Infowars' bankruptcy law shell game

Why it matters: Still, Infowars' April bankruptcy — filed by three corporate entities related to Jones and the publication — seeks to use a new section of the law in a way that could break through previously understood boundaries of what the bankruptcy code is intended to accomplish.

• The litigation that Jones seeks to deal with is particularly timely and controversial. The claims are being brought by Sandy Hook families against Jones for his calling America’s most deadly school shooting a hoax — putting the families on the receiving end of harassment by Jones' followers.
• This comes at a time when Texas, where Jones is based and where some of the litigation was filed, is fresh off a mass school shooting within its borders that’s already spawned misinformation about 'false flag' operations.

The impact: The Justice Department is seeking to dismiss the bankruptcy case altogether. In April, its bankruptcy watchdog wrote that "the strategy employed here ... is a novel and dangerous tactic that is abusive and undermines the integrity of the bankruptcy system."

• Meanwhile, some of the key creditors are in the the process of removing themselves from the case — more on that below.

State of play: Jones was found liable in multiple defamation lawsuits brought by the Sandy Hook families against him and his companies. The damages trial was set to go forward when the three small Jones-affiliated companies filed for Chapter 11 bankruptcy, using a relatively new “subchapter” meant to help struggling small businesses reorganize rather than face liquidation.

• This is where it gets technical: The so-called 'subchapter V' offers a streamlined process. There are no creditors committees with reams of costly advisors, and — crucially — creditors don’t get to vote to accept or reject the bankruptcy deal.
• The key: In order to be eligible, a company’s debt load can’t exceed $3 million, and it also must be engaged in business activities.
• Since the companies that Jones put in bankruptcy hold few assets themselves, the idea was for Jones to funnel them some money, have the bankruptcy court decide damages, force creditors (i.e. the Sandy Hook claimants) to accept them — and viola! He can move on.

So how’s this different from Purdue, PG&E and the like?

• First off, those others didn’t use subchapter V. Jones chose to hive off some smaller entities and file those for bankruptcy, rather than filing personally or putting the main operating company that holds his business in bankruptcy. As such, he utilized the new small-biz subchapter, and the lack of creditor rights that comes with it.
• Purdue and PG&E may have used the bankruptcy process as a way to deal with sprawling litigation claims — but in regular Chapter 11 they ultimately had to come to a deal that claimants would vote to accept.
• And critics of Jones' strategy point out another wrinkle: the law requires the companies that file for bankruptcy to be "engaged in business activities" — which the bankrupt Infowars entities arguably are not.

"I think it's fair to say that the drafters of subchapter V didn't envision this type of filing. Subchapter V is intended to rehabilitate small businesses," Ryan Preston Dahl, a partner in Ropes & Gray's business restructuring group, who's not involved in the case, tells Axios.

Where it stands: The Sandy Hook plaintiffs, in response, also have a few tricks up their sleeve.

• They're in the process of dismissing the debtors from their lawsuits, with the goal of freeing themselves from the bankruptcy case altogether, so they can continue to seek damages from Jones himself.

What's next: A Texas bankruptcy judge is set to hear the DoJ's motion to dismiss the bankruptcy case next week.