"The Amended Complaint Alleges a Sprawling Tapestry of Ethical Lapses by Major Players in the Nation's Bankruptcy System"

From Van Deelen v. Jones, decided Friday by Chief Judge Alia Moses (S.D. Tex.) (for more on the underlying scandal, see here):

The Amended Complaint alleges a sprawling tapestry of ethical lapses by major players in the nation's bankruptcy system. The Defendants insist that these accusations, however salacious, create no viable cause of action for the Plaintiff to pursue. Upon reviewing the applicable law and the Plaintiff's allegations, the Court agrees and dismisses the Plaintiff's claims—though it does so with some consternation….

The Plaintiff alleges that the Defendants—a former Chief United States Bankruptcy Judge, his romantic partner, and two firms with nationally renowned bankruptcy practices—rigged the nation's busiest bankruptcy court for profit and prestige. This scheme propelled the Defendants to national prominence and yielded tens of millions of dollars in attorneys' fees, all drawn from bankruptcy estates at the expense of creditors. The Defendants advanced this scheme, the Plaintiff claims, through a pattern of deception that included the concealment of a romantic relationship between then-Chief Judge David R. Jones ("Jones") and Elizabeth Freeman ("Freeman"), a partner at Jackson Walker, LLP ("Jackson Walker") and Jones's former law clerk.

This relationship, while unknown to the public, was an open secret among the close inner circle of lawyers whom Jones appointed to dozens of the most lucrative bankruptcy cases in the country. According to the Plaintiff, the Defendants' scheme diminished the financial recovery of parties, like him, with a pecuniary interest in the cases Jones oversaw. The Plaintiff ultimately seeks relief from what he calls "perhaps the most significant bankruptcy scandal in U.S. history." …

Today, Houston looms large in the nation's bankruptcy system, but this was not always so. According to the Plaintiff, Jones transformed Houston, almost single-handedly, from a "bankruptcy backwater" into the chapter 11 filing capital of the nation. Upon becoming Chief Judge of the United States Bankruptcy Court for the Southern District of Texas in 2015, Jones set out to make Houston an attractive venue for large corporate chapter 11 filings. He established a "complex advisory" committee that featured the head of Kirkland's bankruptcy practice, among other prominent bankruptcy lawyers in Jones's inner circle. Jones also directed all complex chapter 11 bankruptcies filed in any division in the district to himself and the Honorable Marvin Isgur, United States Bankruptcy Judge, who also sits in Houston. Consequently, parties filing chapter 11 cases in the Southern District would reliably face one of two judges—Chief Judge Jones or Judge Isgur—in a district that was now custom built for goliath chapter 11 filings.

Predictably, bankruptcy lawyers flocked to Houston. The city soon became "the single most popular destination for large, public company bankruptcy filings," far surpassing New York and Delaware. By 2023, Jones and Judge Isgur oversaw nearly half of all large chapter 11 cases nationally. …

While Jones was transforming his docket into the top venue for major chapter 11 filings, he and his then-law clerk, Elizabeth Freeman, maintained an intimate relationship. Although it is unclear when the relationship began, Jones's and Freeman's lives were meaningfully intertwined as early as 2016, when Jones purchased a home in Coldspring, Texas, in which Freeman had lived since 2007. A year later, Jones and Freeman were living together in a co-owned home in Houston. And in 2020, Freeman's parents moved into Jones's Coldspring home—which Jones still owns. Jones has since admitted to maintaining a romantic and personal relationship with Freeman….

Freeman left Jones's chambers in 2018 and joined Jackson Walker, where she became a bankruptcy partner. Upon her arrival, the firm immediately began securing lucrative appointments as local counsel in large Houston bankruptcies. Jackson Walker soon became the go-to local counsel firm for corporate debtors filing for bankruptcy in Houston. By 2022, Jackson Walker was the top firm in the country for local counsel appointments in large bankruptcies.

Jackson Walker was not the only firm whose bankruptcy practice burgeoned after Freeman entered private practice. Kirkland's bankruptcy practice also began rapidly expanding in 2018. According to the Plaintiff, these two firms formed a relationship that "went beyond a traditional referral arrangement," in which Kirkland would serve as lead counsel on dozens of complex bankruptcies, with Jackson Walker hired as local counsel. The Plaintiff claims that Kirkland used Jackson Walker as "a back channel to Houston's two judges," as the firm included former law clerks to both Judge Isgur and Jones. By 2023, Kirkland was the nation's top firm representing debtors in large chapter 11 cases "by a significant margin." …

Despite his ongoing romantic relationship with Freeman, Jones presided over many cases in which Freeman, Jackson Walker, and Kirkland appeared as counsel. These cases were goldmines for the firms. Jones awarded over $12 million in attorneys' fees and expenses to Jackson Walker across at least 26 cases, including several matters in which Freeman was substantially involved. Kirkland's attorneys' fees in these matters totaled $162 million. These cases included the chapter 11 bankruptcies of Seadrill Partners, LLC and GWG Holdings. Yet in none of the cases did anyone disclose the obvious conflict. In fact, both Jackson Walker and Kirkland filed declarations of disinterestedness, which included verified statements of the attorneys' potential conflicts on each case but did not mention the Jones-Freeman relationship.

The case most pertinent to this suit is the chapter 11 bankruptcy of McDermott International, Inc. ("McDermott"), a company in which the Plaintiff once held 30,000 shares. In February 2020, Jackson Walker partner Matthew Cavenaugh ("Cavanaugh") filed an application for the firm to be appointed as Kirkland's conflicts counsel and co-counsel. As in previous cases, Jackson Walker's application included a declaration of disinterestedness that did not mention the Jones-Freeman relationship. Jones approved the request. Although Jones's appointment order did not mention his ongoing relationship with Freeman, he ordered Jackson Walker to "review its files periodically during the pendency of these chapter 11 cases to ensure that no conflicts or other disqualifying circumstances exist or arise." Jones further advised the firm that "[i]f any new relevant facts or relationships are discovered or arise, Jackson Walker LLP will use reasonable efforts to identify such further developments and will promptly file a supplemental declaration, as required by Bankruptcy Rule 2014(a)." In March 2020, Jones appointed Kirkland as lead counsel for the debtors in possession.

The case proceeded, and the parties submitted a proposed reorganization plan (the "Plan"), which set forth the terms of McDermott's reorganization. The Plan, among other things, cancelled "all equity interests of McDermott International Inc," including the Plaintiff's 30,000 shares in the company. The Plaintiff opposed this Plan and litigated his objections before Jones. After several heated exchanges with the Plaintiff, Jones forbade him from entering his courthouse unless escorted by a court security officer. Jones also notified the United States Marshal and United States Attorney about the Plaintiff's unruly behavior in court.

Over the Plaintiff's objections, Jones entered orders confirming the Plan on March 12 and 14, 2020. Five months later, on August 14, 2020, Cavenaugh filed an application for $21,154.16 in expenses and $391,655 in attorneys' fees. Freeman's work accounted for nearly a third of those fees. Over a two-month period, Freeman billed 147 hours, including 2.7 hours for appearing at a telephonic hearing before Jones. Cavenaugh also filed a fee application on Kirkland's behalf. In it, Kirkland sought $8.2 million in attorneys' fees and $142,428.01 in expenses. Jones adopted the firms' proposed fee award orders verbatim. Throughout the fee application process, neither Jones, nor Freeman, nor anyone at the law firms, disclosed the Jones-Freeman relationship….

While the McDermott bankruptcy was ongoing, the Plaintiff sued several McDermott officers in state court for conspiracy, fraud, breach of fiduciary duty, and other state law claims. But despite filing his case in state court, the Plaintiff soon faced a familiar cast of characters. The McDermott officers, represented, inevitably, by Jackson Walker and Kirkland, removed the case to bankruptcy court, where it was assigned, of course, to Chief Judge Jones. Still unaware of the Jones-Freeman relationship, the Plaintiff moved to recuse Jones based on the latter's "animosity" toward the Plaintiff in the McDermott bankruptcy proceedings. The motion languished on Jones's docket for seven months.

While waiting for Jones to rule on the recusal motion, the Plaintiff received an anonymous letter. The letter accused Jones of corruption and of maintaining an intimate relationship with Freeman. The Plaintiff emailed Cavenaugh on March 6, 2021, with this new information. He also filed this letter on March 8, 2021, as an addendum to his recusal motion. The next day, Jones referred the motion to Judge Isgur, who, after a hearing, denied the recusal motion in a one-sentence order. Judge Isgur also ordered the clerk's office to seal the anonymous letter. Jones then promptly dismissed the Plaintiff's adversary proceeding. The Plaintiff appealed the dismissal to the district court, where the dismissal and denial of the motion to recuse were affirmed.

In none of these proceedings did Jones, Freeman, Jackson Walker, or Kirkland disclose that Jones was maintaining an intimate relationship with Freeman. In fact, the relationship remained hidden from the public until the Plaintiff filed this lawsuit. Only then did Jones admit that he and Freeman shared a home and were romantically involved….

There's a lot more in the factual recitation, and in the legal analysis. Ultimately, for complicated reasons, the judge concludes that plaintiff cannot prevail in this case. But she adds:

The Court takes no pleasure in this result. The Plaintiff's allegations, if true, cast doubt on the integrity of numerous high-profile bankruptcy cases. Litigants should not have to wonder whether the judge overseeing their case stands to gain from ruling against them; but in Jones's courtroom, they did. Dismissing the Plaintiff's allegations at this early stage deprives him of discovery tools to further investigate his claims and potentially try this case to a jury of his peers. Of course, the Plaintiff is not alone in investigating these allegations—the U.S. Trustee has been seeking to claw back attorneys' fees paid to Jackson Walker and, by all indications, has been vigorously investigating the Jones-Freeman relationship. And thus, this saga continues. But the damage has been done. Public confidence in our courts is difficult to rebuild. No one litigant—no matter how zealous or well-represented—can lift the specter of impropriety these allegations have cast over the courthouse in which, until recently, half of all large bankruptcy cases were decided. This could have, and should have, been avoided.

She also writes:

None of the foregoing discussion redeems Jones's misconduct. By statute, a judge "shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned." The Jones-Freeman relationship presented a glaring appearance of impropriety. Even if Jones felt that his relationship with Freeman would not actually affect his judgment, courts evaluate § 455(a) "on an objective basis, so that what matters is not the reality of bias or prejudice but its appearance." Jones also violated § 455(b), which requires disqualification when a judge's "spouse, or a person within the third degree of relationship to either of them … is acting as a lawyer in the proceeding." Subsection (b) also requires disqualification where the judge "knows that he … or his spouse … has a financial interest in the subject matter in controversy." Although Jones and Freeman are unmarried, courts interpret § 455(b) to require disqualification whenever a conflict presents "the functional equivalent of a relationship that creates the objective appearance of a § 455(b) violation." The disqualifying conflicts outlined in § 455(b) are non-waivable.

When a law firm partner is related to the judge within the third degree and is counsel in a case, the Fifth Circuit has found that he "automatically has an interest that could be substantially affected by the outcome of the proceedings." Here, the Plaintiff alleges an even clearer conflict: an attorney who is romantically involved with the judge and living with him in a co-owned house. Any litigant or member of the public might reasonably question whether the fees Jones awarded to Jackson Walker may have been paying the judge's mortgage and utility bills.

Likewise, as Chief Judge Richman explained, Jones ran roughshod over several canons of the Code of Conduct for United States Judges. (ECF No. 10-1); e.g., Code of Conduct for U.S. Judges, Canon 2 (2019) ("A judge should avoid impropriety and the appearance of impropriety in all activities."); id. at 2B ("A judge should not allow family, social, political, financial, or other relationships to influence judicial conduct or judgment."); id. at 3C(l)(c) (requiring disqualification when a judge's spouse, or anyone "with whom the judge maintains both a household and an intimate relationship" has a financial interest in the case).

Whether through hubris, greed, or profound dereliction of duty, Jones flouted these statutory and ethical requirements by presiding over dozens of cases from which he was obviously disqualified. The legal deficiency of the Plaintiff's claims does not erase these failures….

Kirkland has filed a Motion for Sanctions against the Plaintiff and his attorneys. It argues that the Amended Complaint is "legally and factually frivolous." Kirkland thus seeks an award of attorneys' fees and costs it spent defending against the Amended Complaint, including fees and costs associated with its Motion for Sanctions and Motion to Dismiss. Further, Kirkland asks that the Court order the Plaintiff to "pay a 'penalty into the court' in an amount the Court deems appropriate." As outlined below, the Court finds that sanctions are not appropriate at this juncture and denies Kirkland's request….

According to Kirkland, "[b]oth Plaintiff and his counsel have astounding track-records of filing meritless cases." The Plaintiff has filed myriad federal cases as a pro se litigant. Kirkland also highlights several statements the Plaintiff allegedly made in bankruptcy court as evidence of his history of misbehavior. The bankruptcy court record indicates that the Plaintiff "called the Court a 'son of a bitch'" and made other "vulgar remarks" toward a partner at Kirkland. The Plaintiff denies making these statements.

Kirkland argues that the lawyers whom the Plaintiff hired to represent him in this suit have an equally sordid history of unethical litigation tactics. Indeed, the Bandas Law Firm is no stranger to Rule 11. The firm has been "widely criticized by … courts around the country" for its "excessive and irrelevant pleadings and documents to slow down the litigation process." …

Just because the Plaintiff and his lawyers have previously violated Rule 11 does not mean they have done so here. Assuming the truth of the Plaintiff's allegations, he was a victim of a conspiracy that deprived him of fair access to the federal courts and extinguished a valuable interest in McDermott. Although the Plaintiff fails to state a valid cause of action, his allegations, if true, show that he suffered injustice in Jones's courtroom. The Court will not punish the Plaintiff for seeking to redress his grievances in a forum in which, for once, the deck is not stacked against him.

True, the Plaintiff has a history of filing meritless claims about supposed public corruption. But this time, he was right. Time and time again, the most powerful players in the bankruptcy system dismissed him as another crazed, vexatious litigant. And now, in one final twist of the knife, Kirkland seeks to punish the Plaintiff for having the audacity to sue it. The Court will not oblige. After all, it was the Plaintiff's audacity that brought this scandal to light. Had the anonymous letter arrived in anyone else's mailbox, perhaps Jones would still be on the bench, awarding millions of dollars to Kirkland and Jackson Walker.

The Court is less sympathetic towards the Plaintiff's counsel, Robert Clore and Mikell West of the Bandas Law Firm. These attorneys have considerable experience litigating complex federal cases. They, of all people, should know the limits of Article III standing. Yet across hundreds of pages of briefing, they advance a theory of the Plaintiff's injury that contradicts binding precedent and leaves this Court without jurisdiction over almost all of the Plaintiff's claims. Still, this case presents some novel issues in an unusual factual context. Courts sometimes give special consideration to allegations of misconduct that target the federal judiciary. As the Second Circuit concluded in Alix:

[T]his case requires us to focus on the responsibilities that Article III courts must shoulder to ensure the integrity of the Bankruptcy Court and its processes. Litigants in all of our courts are entitled to expect that the rules will be followed, the required disclosures will be made, and that the court's decisions will be based on a record that contains all the information applicable law and regulations require. The fact that this case invokes our supervisory responsibilities makes our resolution of it sui generis and of little, if any, application to "ordinary" RICO cases where these responsibilities are not front and center.

It is not unreasonable, then, for Mr. Clore and Mr. West to believe a court might give "special consideration[ ]" to allegations of corruption within the nation's most important bankruptcy court.

The Court is satisfied that the Plaintiff's lawyers have not litigated this case in bad faith, and thus, the Court declines to impose sanctions at this juncture. The claims advanced in the Amended Complaint are legally insufficient but not altogether frivolous. Still, the Court admonishes Mr. Clore and Mr. West to diligently review the facts and the relevant law in all future filings….