“Scandal of epic proportions” in the bankruptcy courts

This story is bonkers.

Usually confident to the point of coming across self-righteous, Houston Bankruptcy Judge David Jones’ voice quivered as he stated repeatedly, “I don’t know. I don’t know. I don’t know what is going to happen next. I just don’t know.”

The chief judge of the U.S. Court of Appeals for the Fifth Circuit had just published notice that it was investigating possible misconduct by Judge Jones over allegations that he had been involved in a multi-year secret romance with a former bankruptcy partner, Elizabeth Freeman, at Jackson Walker. The Dallas-based firm had been paid more than $20 million — fees often approved by Judge Jones — for its role in dozens of high-profile bankruptcies in which Jones served as judge or mediator.

“I’m going to send a letter tomorrow announcing that I am resigning,” Jones told The Texas Lawbook in an interview one year ago Tuesday. “I didn’t think my personal life was anyone’s business. We never discussed cases. It never impacted a single decision I made. But I guess I have to resign. I have no idea what I am going to do next.”

Jones, who handled more large corporate bankruptcies from 2019 to 2023 — including North Texas-based companies such as Neiman Marcus and J.C. Penney — than any other judge in the U.S., officially resigned Oct. 15, 2023. The 365 days since have been pure chaos in the Houston bankruptcy courts, which is one of the three busiest courts in the nation for business bankruptcies.

“The whole thing is a mess, a complete fiasco,” said Royal Furgeson, the former dean at the University of North Texas at Dallas College of Law. “The stress that Judge Jones and this situation has created for his fellow judges and for the lawyers and law firms is tremendous. The future of some excellent Texas lawyers and law firms is at risk. And it all could have been easily prevented by some simple disclosures and recusals.”

The fallout during the past 12 months has been intense, including:

  • The U.S. Trustee, the federal watchdog over bankruptcy proceedings, is seeking to force Jackson Walker to return between $18 million to $22 million in legal fees it was paid in 33 different bankruptcy cases involving Freeman in which Jones was either the judge or the mediator. The case is scheduled to go to trial Dec. 16.
  • The U.S. Justice Department has opened a criminal investigation into the matter, ordering many of the lawyers and Houston federal court officials involved to preserve their records. As a result, Jones took the Fifth
    Amendment against self-incrimination when asked about his relationship with Freeman during a deposition earlier this month.
  • Two federal lawsuits brought by creditors in cases handled by Judge Jones and that involved Freeman accuse the judge, Freeman, Jackson Walker and the law firm Kirkland & Ellis of a conspiracy to favor debtors at the expense of creditors and to funnel tens of millions of dollars in legal fees to the defendants.
  • Two investment firms, Fidelity and Apollo Global Management, filed court documents three months ago in Sanchez Energy’s bankruptcy claiming they would not have accepted a 2020 settlement agreement pushed by Judge Jones, who mediated the dispute in which Freeman was a lawyer for the debtor, Sanchez, which is now called Mesquite Energy. The two lenders want to participate in the claw back of fees against Jackson Walker.
  • And just three weeks ago, Houston Bankruptcy Judge Marvin Isgur, whom Jones has described as his mentor and best friend, referred Jackson Walker to a federal district judge to consider disciplinary action for ethical breaches that Judge Isgur said “defiled the very temple of justice” by not disclosing the relationship between Freeman and Jones years earlier.

“What we have here is a scandal of epic proportions, all brought about by failures to disclose,” Nancy Rapoport, former dean of the University of Houston Law Center and a bankruptcy law expert, wrote in a law review article for Emory University’s Bankruptcy Law Developments Journal. “Judge Jones absolutely should have recused himself from cases involving Ms. Freeman. Ms. Freeman should have disclosed the relationship, and she shouldn’t have appeared in cases assigned to her romantic partner. Jackson Walker should have disclosed the relationship once it became aware of it (and it should have done more than take Ms. Freeman’s word for it that the relationship had ended).”

“It’s hard to avoid the conjecture that the lawyers who should have disclosed chose not to do so at least in part because of the financial and strategic benefits of being employed in those cases,” wrote Rapoport, who is now a law professor at the University of Nevada Las Vegas.

Dallas lawyer Randy Johnston, an expert on legal ethics, said that “the facts in this case are devastating.”

“What happened here are almost certainly clear ethical violations and breach of fiduciary duties by the judge, the lawyers and Jackson Walker,” Johnston said. “If I was a Jackson Walker lawyer right now, I would need a change of underwear.”

Multiple efforts to seek comments from Jackson Walker, Judge Jones and Freeman were unsuccessful.

Jones has argued that he has judicial immunity from all legal claims. Jackson Walker has claimed that Freeman lied to them about her relationship with the judge and that it did nothing wrong. Jackson Walker has also argued that if the U.S. Trustee or attorneys in that office knew of the relationship before it was publicly reported and failed to act, it cannot now try to claw back Jackson Walker’s legal fees.

Legal experts say the questions in nearly all of the related cases come down to this: When did the lawyers know about the relationship between Jones and Freeman, and what, if anything, did they do about it?

This is a story for subscribers only, but Ginger is a subscriber and gave me a PDF of it. Some googling pointed me to stories in Bloomberg Law and Reuters with more details if you want to know more. This story was also reported in Texas Lawbook, but it too requires a subscription.

Anyway, you get the basic outline, and the rest is that there’s a big mess to clean up, the parties responsible for the mess don’t want to be held responsible for it, and so on. I’m not sure what shocks me more, that a lack of disclosure of a personal relationship by a judge and a person with lots of business before that judge turned into an ethical quagmire, or that it was possible for the judge in question to be accountable for it. Who even knew that could happen? Maybe we should broaden that idea to include more federal courts. Crazy, I know, but it just might work.

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One Response to “Scandal of epic proportions” in the bankruptcy courts

  1. C.L. says:

    Crazy. Hold my beer while I go grab the popcorn.

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