May Firms Barred from Working in Alex Jones Bankruptcy Cases be Paid Through Settlement?

The U.S. Trustee has objected to an attempt to compensate a law firm and a financial advisor, through a proposed settlement agreement, where the bankruptcy court declined to approve their employment. The settlement seeks to pay the firm and advisor a total of approximately $126,000, which is almost 20% of their total unpaid attorney’s fees and compensation of about $670,000.

Alex Jones’ media company, namely Free Speech Systems LLC, filed for protection under chapter 11 of the Bankruptcy Code in July 2022, followed five months later by Jones himself. The bankruptcies were precipitated by multimillion-dollar defamation verdicts in favor of the families of Sandy Hook Elementary School shooting victims, whom Jones accused of being paid actors.

Free Speech Systems applied for bankruptcy court approval to employ Shannon & Lee LLP as counsel and Schwartz Associates LLC as a restructuring officer.  On September 20, 2022, bankruptcy Judge Christopher Lopez denied the request because the firms had worked with other, related debtors without disclosure.

In the two months since the start of the case, the firm and advisor had accrued almost $670,000 in unpaid invoices.  They took an appeal to the U.S. District Court for the Southern District of Texas, which is pending.

Now, the firms seek bankruptcy court approval of a settlement agreement with the debtor, which is supported by the debtor’s Subchapter V trustee, Melissa Haselden. The proposed agreement would pay the firms about $126,000 in exchange for dropping the appeal.

The U.S. Trustee objects to the settlement, arguing that professionals may not be paid via settlement where their employment was not approved. Under such circumstances, professionals are “categorically ineligible” for compensation.

However, the motion to approve the settlement points out that there are risks and litigation costs that must be taken into account. Under the circumstances, the proponents believe that the settlement is in the best interests of the bankruptcy estate and creditors.

The U.S. Trustee’s objection highlights the unfairness and illogic of compensating professionals whose employment was expressly disapproved. But it is likewise unfair and illogical to force the estate to potentially pay recoveries and litigation costs in excess of the settlement amount.

Who will prevail? It is impossible to say. But this is not just rubbernecking. These sorts of issues come up in many cases, especially when they involve non-bankruptcy counsel and professionals who are not familiar with the rules of engagement and compensation. If the settlement is approved in this case, it could provide an avenue to at least partial payment for such professionals.

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