A hearing for a case recently began in a Texas bankruptcy court. The case involved the participation of over 50 individuals who joined on the phone. The case was initiated by Alex Jones, who is a conspiracy theorist and best known as the creator of the show InfoWars. The case involved judgments brought against Jones regarding defamatory claims alleging that victims of the Sandy Hook shooting were “crisis” actors. While the case’s basis is another notable obstacle in the efforts of Sandy Hook victims to receive compensation from Alex Jones, the case could prove influential in defining Chapter 11’s Subchapter V proceedings.
The Parties Involved in the Case
At the beginning of the hearing, various parties, which include both the plaintiffs’ attorneys as well as the United States Trustee’s counsel, vocalized disagreement with one another. While some disagreement arose about utilizing bankruptcy to simplify the judgments brought against Jone without Jones being a debtor, another critical issue arose. The issue is whether a debtor qualifies for Subchapter V status given the statements in the documents that the debtor companies conduct no business and are chiefly composed of money utilized by Jones to pay for settlements with Sandy Hook victims.
The Role of Subchapter V
Chapter 11 is a type of bankruptcy that provides businesses the opportunity to both restructure as well as reorganize debts over three to five years while still operating. Unfortunately, business owners often find that Chapter 11 is too costly for entities that operate small businesses. Subchapter V was tacked onto Chapter 11 in 2019 to help small businesses pursue bankruptcy. Businesses that pursue Subchapter V can require creditors to accept repayment plans between three to five years. Businesses can also utilize Subchapter V to address unsecured debt.
Some advantages people realize by pursuing Subchapter V include:
- An entity can continue running a business provided the entity follows its payment plan.
- A court can confirm a reorganization plan without approving creditors it determines to be fair. Chapter 11 plans must be approved by creditors.
- In other types of Chapter 11 cases, creditors are permitted to submit plans on an entity’s behalf. In Subchapter V, however, only the debtor can submit a reorganization plan.
- An entity must file a disclosure document in a court of law. The statement offers a detailed examination of businesses if you can repay creditors. In Subchapter V, statements of this type are not required to be filed.
- An entity continues running a business in bankruptcy, but trustees must be named to monitor an operation. A trustee also offers recommendations to the court concerning a reorganization plan’s confirmation.
- In Chapter 11, an entity is required to pay all administrative costs on the day a plan is made effective. Subchapter V permits a person to pay these costs over the duration of a plan.
Entities that are eligible for Subchapter V must be pursuing activities related to business and have debt that is less than $2.75 million. The debt owed by the business also cannot include what is owed to company insiders. Furthermore, half or more of the business’s debts are required to arise from business activities. Additionally, business entities that have a primary activity of owning and operating one property do not qualify for Subchapter V.
Subchapter V Requirements
Following Subchapter V regulations, a debtor must satisfy various requirements regarding eligibility. One requirement is a debtor must be involved in activities that are of a business or commercial nature following section 1182(1). This is the requirement that various claims the debtor fails to meet. The arguments brought up during the hearing in opposition to the cases are focused on language in the documents that initiated the case stating that the companies were not engaged in business and were formed to fund a trust that would compensate litigation claims.
The declaration that was attached to the petitions, which was filed by the Chief Restructuring Officer before he was appointed to the case, states that the officer has discovered the debtor has no purpose besides holding assets that are utilized by other entities. The debtors undertake no business activities and do not lease, sell, or rent anything to anyone. The debtor’s assets also do not generate any income. The debtor also has no bank accounts and does not pay money to any person for any reason. The debtor also holds no debts or liabilities besides those associated with pending or potential litigation.
Issues Introduced by the Case
Based on these documents, the parties who objected to the bankruptcy questioned whether the debtors are participating in business or commercial activity as dictated under the bankruptcy code. During the bankruptcy hearing, the plaintiffs stated that a motion to dismiss was pending. Two motions attempting to obtain the dismissal of the bankruptcy case as a bad filing were later filed in April 2022. These motions both question whether the debtors are eligible for debtor status under Subchapter V. The importance of these cases in addition to the question of law in this blossoming part of bankruptcy litigation will almost certainly have a lasting impact on bankruptcy law. The question of what constitutes being part of a business or commercial activities could end up influencing various bankruptcy issues including what makes a debtor and how a person becomes eligible for Subchapter V.
The Case’s Potential Impact
Other cases involving well-known individuals have helped to influence bankruptcy law as well. Despite the outcome of the motions to dismiss, Alex Jones and his effort to obtain a bankruptcy discharge could end up becoming influential in what constitutes being part of a business or commercial activity.
Contact a Bankruptcy Lawyer Today
Subchapter V is just one of the complex areas of law involving bankruptcy. If you or a loved one needs help navigating this process, you should not hesitate to speak with an experienced bankruptcy attorney. Contact lawyer Melanie Tavare to schedule a free case evaluation.