The fallout from the affair involving a Texas bankruptcy judge and a former Jackson Walker LLP partner has put at least $13 million in fees at risk, and bogged the firm down in multiple proceedings that threaten to wreak more damage on its reputation.
Jackson Walker, a more than 500-attorney outfit with six offices across the Lone Star State, already collected the fees across 26 Chapter 11 cases in which the firm didn’t disclose that former partner Elizabeth Freeman was romantically involved with now-resigned bankruptcy judge David R. Jones.
But Jackson Walker and others in the coming months face more accusations that they harmed creditors and others involved in several cases overseen or mediated by Jones and that they jeopardized the integrity of the nation’s bankruptcy system by failing to adhere to legal disclosure requirements.
“I’m not sure the ball has stopped rolling yet,” said Northwestern Pritzker School of Law professor and former Nevada bankruptcy judge Bruce Markell. It all turns on “who knew what, when,” he said.
A thorough investigation by the US Trustee—the Justice Department’s bankruptcy oversight program—into the firm’s decision-making and lack of disclosure is still months away. Disciplinary or even criminal proceedings could follow depending on what’s found, bankruptcy academics and attorneys say.
Meanwhile, the calls for Jackson Walker to disgorge fees is being handled across multiple courtrooms, with some venues still being decided.
“The condition is sad, sad, sad and it’s not being made any better by these delays and complexities that have arisen,” said Clifford White, former director of the US Trustee Program. “One would have hoped this would have been handled in a far more efficient process.”
Five months after the relationship came to light, pending legal actions threaten the reputation of the firm’s booming corporate bankruptcy practice. Additionally, Jackson Walker and others engulfed in the scandal are battling civil lawsuits alleging fraud and obstruction of justice.
Bankruptcy attorneys and academics expect more details about the concealment of a potential conflict of interest to be revealed as the proceedings play out. Civil Suits
A pair of lawsuits against Jones, Freeman, and the law firms that allegedly knew about the relationship aim to hold them accountable for, in the plaintiffs’ view, illicitly profiting off its concealment.
“In my world, this is an unimaginably bad scandal,” said Nancy Rapoport, a University of Nevada, Las Vegas law professor who has written about the defendants’ duties to disclose.
The firm moved to dismiss one of the suits on March 22, shortly after it hired renowned Houston attorney Rusty Hardin to wage its defense.
“They’ve found exceptionally talented lawyers with an expertise in high profile criminal and civil trials, so it’s clear they’re taking it seriously, as they should,” said Rapoport.
The legal firestorm began with a lawsuit filed in early October by an aggrieved former shareholder of McDermott International Inc. Plaintiff Michael Van Deelen alleged that the judge’s neutrality was compromised by his undisclosed relationship, which Van Deelen discovered after an anonymous letter led him to records showing the pair owned property together.
Days after the suit was filed, Jones admitted in an interview with the Wall Street Journal that he and Freeman had been in a multiyear relationship and shared a home together. The bombshell revelation quickly led to a misconduct inquiry by the US Court of Appeals for the Fifth Circuit, and Jones’ decision on Oct. 15 to resign from the bench.
The inquiry ended with no action from the Fifth Circuit, but since then, legal challenges have arisen in cases overseen or mediated by Jones in which Jackson Walker served as counsel for corporate debtors. Before he resigned, David R. Jones was one of the busiest bankruptcy judges in the country. Brett Coomer/Houston Chronicle via Getty Images Once Jones acknowledged that the relationship rumor was true, “you couldn’t go back and unscramble the egg,” Markell said.
Van Deelen later expanded the scope of his suit to bring claims for civil racketeering and fraud against Jones, Freeman, Jackson Walker, and Kirkland & Ellis LLP—which served as lead counsel in the McDermott case.
The defendants were hit with a similar complaint last month by the former CEO of Bouchard Transportation Co., who said the petroleum barge company’s Chapter 11 case—also steered by the same law firms—was mismanaged and derailed due in large part to the undisclosed relationship.
The suits face stiff opposition from the defendants and have prompted some finger-pointing among the key players themselves. Jones has said he should be protected from the litigation by judicial immunity, while Kirkland has said it “was lied to about the existence and extent of the improper relationship.” Freeman has argued that the failure to disclose the relationship—which she said was in part Jones’ decision—had no bearing on the course of McDermott’s bankruptcy reorganization.
Jackson Walker has accused Freeman of lying to the firm about the nature of her relationship with Jones. Government Watchdog Actions
While the civil complaints seek redress from multiple parties, the US Trustee has kept a sharp focus on Jackson Walker. It’s filed numerous bankruptcy court requests to disgorge fees that the firm earned in dozens of cases presided over by Jones from 2018 to 2022 while Freeman was an attorney at the firm. But the process is convoluted and remains in the early stages.
In some instances, trials are set. Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas in August will hear Jackson Walker fee disputes in the cases of Neiman Marcus, Seadrill Partners, and Strike LLC.
But many others remain in flux. The fact that several months have passed and it’s still undetermined which court will be handling certain matters “is most unfortunate for those who care about the public confidence in the bankruptcy process and the bankruptcy system,” said White.
Jackson Walker violated multiple legal requirements and compromised the integrity of the bankruptcy system by failing to disclose the relationship, the US Trustee argued.
In some instances, the government is seeking a court order to reopen cases that have been closed for months, or even years. The administrative burden of reviving bankruptcies that, in some cases, were long ago completed, has even caused confusion for Judge Christopher Lopez, who is tasked with overseeing some of the US Trustee’s fee disgorgement requests.
“I didn’t know these cases were closed,” Lopez said at a March 21 bankruptcy court hearing regarding a subset of the cases assigned to him months ago.
Chief Bankruptcy Judge Eduardo V. Rodriguez, who leads the Houston bankruptcy court, was tapped to handle the complicated discovery and pretrial issues that have arisen from the fee disgorgement proceedings. Those matters were consolidated under a single court docket with the aim of efficiently wrangling issues such as scheduling, noticing, disputes, and conferences. Discovery is scheduled to begin on May 15.
As part of that proceeding, Rodriguez has heard, and recommended against, arguments that the fee issues be sent out of bankruptcy court and handled instead by a district court. But the ultimate decision about whether any of the fee matters will be moved will be made by US District Court for the Southern District of Texas Chief Judge Randy Crane. The timing of any such decision is unclear.
From an appearance perspective, it’s disconcerting that a bankruptcy judge from the same court where Jones sat is still presiding over the proceedings, White said.
Additional Fallout
Despite procedural hurdles, probes into what was known about the relationship will eventually take place and additional facts will likely come out, said Markell. “We don’t even know the other shoes that are going to drop,” Rapoport said. “Depending on what facts get found, there may be bar complaints, too.”
Law firms are obligated to ensure their people operate within ethical guardrails, Rapoport said. On top of potential consequences for violating bankruptcy rules, the parties could be subject to disciplinary action by the Texas bar.
There could also be a criminal referral depending on what additional information comes out as the lawsuits and fee disgorgement motions move forward, both Rapoport and Markell said.
In his days as a bankruptcy judge, Markell regularly reported possible violations of bankruptcy crimes to the US Attorney and requested that they perform a statutory follow-up, he said.
“Is Judge Jones going to be prosecuted criminally?” he asked. “If he’s prosecuted, there’s going to be a lot of aiders and abettors.”
An attorney for Jones didn’t respond to a request for comment. Freeman and Jackson Walker declined to comment.