less burdensome for small businesses.
The issue is one of a long list of challenges right-wing conspiracy site owner Alex Jones faces in his efforts to use ‘Subchapter V’ bankruptcy to minimize the fallout from judgments for his misrepresentations. about the Sandy Hook school shooting.
Debtors who file bankruptcy cases under Chapter 11 Subchapter V of the U.S. Bankruptcy Code have access to a variety of benefits aimed at streamlining court proceedings, such as not having to face a creditors’ committee . But the law requires corporate debtors to be “engaged in business” to qualify for Subchapter V, a provision that has caused mixed interpretation and is making its way to appellate review.
The three debtors linked to Infowars – who have been accused of being mere shell companies – will have to answer in the US Bankruptcy Court for the Southern District of Texas as to how they qualify as being ‘engaged in business or commerce’ as they seek to take advantage of the benefits of Subchapter V.
The court’s decision will go a long way in determining the fate of debtors and providing broader guidance to practitioners who have grappled with the issue and the varying interpretations by the courts since the Subchapter V law came into effect. in 2020.
“All of the cases on this subject are remarkable because this section – and all of subchapter V – remains a new area of law,” said Nicholas Koffroth, attorney at Fox Rothschild LLP. “Practitioners will get a clearer and clearer picture of the scope of ‘commercial or commercial activity’, the more the courts add meat to the bones of these terms.”
Qualifying for Subchapter V has several advantages over a typical Chapter 11. Cases generally do not have a committee for unsecured creditors, allowing debtors to avoid an otherwise required obligation to pay committee expenses.
In sub-chapter V, only the debtor can file a reorganization plan. And unlike a standard Chapter 11, debtors can generally retain their interest in their property even if dissenting creditors don’t see full recovery.
The three Infowars entities have said they want to use Subchapter V to save money and have their reorganization plan upheld by a court within 120 days.
Courts have come to different conclusions on the question of Sub-Chapter V eligibility. But so far they have been relatively permissive on what it means for a business to be “engaged in commercial or “.
“Whether an entity is ‘engaged in commercial or commercial activity’ is one of the most contentious issues in Subchapter V,” said bankruptcy attorney Alan Rosenberg of Markowitz Ringel Trusty & Hartog. PA.
A South Carolina bankruptcy court in 2020 found that an individual was “engaged in commercial or commercial activities” under Subchapter V simply by “dealing with residual commercial debt.” The debtor told the court that he continued to deal with creditors related to a business he partly owned and in which he was personally liable.
Last year, a South Dakota bankruptcy court said a debtor was engaged in business activities negotiating an office lease when he filed for bankruptcy.
But a 2020 western Missouri bankruptcy court found a couple weren’t engaged in business because they ceased operating their business, sold assets before filing for bankruptcy, then took his retirement.
The ruling in western Missouri raised the baseline level of business or business activity needed to qualify, said Donald L. Swanson, bankruptcy attorney and shareholder of Koley Jessen.
“The courts have made it clear that shell companies are not enough, but the analytical framework is certainly more of a sliding-scale test than a hard and fast calculation,” Koffroth said. “A decision in this case will add another marker on the sliding scale to help elucidate what circumstances may or may not meet the Sub-Chapter V eligibility standard.”
The issue has also started to escalate to the appellate courts.
Private jet company RS Air LLC did not need to show it was trying to make a profit to qualify for Sub-Chapter V – although it had no flight operations, employees, earnings or income for several years, a Ninth Circuit bankruptcy appeals panel confirmed. last month.
The aircraft company met the Subchapter V eligibility standard simply by pleading and negotiating with a major creditor, paying fees, keeping its tax obligations current, and intending to resume its activities, concluded the Court of Appeal.
But even though RS Air’s bankruptcy appeals court ruled for a broader standard, its decision noted that the bankruptcy code does not define “carrying on business or trade” and accepted case law is “light”.
Judge Christopher Lopez, who presides over the bankruptcy of companies linked to Infowars, knows the matter well.
Lopez last year ruled to allow Port Arthur Steam Energy LP, or PASE, to use Subchapter V even though the waste heat producer had ceased selling steam and electricity when it filed for bankruptcy. The company still qualified for subchapter V because it had filed a multimillion-dollar lawsuit against a third party and planned to sell assets, file tax returns and collect accounts, the judge determined.
Infowars took Lopez’s PASE decision to argue that Infowars is also qualified to use the law.
Infowars Debtors say they own the Jones family business intellectual property and website under the Infowars label for use by non-bankrupt affiliates. The debtors also hired a director of restructuring, W. Marc Schwartz.
Courts have developed an “expanded non-temporal view” of what it means to “engage in” a commercial or business activity, debtors argued. A debtor therefore need not be engaged in commercial activities when filing for bankruptcy to qualify for sub-chapter V, they said.
The families of the Connecticut shooting victims, in objecting to the Subchapter V designation, say the debtors are actually shell corporations and must prove they are buying and selling “economic goods or services to for-profit purposes” to qualify.
The families also point to Schwartz’s statement that the companies do not hold any assets other than those used by other companies.
Lopez weighing in on the Subchapter V issue again could be particularly helpful for practitioners, especially since courts have tended to look at the individual facts of a case to see if someone qualifies.
“It will be interesting to see how Judge Lopez analyzes these facts using the framework he developed in Port Arthur,” Koffroth said.
Even if debtors meet the “engaged in business” standard, they still have to deal with arguments from the U.S. trustee and the families that the case was filed in bad faith and should be dismissed.
“If it’s allowed to go ahead and do it in Subchapter V – where there are special benefits for someone else, not these people – it’s going to rock our world of bankruptcy,” Swanson said.