Lawyers for Jackson Walker contend that the U.S. Justice Department “fails to plead any plausible allegations” in its effort to claw-back legal fees paid to the firm for its work on 26 different corporate bankruptcies and to have sanctions levied against the firm.
The Dallas-based corporate law firm argues that there is no evidence that then-U.S. Bankruptcy Judge David Jones’ intimate relationship with then-Jackson Walker partner Elizabeth Freeman influenced any of his decisions and that Jackson Walker should not be penalized because it only learned about the relationship after many of the cases raised by the U.S. trustee had been concluded.
U.S. Trustee Kevin Epstein filed a petition on Feb. 29 in 10 cases, including the bankruptcies of Neiman Marcus, McDermott International and Seadrill, arguing that “denial of all compensation is warranted because of Jackson Walker’s failures to disclose” Freeman’s relationship Judge Jones. At issue is between $11 million and $13 million in fees paid to Jackson Walker lawyers in those cases.
“Relief against Jackson Walker is necessary to restore faith in the bankruptcy system due to its failure to comply with the law protecting against conflicts of interest,” Epstein wrote.
This week, Jackson Walker and its lawyers at Norton Rose Fulbright shot back.
“Notably absent from the [trustee’s] motion are any specific or plausible allegations that JW had any actual knowledge of any alleged secret intimate relationship before the debtors emerged from chapter 11 or while JW performed legal services for the estates, that JW violated any applicable rule (whether knowingly or inadvertently), that any alleged secret intimate relationship impacted any orders entered by the court,” Jackson Walker argued in its 24-page filing.
“Lost in the U.S. trustee’s attacks are basic principles of pleading, including the requirement of pleading specific and plausible allegations that would support the requested relief within the case at issue,” Norton Rose Fulbright partners Jason Boland, William Greendyke and Maria Mokrzycka wrote in the brief on behalf of their client Jackson Walker. “The U.S. trustee makes no effort to address any of the cases on an individual basis.”
Jackson Walker argued that Epstein does “not distinguish between the time periods and circumstances of any particular case, whether the cases were ‘prepackaged’ or … the duration of the cases.”
The controversy erupted in October when the U.S. Court of Appeals for the Fifth Circuit opened an investigation into allegations that Judge Jones, who as chief bankruptcy judge in the Southern District of Texas had a secret relationship with Freeman, who had been previously his law clerk. Judge Jones, who handled more large and complex corporate restructurings between 2019 and 2022 than any other judge in the U.S., resigned a few days later.
Two lawsuits have been filed by private parties against Jackson Walker, Kirkland & Ellis and Judge Jones.
But legal experts agree that the most serious threats to Jackson Walker are the actions taken by the U.S. trustee, which has special legal standing in bankruptcy cases.
Epstein wrote, “The infirmity here is so foundational that the court should vacate the Jackson Walker retention and compensation orders.”
In its response filed Wednesday, Jackson Walker’s lawyers said the U.S. trustee’s argument lacks supporting facts.
“Nor do any of the U.S. trustee’s motions identify a single ruling in even one of the over 25 cases spanning nearly six years that allegedly was influenced by any alleged secret intimate relationship or otherwise was unsupported by the applicable provisions of the Bankruptcy Code and the record of the case,” Jackson Walker argued.
The Norton Rose Fulbright team representing Jackson Walker noted that most of the Chapter 11 cases had exit plans that “were broadly supported by all constituencies and explicit findings that the provisions of the plan were in good faith.”
While the U.S. trustee filed his action against Jackson Walker in the Neiman Marcus bankruptcy case, Jackson Walker filed its response in the multibillion-dollar McDermott International Chapter 11 bankruptcy restructuring case filed in 2020 because the facts in that case, they argue, show the flaws in the U.S. trustee’s arguments.
“The debtors confirmed their plan and emerged from bankruptcy months before even uncorroborated allegations of a secret intimate relationship between former Judge Jones and Ms. Freeman were made,” Jackson Walker states. “There are no allegations that JW had knowledge of any secret intimate relationship between former Judge Jones and Ms. Freeman before the debtors emerged from chapter 11 or while JW performed legal services for the estates — let alone that any alleged secret intimate relationship impacted any order entered in these Chapter 11 cases.”
The McDermott restructuring was resolved through a “prepackaged plan that left trade creditors unimpaired” and the plan was accepted by nearly 100 percent of voting creditors, Jackson Walker said in its response. The confirmation order was entered 51 days after the bankruptcy was filed. The plan deleveraged McDermott’s balance sheet by $4.1 billion, preserved the business as a going concern and saved tens of thousands of jobs, Jackson Walker argued.
Jackson Walker was paid $391,655.00 in fees.
“The U.S. trustee does not and cannot contend that JW did not provide any of the services for which it was paid and that any such services were reasonable and necessary and benefited the debtors’ estates,” Jackson Walker states in its brief. “Indeed, the U.S. trustee did not file an objection to JW’s request for fees at any time during the pendency of these Chapter 11 cases.”
Jackson Walker restated its November claim that it was “left in the dark as to the nature or extent of any relationship between former Judge Jones and Ms. Freeman.
“Neither former Judge Jones nor Ms. Freeman provided any further information as to the allegations,” the firm’s brief states. “Ms. Freeman affirmatively denied the existence of an intimate relationship when questioned by JW in the spring of 2021 and continued to deny the existence of an intimate relationship until 2022. In any event, these events occurred over a year after JW’s retention and fee orders were approved and the plan was confirmed and went effective.”