The US bankruptcy scandal playing out in a Texas border town

Judge David Jones returned to a federal court in Texas last Thursday. But the man who was once a kingmaker jurist in the US’s biggest corporate restructurings was not perched on the bench in Houston, wearing his regal robes.

Rather he was 350 miles away in a courtroom in an dusty town near the Mexico border, Del Rio, sitting in the back row. Once known for his imperious temperament, he now watched quietly as a handful of the 15 or so lawyers in the room did the talking.

Jones is one of four defendants accused in a civil lawsuit of orchestrating a multiyear conspiracy to steer big legal fees to two law firms: international powerhouse Kirkland & Ellis, and Texas stalwart Jackson Walker — where Jones’s girlfriend and former law clerk Liz Freeman was a top partner.

Jones and Freeman failed to initially disclose their relationship, in what has been cast as grave breach of legal ethics and judicial rules that forced Jones to resign and has cast doubt over several cases where he presided and Kirkland and Jackson Walker worked side-by-side. Even after being put on notice of the intimate ties several years earlier, neither firm amended the disclosures on their fee applications or publicly flagged the issue.

Over the nearly five-hour hearing last Thursday, Alia Moses, the chief judge for the US Western District of Texas, repeatedly asked the attorneys for the defendants — Jones, Freeman, Jackson Walker and Kirkland — how one of the brightest minds on the bench could fail to see the need to walk away from cases where his romantic partner and her law firm were appearing before him.

“Judge Jones should not have been presiding over these matters, period,” she said.

Moses now will decide if the racketeering case is compelling enough to proceed to discovery and trial. But the hearing in rural Texas was itself a humbling fall for a group of firms and individuals who once collectively determined the fate of famous American companies including JCPenney, Neiman Marcus and Chesapeake Energy.

The scandal has also forced white-shoe law firms and Wall Street to reflect on how powerful actors can upset the distribution of justice in US bankruptcy proceedings.

The plaintiff who brought the lawsuit, Michael Van Deelen, has been chasing Jones for years. He had been derided as a “serial litigant” for his vast experience in filing lawsuits and had landed in hot water for making physical threats against legal adversaries, according to filings made by the defendants. Van Deelen was a small shareholder in a multibillion-dollar energy company, McDermott, which filed for bankruptcy in Houston in early 2020.

McDermott’s restructuring plan wiped out equity owners such as Van Deelen — who sued, alleging the zero he received was unfair. He later got an anonymous tip in 2021 about a relationship between Jones and Freeman and moved to have Jones taken off the case. Multiple courts rejected that request, based on how thin they deemed Van Deelen’s evidence at the time.

Moses, in the hearing, expressed shock that Jones had not come clean at that point about his relationship with Freeman. “This vast circle [Jones/Freeman/Jackson Walker/Kirkland] does not give a good impression,” she said. “We know the motion to recuse was valid and should have been granted.”

Moses conceded it would be a steep climb for a minor claimant in one bankruptcy to press ahead with such a sprawling case. A lawyer for Freeman asserted that the terms of the McDermott bankruptcy settlement only allowed the debtor company, not individual claimants, to sue later over the case. Moreover, the lawyer said Van Deelen would not be able to show that another, ostensibly bias-free, judge would have enabled a better recovery.

A lawyer for Jones separately argued on Thursday for “absolute immunity” for judges, which he said applied even if Jones had erred in not disqualifying himself from the McDermott case.

However, Moses kept returning to the idea that Van Deelen had been treated shabbily by Jones and Freeman, asking at one point how Freeman’s lawyer would feel if she, Moses, had been found years later to have been compromised by a relationship with Van Deelen’s lawyer. A federal appeals court had previously found “probable cause to believe that misconduct by Judge Jones had occurred” in response to a complaint about his behaviour.

As litigation proceeds in both the racketeering case and in bankruptcy court — in which the Department of Justice is seeking to claw back at least $13mn in fees awarded to Jackson Walker in cases involving Freeman — cracks between the four, previously accused of being thick as thieves, are emerging.

Jackson Walker said it forced Freeman from the firm in 2022 after learning she had falsely represented to them in 2021 that her relationship with Jones was in the past — although it also later continued to hire her as a contract attorney.

Kirkland, for its part, said it was unreasonable for it to independently conduct due diligence on Jackson Walker and Freeman over their potential conflicts of interest.

Using calculations from bankruptcy filings, Van Deelen’s complaint estimated Kirkland made more than $162mn in fees from cases before Jones in which it was lead counsel and Jackson Walker was co-counsel.

In the clawback matter in the bankruptcy court, Jackson Walker wrote in a May filing that Jones himself pressed their lawyers to file misleading disclosures that underplayed his relationship with Freeman. The Financial Times reported last year that Kirkland lawyers were long aware of the relationship between Jones and Freeman.

Moses did not issue any rulings at the end of Thursday’s hearing. She admitted her judicial experience was more in criminal than civil matters, often the drug and human trafficking cases that are common along the US-Mexico border. She did wonder aloud during Thursday’s hearing why Kirkland, which has a significant Houston office, even needed to hire Jackson Walker as local counsel.

As Moses threw out questions about the bankruptcy process, Jones almost appeared at times to want to chime in from his position in the back row.

Jones declined to comment after Thursday’s hearing, as he and his lawyer lingered on a sidewalk across the street from the Del Rio courthouse.

Kirkland, Jackson Walker and a lawyer for Freeman also declined to comment.

Van Deelen’s lawyers — against whom Kirkland is seeking sanctions — said they felt vindicated that Judge Moses had, for now, seemingly provided a sympathetic ear. “Judge Moses frankly made our job easier,” said Mikell West of the Bandas law firm.

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