By: Donald L Swanson

Three InfoWars entities file voluntary bankruptcy on April 17, 2022, under Subchapter V of Chapter 11.[Fn.1]  And a storm of controversy immediately erupts on whether the three entities actually qualify for Subchapter V relief.

On June 10, 2022, the Bankruptcy Court enters an “Agreed Order Dismissing Debtors’ Chapter 11 Cases” (Doc. 114), based on this stipulation of the three InfoWars debtors: “Debtors and the UST wish to stipulate to the disposition of the Chapter 11 Cases.”

Then . . . on Friday, July 29, 2022, at 4:30 p.m., another InfoWars entity files a new bankruptcy—again, under Subchapter V.  This time, it’s a primary operating entity that files: Free Speech Systems, LLC. [Fn. 2]  A first day Declaration (Doc. 10) says (in par. 27) that Debtor:

• is “engaged in the business of producing and syndicating Jones’ radio and video talk shows and selling products targeted to Jones’ loyal fan base”; and
• “produces Alex Jones’ syndicated news/talk show (The Alex Jones Show) from Austin, Texas, airs via GCN on over 100 radio stations across the United States and via the internet through the website Infowars.com.”

One of Debtor’s first day filings is an “Emergency Motion” to modify the automatic stay so a jury trial, that’s in process, can move forward to conclusion (Doc. 2).  Such Motion represents:

• “A jury has been empaneled and trial is underway in the Heslin/Lewis Suit, scheduled to continue at 9:00 a.m. on Monday, August 1”; and
• “Emergency relief is necessary to prevent delay in the Heslin/Lewis Suit to the detriment of the Debtor, Plaintiffs Hesline and Lewis, and the members of the jury serving in the Heslin/Lewis Suit.”

A hearing on such Emergency Motion occurs on Monday, August 1, at 8:30 a.m., at which time the Bankruptcy Court grants the Emergency Motion. So, the jury trial continues.

Subchapter V Eligibility

The voluntary Petition filed by Free Speech Systems, LLC, on July 29, 2022, elects to proceed under Subchapter V of Chapter 11.  It does so by checking a Petition box (in paragraph 8), representing that “debtor is a debtor as defined in 11 U.S.C. § 1182(1)” because:

• “debts owed to insiders or affiliates” are excluded from the $7,500,000 debt calculation; and
• Debtor’s “aggregate noncontingent liquidated debts . . . are less than $7,500,000.”

Here’s guessing that Subchapter V eligibility issues will be as hotly contested in this new InfoWars bankruptcy as they were in the recently dismissed cases.  What follows is a discussion of some of the reasons why.

TWO ELIGIBILITY ISSUES

11 U.S.C. § 1182(1)(A) establishes a $7.5 million debt limit for Subchapter V eligibility—but not every debt is counted.[Fn. 3] 

What follows is a summary of issues surrounding two statutory exclusions of debts from the $7.5 million calculation.

First Statutory Exclusion: “debts owed to insiders or affiliates”

The “debts owed to insiders or affiliates” statutory exclusion should be easy to apply.

But in Free Speech Systems case, the amount of debt owing to one insider-or-affiliate is in the amount of $53,646,687.82 (see par. 58 of Declaration by Debtor’s CRO, Doc. 10).

$53 million is a lot of money: it’s more than seven times the $7.5 million eligibility limit for Subchapter V. 

Question: Can $53 million of debt to an insider or affiliate exclude a debtor from Subchapter V eligibility as a “small business debtor,” even if that debtor meets, strictly-and-technically, the “small business debtor” definition?

There is no clear answer.  But here’s guessing the Southern Texas Bankruptcy Court will look long and hard at this issue in the Free Speech Systems case.

Second Statutory Exclusion: “aggregate noncontingent liquidated debts”

Contingent / unliquidated debts are excluded from the $7.5 million eligibility calculation.  

Operative statutory language, describing an eligible debtor, is this: “a person . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . in an amount not more than $7,500,000” (emphasis added).

By way of definitions:

• a “contingent” debt will arise only under circumstances that have not yet occurred and may never occur; and 
• an “unliquidated” debt is for an amount that is not yet certain. 

A guaranty obligation is a common example of both: until the principal obligor defaults (which may never happen),

• the guarantor’s payment obligation does not arise [is contingent]; and
• the amount of the guarantor’s obligation cannot be determined [is unliquidated].

–Debtor’s Purpose

Notably, Free Speech Systems files its Subchapter V Petition in the middle of a trial on the amount of damages—Debtor’s liability is already established by prior court order. 

So, why not wait to file until the trial concludes?  Presumably, the answer is this:

• once the jury returns a verdict, plaintiffs’ claims become both noncontingent and liquidated; and
• if the verdict is for millions of dollars, Subchapter V eligibility may be lost.

–A Legal Issue

One issue in Free Speech Systems is from the unusual circumstance noted above:

• liability is already established before the bankruptcy is filed (i.e., plaintiffs’ claims are already noncontingent); but
• the amount of plaintiffs’ claims is not yet established as of he bankruptcy filing (i.e., plaintiffs’ claims are unliquidated).

Question: Is an established liability (“noncontingent”) on an unliquidated claim to be included in debtor’s $7.5 million eligibility calculation?  In other words, must a claim be both “contingent” and “unliquidated” to be excluded from the $7.5 million calculation—especially in the unusual circumstance of a trial-in-process on damages at the time of bankruptcy filing?

There is no clear answer.  Comparisons of similar language, in various chapters of the Bankruptcy Code, are as follows:

• Subchapter V eligibility language is, “a person . . . that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition . . . in an amount not more than $7,500,000” (§ 1182(1)(A), emphasis added);
• Chapter 12 eligibility language is, “individual or individual and spouse . . . whose aggregate debts do not exceed $10,000,000” and “corporation or partnership . . . and (i) its aggregate debts do not exceed $10,000,000” (§ 101(18)(A)&(B)(1), emphasis added);
• current Chapter 13 eligibility language is, “an individual . . . that owes . . . noncontingent, liquidated debts of less than $2,750,000 or an individual . . . and such individual’s spouse . . . that owe . . . noncontingent, liquidated debts that aggregate less than $2,750,000 may be a debtor” (§ 109(e), emphasis added);
• former Chapter 13 eligibility language is, “an individual . . . that owes . . . noncontingent, liquidated, unsecured debts of less than $419,275 and noncontingent, liquidated, secured debts of less than $1,257,850, or an individual . . . and such individual’s spouse . . . that owe . . . noncontingent, liquidated, unsecured debts that aggregate less than $419,275 and noncontingent, liquidated, secured debts of less than $1,257,850 may be a debtor” (id.).

 Note these differences in the quoted statutes:

• Subchapter V does not have a comma between “noncontingent” and “liquidated,” while Chapter 13 does have a comma between those two words; and
• Subchapter V puts the word “aggregate” before “noncontingent” and “liquidated,” while Chapter 13 puts the word “aggregate” after the words “noncontingent” and “liquidated—but only when talking about debts owed by both spouses.

Are these differences significant?  No one knows.

But here’s guessing the Southern Texas Bankruptcy Court will look long and hard, in Free Speech Systems, at whether a noncontingent-but-unliquidated claim is excluded from Subchapter V’s calculation of the $7.5 million eligibility limit. 

Significance of Debtor’s Subchapter V Election

Debtor in the Free Speech Systems bankruptcy obviously wants to be in Subchapter V, rather than in regular Chapter 11.

Reasons why seem obvious:

• Regular Chapter 11 has the absolute priority rule, under which a debtor cannot confirm a plan that retains pre-bankruptcy ownership interests, unless creditors are paid in full or agree to something less; but
• Subchapter V does not have the absolute priority rule—instead, a debtor can confirm a plan, over creditor objections, by paying creditors the greater of (i) liquidation value of debtor’s assets, and (ii) debtor’s projected disposable earnings for three to five years; and
• If an insider’s $53 million secured claim is superimposed over Debtor’s assets, unsecured creditors probably won’t get much money under a Subchapter V plan. 

Conclusion

InfoWars’ eligibility issues, under Subchapter V, are in a second round of bankruptcy filings, and will continue to be litigated.

It will be interesting to see how it all shakes out.

——————–

Footnote 1.  The entities who filed bankruptcy were InfoW, LLC; IWHealth, LLC; and Prison Planet TV, LLC.  Their Subchapter V cases were jointly administered at Case No. 22-60020 in the Southern Texas Bankruptcy Court. 

Footnote 2.  The new Subchapter V filing is at Case No. 22-60043 in the Southern Texas Bankruptcy Court.

Footnote 3.  11 U.S.C. § 1182(1)(A) provides:

“The term ‘debtor’—(A) . . . means a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a person whose primary activity is the business of owning single asset real estate) that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor.”

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