Rather than making necessary disclosures required after learning of the romantic relationship between a former Jackson Walker bankruptcy partner and a then-sitting bankruptcy judge in Houston, the law firm “worked to circle the wagons” to protect itself from the fallout, JCPenney has alleged in a recently-filed complaint.
The 18-page lawsuit seeking to claw back about $1.1 million in bankruptcy fees, along with other damages, was filed Tuesday in the bankruptcy court for the Southern District of Texas, Corpus Christi Division and brings claims for disgorgement for failure to make bankruptcy disclosures, breach of fiduciary duty and negligence.
The U.S. Trustee has identified 34 cases in which former judge David Jones served as judge or mediator in which Jackson Walker and its former partner Elizabeth 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.
Citing text messages between Jackson Walker lawyers Matthew Cavenaugh and Veronica Polnick that have been produced in discovery in the underlying bankruptcy fee litigation, JCPenney told the court that evidence shows the law firm “knew the significance of the relationship, which had the potential to wreak havoc on their lucrative bankruptcy practice.”
“Importantly, the text messages also indicate that several senior JW partners, including its general counsel, knew about the relationship at least as early as March 7, 2021, and worked to circle the wagons to protect JW.”
JCPenney opened its complaint by quoting U.S. Bankruptcy Judge Marvin Isgur, who referred Jackson Walker for possible disciplinary proceedings related to its failure to disclose the relationship.
“The conclusion drawn by Judge Isgur as expressed in his September 20, 2024, disciplinary referral of Jackson Walker LLP says it all: Jackson Walker’s deliberate failure to inform its clients [of the Relationship (defined below)] was an ethical breach that we cannot excuse,” the complaint reads.
JCPenney decided to reorganize its debts during the pandemic and hired Jackson Walker in May 2020 to represent it in Chapter 11 bankruptcy proceedings, which commenced the same month. The company told the court in its complaint that it was unaware of the Freeman-Jones relationship at that time.
The lawsuit takes specific aim at a declaration filed by Jackson Walker bankruptcy partner Cavenaugh in June 2020, stating that the firm “does not have any undisclosed ‘connections’ and is ‘disinterested.’” JCPenney points out in its complaint that Cavenaugh and Jackson Walker “never supplemented” that declaration even after the evidence shows the firm did gain knowledge of the Freeman-Jones relationship.
The Freeman-Jones relationship was publicly reported by national news outlets in October 2023, after Michael Van Deelen, a shareholder who lost everything in the McDermott International bankruptcy handled by then-judge Jones, filed a federal fraud and breach of fiduciary duties lawsuit accusing Jones and Freeman of being involved in a secret romantic relationship.
JCPenney alleges that while the Freeman-Jones relationship “began as early as 2013,” Jackson Walker had “imputed knowledge of the relationship beginning in May 2018.”
“Despite this knowledge, no one informed JCP of the relationship when it retained JW two years later,” the complaint alleges.
Van Deelen emailed Cavenaugh on March 6, 2021, “questioning the truthfulness of an anonymous letter he purportedly received the previous day claiming Freeman and Jones were in a romantic relationship,” according to the complaint, and two days later informed then-judge Jones of the allegations by filing an addendum to a motion to recuse Jones.
But the allegations would remain under wraps until Van Deelen filed his federal lawsuit two years later. JCPenney told the court, via a series of bullet points in the complaint, that Jackson Walker had ample opportunity to disclose the relationship and chose not to:
- in May 2018, when Freeman joined JW knowing of the relationship, thus imputing such knowledge to JW,
- in 2019, when JW hired a bankruptcy lawyer who knew that Jones and Freeman owned a house together in addition to another partner who knew of the relationship,
- in May 2020, when JCP retained JW to assist with JCP Cases,
- on June 11, 2020, when JW filed an application to be retained as counsel for JCP,
- any time after July 2020, when it failed to supplement the Cavenaugh declaration despite the retention order directing supplementation,
- prior to December 24, 2020, when it confirmed a plan of reorganization that allegedly released JW from any liability,
- on March 6, 2021, when it learned of the Van Deelen allegations and Freeman confirmed a past relationship,
- on March 10, 2021, when it filed its final fee application in the JCP Cases seeking approval of $1,101,482.21 in fees,
- when outside ethics counsel advised it to disclose,
- on February 22, 2022, when a JW partner learned from a friend that Freeman and Jones lived together,
- in March 2022, when Freeman confirmed a present relationship and cohabitation in a jointly owned home,
- in December 2022, when JW terminated Freeman so that it could keep appearing in front of Jones, or
- ever.
“And, ultimately, it fired Freeman, while continuing to work with her on a contract basis,” JCPenney alleges. “These half-hearted efforts did nothing to ameliorate its ethical duties. Simply put, the revenue from appearing in front of Jones outweighed JW’s view of its professional obligations.”
Jackson Walker declined to comment Thursday.
JCPenney is represented by Stephen W. Lemmon and Rhonda Mates of Streusand, Landon, Ozburn & Lemmon.
Jackson Walker is represented in related litigation over bankruptcy fees it received 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 case number is 20-20184.