Mark Berman, who teaches a bankruptcy course at Northeastern, sheds some light on the bankruptcy proceedings — and why a judge decided to nix the acquisition.
News that Alex Jones’ Infowars had been purchased by the satirical news site The Onion may have been seen by Jones’ detractors as a delicious bit of irony — one, no doubt, with many layers to it.
But the bid appeared to backfire after a federal judge blocked the sale, citing concerns about the auction process, including the possibility that the creditors’ whom Jones owes money had been shortchanged.
Those creditors include the relatives of 26 children who were killed during the Sandy Hook Elementary School shooting in 2012. The family members sued Jones for defamation in 2018 after he repeatedly stated that the massacre was a hoax, and judges in Connecticut and Texas found him liable to the tune of $1.5 billion — money he still owes.
The judgment forced Jones to file for Chapter 11 bankruptcy, later agreeing to liquidate his assets, including his website Infowars, to help pay down the debt. As part of The Onion’s bid agreement, family members said they would forgo part of what they were owed so that other creditors would receive more money than they would from the second-place bidder, which was made by First United American Companies.
Rather than order a new auction, U.S. Bankruptcy Judge Christopher Lopez left it up to the trustee, Christopher Murray, to decide on next steps, with instructions to report back to the court in 30 days.
We asked Mark Berman, who teaches a business bankruptcy course at Northeastern University, to help us better understand how these bankruptcy proceedings work — and why a judge decided to nix The Onion’s bid to acquire Jones’ right-wing conspiracy website.
There are no bankruptcy rules about how to conduct an auction. It’s really up to the local judge to decide what that procedure will be — or, in his absence, the auctioneer decides, in consultation with his client, the trustee, to determine what the procedure will be. And ultimately the result of that auction has to be approved by the bankruptcy judge subsequently, after the result is achieved.
Usually, the objective of a trustee in bankruptcy is to maximize the value of the assets that are part of the bankruptcy estate, and he has to figure out the best way to do that. It could be either a private sale or a public auction process. If he gets an offer for the assets, he could ask the bankruptcy court for permission to sell. If somebody wanted to offer more, they would come and object to the sale, and the bankruptcy court would probably order some kind of auction so that anyone interested in the asset would have an opportunity to bid.
What happened was some people were complaining about the procedure that was followed in the initial auction. That’s because the way they did it was by asking everyone who was interested in the assets to make a bid. And they made the bids in writing; they opened the bids, and The Onion’s parent company [Global Tetrahedron] was viewed by the auctioneer as having the best bid.
The auctioneer’s analysis of the best bid … was that he wanted to produce the highest distribution to unsecured creditors. Usually you get that by just having the highest price paid for the assets.
Here, because of the way it was offered, the bid contained a smaller amount of cash — $1.75 million, according to the reporting — but it also came with a number of additional benefits, primarily that the people who have the tort judgment against Alex Jones and Infowars … forgo any distribution. Now because they are by far the largest unsecured creditors, their willingness to forgo a distribution meant that there would be much more money to distribute to the other unsecured creditors.
The auction proceeds go into the bankruptcy estate; the estate is then distributed, at the end of the bankruptcy case, to all the creditors who are entitled to claims against the estate. Imagine you have one hundred dollars’ worth of creditors split up amongst 10 different creditors; and imagine two of those creditors have over 90% of all of the claims: they’re going to get 90% of what is ultimately going to be distributed to creditors.
If some agree to waive their claims to this distribution, that means that the proceeds that the auction would be distributed to everybody else — namely, the 10% who don’t have those defamation claims, and they would, therefore, get paid a substantially larger amount than if the defamation claims were included.
Their willingness to waive their claims as part of The Onion’s bid meant that the distribution to everyone else was going to be much higher. The auctioneer and the trustee thought that was a tremendously wonderful result for all of those creditors who were going to get a bigger distribution. But the judge didn’t think that was necessarily a fair result.
The reason is because much of the negotiation over the details of this bid were done not in public, but rather in private. And that lack of transparency in the process seemed to bother the judge quite a bit.
Whether Jones is making the argument or the other bidder is making the argument — they’re making an argument that has some appeal to the judge, and the judge sees the significant difference in cash in the two bids, and doesn’t seem sold that the waiver of claims is a valuable part of the bid.
My guess is the trustee will be meeting with both bidders to see if he can better the bids and establish a clear winner in a more public process. Whether or not they’re going to have sealed bids or open bidding — I don’t know. As I said, there are no rules about how to conduct an auction. It is primarily up to the auctioneer and the trustee. It doesn’t normally get approved by the court in advance of an auction, but rather any complaints about the sale, whether by auction or otherwise, would be heard after the result is achieved.
I think they’re just going to start over. What’s disappointing is how long this legal process is taking. I have the same complaint with the lack of progress in the [Rudy] Guliani bankruptcy case. You might question the lack of speed in so many court processes these days. It seems to undercut the public’s sense of justice.