A group of GWG Holdings bondholders are alleging the parties that have been implicated in the secret romance scandal involving a former Houston bankruptcy judge and a bankruptcy lawyer were actually players in a racketeering conspiracy, “work[ing] together to prey upon distressed entities for their own financial gain.”
The lawsuit, filed Thursday, names as defendants David Jones, Elizabeth Freeman, The Law Office of Liz Freeman, Jackson Walker and Porter Hedges. Once the previously undisclosed live-in relationship between Jones and former Jackson Walker bankruptcy partner Freeman was publicly reported in October 2023, Jones left the bench. Freeman left Jackson Walker to launch her own firm in December 2022. Jackson Walker has become the target of actions by the U.S. trustee to claw back millions in fees awarded to the firm in 33 bankruptcy proceedings where Jones served as judge or mediator.
The bondholders allege that Porter Hedges — where Jones and Freeman previously practiced before Jones was named to the bench and Freeman became his law clerk — also knew about the relationship because Freeman’s ex-husband, a partner at the firm, was aware of it and his “knowledge of the continuing relationship is imputed to Porter Hedges.” Porter Hedges also served as counsel to the bondholders committee.
“Never once across more than 30 mega-bankruptcies did they ever disclose the relationship between Jones and Freeman even though the law demanded it,” the 138-page lawsuit alleges. “Typically, they carried out their scheme by ensuring cases were assigned to Jones. That allowed Jones to award Jackson Walker, Freeman, and indirectly himself millions of dollars in attorneys’ fees while keeping interested parties in those bankruptcies unaware of the disqualifying conflict. Even in cases where Jones was not presiding, the group arranged for him to serve as a judicial mediator, ensuring liquidation of distressed entities for their pecuniary gain.”
A Dallas-based financial services firm that sells bonds backed by life insurance policies, GWG Holdings filed for Chapter 11 bankruptcy in April 2022 and U.S. Bankruptcy Judge Marvin Isgur was assigned the case. Jones was appointed to serve as mediator.
“Then, without warning at the mediation, Jones advised the parties and stakeholders that there would no longer be a reorganization,” the lawsuit alleges. “Despite the promise of a reorganization that management believed would recover 100% to the bondholders, the company would be liquidated and none other than newly ‘solo’ attorney Freeman would be appointed as wind down trustee.”
The lawsuit alleges that liquidating the company means that Freeman “and indirectly Jones” would receive more than $1 million in fees and could direct millions to select firms, too.
“Unlike some other cases, Jackson Walker cannot argue in the GWG bankruptcy, filed on April 20, 2022, that it learned of the Jones-Freeman relationship after-the-fact. Jackson Walker knew from the inception of the bankruptcy,” the suit alleges.
Jackson Walker recently agreed to attempt to mediate the claims brought by the U.S. trustee.
The lawsuit accuses the defendants of breaching their fiduciary duties to the bondholders.
“Shockingly, Freeman continues to serve as wind down trustee to this day, compounding her ethical breaches without any challenge to her ongoing role in the GWG bankruptcy,” the suit alleges.
That Freeman remains the wind down trustee for the GWG bankruptcy was raised by a bondholder opposed to proposed settlement agreements at a hearing in April. The bondholder, who called in remotely to attend the hearing, raised the issue of Freeman’s illicit relationship with Jones.
“How can we trust her?” the caller asked.
The bondholders are seeking unspecified damages.
The bondholders told the court the misconduct alleged in the suit has resulted in their interests in GWG Holdings being “rendered entirely or nearly worthless — a loss of at least 96% of the value of their bonds.”
The lawsuit has been assigned to U.S. District Judge Andrew Hanen.
At a hearing Friday morning before U.S. Bankruptcy Judge Christopher M. Lopez in the GWG Holdings case, where the judge eventually approved four settlements totaling $91.3 million, the lawyer who filed the lawsuit on behalf of the aggrieved bondholders, Mikell A. West of Bandas Law Firm, addressed the court.
On Thursday night when he filed the lawsuit, West also filed a suggestion of lawsuit in the docket for the GWG bankruptcy. Judge Lopez told West Friday morning that he had read the lawsuit and denied his request to ask questions directly of the litigation trustee, Michael I. Goldberg, about the scope of the release for Mayer Brown in the firm’s proposed $30 million settlement.
West told the court he believed the scope of the settlement encompassed elements of the Jackson Walker fee dispute. In April, the Chief U.S. District Judge for the Western District of Texas, Alia Moses, took control of the more than two dozen bankruptcy cases where the U.S. trustee is seeking to claw back Jackson Walker’s fees.
Judge Lopez, who noted Mayer Brown wasn’t named as a party in the lawsuit West filed, disagreed that that was the case.
In the four-page suggestion of lawsuit, the bondholders allege the release “could be interpreted to include (and does not expressly carve out) potential claims against Mayer Brown based on the failure to disclose the Jones-Freeman relationship during the GWG bankruptcy (to the extent any partner at Mayer Brown had knowledge of the relationship),” and therefore Chief Judge Moses should be the one to approve, or not, the release.
The case number is 4:25-cv-02761.