A few weeks ago, and over ardent objections from the U.S. Trustee, a bankruptcy judge agreed that Jackson Walker can depose the leader of that office in its effort to suss out whether the bankruptcy watchdog knew about a secret relationship between a sitting judge and a bankruptcy lawyer that is now the basis of its efforts to claw back millions in fees awarded to the law firm.
The order from Chief U.S. Bankruptcy Judge for the Southern District of Texas, Eduardo V. Rodriguez, means Kevin Epstein, the trustee for Region 7, will have to answer questions about his knowledge of the relationship between former bankruptcy judge David Jones and Elizabeth Freeman. Jackson Walker has argued that if the attorneys in the U.S. Trustee’s office were aware of the relationship and failed to disclose it, there cannot be the “extraordinary circumstances” or “manifest injustice” that would allow the trustee’s office to claw back Jackson Walker’s fees.
The U.S. Trustee has identified 34 cases in which former judge Jones served as judge or mediator in which Jackson Walker and its former partner Freeman were awarded fees totaling about $18 million — fees that the U.S. Trustee is attempting to claw back. Jones resigned from the bench in October 2023 when the secret relationship was publicly reported. Freeman was asked to leave the partnership in 2021 after confessing to the firm the relationship existed.
In light of Judge Rodriguez’s ruling, The Lawbook reached out to bankruptcy professors for their thoughts on what defenses Jackson Walker may raise in the case and the likelihood they will be successful.
Nancy Rapoport is the former dean of the University of Houston Law Center and current professor at the University of Nevada, Las Vegas William S. Boyd School of Law. She teaches business ethics and bankruptcy. She said, in her view, as it relates to the Freeman-Jones relationship, Jackson Walker “had an affirmative duty to make that information known — publicly.”
“It doesn’t matter if every other human in Houston knew about the Jones-Freeman relationship (though, clearly, that was not the case),” she said. “It doesn’t matter if the government knew, though my guess is that, had anyone in the government known, those people would’ve spoken up … So, I don’t think that the defense of ‘Hey, other people knew, so we didn’t have to say anything’ would work, in the same way that I don’t think the defense of ‘no harm, no foul’ works.”
Summer Chandler is a professor at Louisiana State University’s Paul M. Herbert Law Center. She teaches bankruptcy and focuses her research on bankruptcy and legal ethics. She also expressed doubts about Jackson Walker’s likelihood of prevailing on the defense that if the U.S. Trustee knew about the relationship and failed to disclose it, then there can exist no “manifest injustice” or “extraordinary circumstances” that would prevent the clawing back of fees.
“It is not clear to me that a failure by the U.S. trustee to object to the payment of fees at the time the orders were entered would necessarily relieve Jackson Walker of any responsibility it may bear and bar Rule 60(b) relief,” she said. “Although, under those circumstances, the U.S. Trustee may have had the knowledge necessary to object to the entry of the orders, other parties in interest still would have been denied that knowledge and the opportunity to object.”
Jackson Walker has argued in briefing to the court that under Bankruptcy Rule 2014 — which requires the disclosure of “connections” with the debtor, creditors, other parties in interest, accountants and attorneys for those parties, the U.S. Trustee or those employed in that office — it had no duty to disclose the Jones-Freeman relationship.
“It does not expressly require professionals to disclose relationships they may have with judges,” Chandler said. “Still, even without this express requirement in Rule 2014, other relevant rules can be read to impose this requirement. Rule 5002(b) prohibits the bankruptcy judge from approving a professional’s employment if the judge has a close connection with that professional.”
“Similarly, Rule 5004(b) prohibits the judge from approving the compensation of a relative or someone who has a close connection with the judge. Both rules suggest that the professional who wants to be properly hired and paid should disclose connections with the judge, if any, to be sure there is no issue later regarding the professional’s employment and pay.”
Jackson Walker and the U.S. Trustee filed a stipulation and agreed order Nov. 22 (and Judge Rodriguez signed off on it Nov. 25), extending certain deadlines in the case — the parties now have until Dec. 16 to file any dispositive motions and responses to those are due Jan. 14. They told the court they have been “conferring in good faith to resolve some or all the issues presented in this case.”
“The parties believe that they will benefit from continuing these discussions but also wish to preserve the opportunity to seek mediation at a later date should they mutually agree that it is appropriate to mediate the dispute,” the filing reads. “Whereas, the U.S. Trustee and Jackson Walker will seek appropriate relief from this Court by January 17, 2025, to proceed with mediation if the parties possess a good-faith belief that any remaining dispute can be mediated at a later date.”
In September, on the same day he recused himself from all disputes involving Jackson Walker and the U.S. trustee, U.S. Bankruptcy Judge Marvin Isgur referred Jackson Walker for possible disciplinary proceedings for its failure to disclose the relationship between Freeman and Jones. U.S. District Judge Lee Rosenthal has been appointed as the “hearing judge” to oversee the disciplinary case against Jackson Walker. There has been no movement in the case since it landed with Judge Rosenthal on Sept. 20.
The case number for that proceeding is 4:24-mc-01523.
Rapoport said the failure to disclose the relationship “has created a massive breach of trust in the entire system.”
“Had Jones recused, this wouldn’t have happened,” she said. “Had Freeman disclosed, this wouldn’t have happened. Had JW disclosed, again, that sunlight on the issue would have made a huge difference.”
And the disposition of the case will reverberate for years to come, Chandler said.
“Whatever the end result here may be, both the way the process is handled, and the ultimate outcome, will certainly have a far reaching and long-lasting impact in the world of bankruptcy.”
Jackson Walker is represented by Jason L. Boland, William R. Greendyke, Julie Harrison, Maria Mokrzycka and Paul Trahan of Norton Rose Fulbright and Rusty Hardin, Leah M. Graham and Emily Smith of Rusty Hardin & Associates.
The U.S. Trustee is represented by Alicia Barcomb of the Department of Justice.
The case number for the fee litigation is 23-00645.