On the 867th day since the U.S. Trustee moved to vacate fees awarded to Jackson Walker in bankruptcy proceedings in 34 cases involving former Houston bankruptcy judge David Jones and a former firm partner, the parties met in federal court in downtown Houston for the start of a three-day hearing.
The purpose of the hearing is to determine whether the court will recommend approval of nine settlements the law firm struck with former bankruptcy clients after the U.S. Trustee got involved in the case. The bankruptcy watchdog jumped into the litigation after a once-private romantic relationship between Jones and Elizabeth Freeman was publicly reported, leading to Jones’ resignation from the bench.
The U.S. Trustee has maintained the settlements are an attempt to end-run its efforts to vacate more than $20 million in fees awarded to the firm. Counsel for Jackson Walker has maintained the settlements between two private parties, the firm and its respective client, have no bearing on the actions of the trustee, pursuing relief under Rule 60 motions, and no bearing on the inherent authority of the court.
But a key exchange in the hearing that started at 9 a.m. Tuesday and lasted until about 10 minutes after 9 p.m. came more than eight hours in when Chief U.S. Bankruptcy Judge Eduardo V. Rodriguez asked counsel for one of the settling parties, counsel for the U.S. Trustee, and counsel for Jackson Walker to respond to a compound hypothetical he had been mulling throughout the day:
Assume Chief Judge Rodriguez recommends Chief U.S. District Judge Alia Moses approve the settlements, she does, and subsequent distributions are made to the creditors in the respective bankruptcy cases and the estates are closed. Then assume the U.S. Trustee’s case against Jackson Walker seeking disgorgement proceeds to trial on the merits and the court orders a vacatur of all fees awarded. What happens to the money? Where do the funds go?
“That’s the dilemma I’m facing,” Chief Judge Rodriguez said. “It’s a tough question and I don’t have any answers and no one has offered any.”
Chief Judge Rodriguez ordered the parties to provide briefing to the court by April 10 addressing whether the estates could be reopened and distributions made should additional monetary relief become available post-trial, what the impact would be of keeping the estates open in the interim even if he did approve the settlements, and whether the settlements themselves would preclude the settling parties from accepting more recovery.
“This is a heavy lift … that’s why I’m posing these tough questions,” he said.
Another key exchange preceded the hypothetical question. After a full day of testimony where the counsel for the U.S. Trustee, Joel Charboneau, repeatedly told the court that approving the settlements would doom the U.S. Trustee’s ability to pursue relief under the Rule 60 motions, Chief Judge Rodriguez asked Charboneau where that language appears in the settlements at issue.
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Charboneau conceded that language wasn’t there in “bold” “20-point font” because then it would be too difficult for Jackson Walker to “sneak it by the court.” After Chief Judge Rodriguez then wondered aloud why they had spent an entire day discussing the issue if Charboneau conceded that provision wasn’t in the settlements, Jason Boland of Norton Rose Fulbright, counsel for Jackson Walker, briefly approached the podium.
“It doesn’t [say that],” he said of the settlements. “And to suggest that we’d try to sneak something by the court is, frankly, offensive.”
Earlier in the day, U.S. Trustee lawyer Laura Steele told the court Boland made comments on the record at a December hearing indicating he believes the settlements will bar any additional monetary recovery for the settling parties.
“The transcript is replete with representations that that is the purpose of the settlement agreements,” she said.
Boland told the court the U.S. Trustee has continually “misrepresented the back and forth” in those comments. He explained that the language in the settlements in no way circumvents the bankruptcy court’s authority.
While Jackson Walker maintains that the U.S. Trustee doesn’t have standing to bring the disgorgement claims against the law firm, Boland reiterated that the settlements have no preclusive effect on the U.S. Trustee’s actions.
Chief Judge Rodriguez asked Steele what exactly her objection is to the Jackson Walker settlement language and she said it was that the settling parties can’t take any more recovery if the case goes to trial and recovery is obtained. She argued the settlements are “creating a ceiling for what this court can return” to the settling parties.
“Your honor, it absolutely does not create a ceiling,” Boland said.
Chief Judge Rodriguez said one party’s opinion of what the settlement does has no bearing on the court’s ability to determine what it does.
“We simply, plainly … want the court to confirm these settlements do not impact our vacatur motions,” Steele said in response. “Plain and clear language, not lawyerisms.”
In comments he made to the court before a late lunch break Tuesday, Boland told Chief Judge Rodriguez 867 days is “an absolute eternity in our world, as you know.”
“We’re not seeking to settle or dismiss any of the U.S. Trustee’s Rule 60 motions,” he said. “This is not an end-run around this court’s inherent authority.”