David R. Jones resigned from his post as chief judge at the US Bankruptcy Court for the Southern District of Texas (SDTX), leaving behind nearly two dozen active bankruptcy cases and a legacy of work.
On 4 October, Michael Van Deelen - a former McDermott International shareholder who clashed with Jones during that bankruptcy case - filed a complaint against Jones in the US District Court for the Southern District of Texas, alleging that he had an undisclosed romantic relationship with Elizabeth Freeman, who was Jones’ law clerk for six years before moving to Jackson Walker, where she frequently appeared before him as counsel to debtors and other parties. Freeman left Jackson Walker in December and founded The Law Office of Liz Freeman.
Jones admitted to the relationship shortly after the complaint hit, telling the press he did not disclose the connection because he did not want to give the perception that a company filing for bankruptcy in his court “should go out and hire Jackson Walker.” The following days proceeded as normal, with the judge even hearing summary judgment arguments in a dispute in the heavily contested Chapter 11 case of Wesco Aircraft. But by Friday (13 October), the US Court of Appeals for the Fifth Circuit had launched an investigation into the situation and asked Jones to step down from taking complex cases, to which he agreed. Over the weekend, Judge Jones formally resigned.
Judge Jones’ recent resignation and the underlying allegations of impropriety that prompted one of the nation’s most prominent bankruptcy court judges to step down from the SDTX Bankruptcy Court, the nation’s busiest bankruptcy court in terms of large and complex Chapter 11 filings, has raised a number of questions as to what might happen next with respect to both his ongoing cases and cases in which Judge Jones has issued rulings.
In this article, Debtwire’s court and legal analyst teams provide an overview of where things stand now and what we expect might happen down the road. As further discussed below, there are mechanisms for various affected and unsatisfied parties to move to vacate certain of Judge Jones’ rulings based on his failure to recuse himself. The likelihood of those rulings being vacated should turn largely on a fresh review of the rulings, and a weighing of harm to the parties challenging the rulings.
Venue visibility
As noted above, the SDTX Bankruptcy Court is one of the most popular venues for large Chapter 11 debtors, with over one-third of cases involving liabilities exceeding USD 1bn having been filed there since January 2022, according to Debtwire’s Restructuring Database (RDB). As further illustrated in the chart below, 17% of all such cases have been assigned to Judge Jones.
A comparison of the assignment of major cases to the various US Bankruptcy Court judges, according to data provided by the RDB, highlights that Judge Jones leads the pack in terms of overseeing these cases.
As highlighted in the table above, Judges Jones and Marvin Isgur have handled the largest share of major Chapter 11 cases. Judge Jones was a partner at Porter Hedges prior to taking the bench in 2011 and has been SDTX’s chief judge since 2015. Judge Isgur has served the court since 2004 and announced last year that he was stepping down from complex cases, but Judge Isgur is now returning to the fray. Judge Isgur and Judge Christopher Lopez, who has taken over Judge Isgur’s cases over the past year as the latter wound down his caseload, will take over Judge Jones’ cases. Over the weekend, the SDTX filed notices in all of Judge Jones’ bankruptcy cases stating that they had been reassigned.
Judge Isgur will take Barretts Minerals Inc, Condor Inversiones, Alpine Summit Energy Partners Inc, Instant Brands, Genesis Care, National CineMedia, Wesco Aircraft Holdings (Incora), Diebold Holding Company, Athenex Inc, 4E Brands, Party City. Lopez will handle Sorrento Therapeutics, Core Scientific, Orbital Infrastructure Group, Chemical Exchange Industries, AppHarvest Products, Center for Autism and Related Disorders, Paradox Resources, Venator Materials, Lifesize Inc, and Basic Energy Services.
Jones has previously been on the other side of a disclosure dispute. AlixPartners founder Jay Alix has spent years, via his Mar-Bow Value Partners vehicle, pursuing claims against McKinsey unit McKinsey Recovery & Transformation Services, alleging that the firm knowingly concealed dozens of conflicts of interest while serving as advisor to various Chapter 11 debtors. In arguments in 2019, Jones warned that the disclosure battle could be a “career-ender for somebody” given the seriousness of the allegations flying back and forth. McKinsey Recovery & Transformation Services would later reach settlements in various cases, paying over USD 40m to settle disclosure allegations from the US Trustee and the US Securities and Exchange Commission.
At least one former Jones foe has taken the opportunity to gloat, with Dan Kamensky calling the resignation “karma” and alleging that Jones “has acted for too long outside the bounds of professional ethics and norms of civilized behavior.” While Kamensky did not get specific, the comments likely date to a December 2020 hearing where Jones called him a “thief” for his actions in the Chapter 11 case of Neiman Marcus. Kamensky later pleaded guilty to engaging in fraud and extortion to pressure a rival bidder for Neiman Marcus’ assets to abandon its pursuit and was sentenced to six months in prison.
The following table lists the cases that (i) Judge Jones oversaw during the alleged duration of his relationship with Ms. Freeman while she was at Jackson Walker, and (ii) involved Jackson Walker as either debtor’s counsel or counsel to other parties in interest.
Appearance of impropriety
The Code of Conduct for US Judges sets forth five overarching ethical canons that provide guidance on federal judges’ performance of their official duties and their engagement in a variety of outside activities. The Code of Conduct was adopted by the Judicial Conference.[1]
The first canon obligates judges to uphold the integrity and independence of the judiciary, while the second canon mandates that judges must avoid even the appearance of impropriety (not just actual impropriety) at all times. As part of complying with the second canon, judges are instructed to “not allow family, social, political, financial, or other relationships to influence” their conduct or judgment. The commentary on this canon explains that “an appearance of impropriety occurs when reasonable minds, with knowledge of all the relevant circumstances disclosed by a reasonable inquiry, would conclude that the judge’s honesty, integrity, impartiality, temperament, or fitness to serve as a judge is impaired.”
The third canon requires that judges perform their duties of office fairly, impartially and diligently. Notably to this point, the Code of Conduct provides here that a judge must “disqualify himself or herself in a proceeding in which the judge’s impartiality might reasonably be questioned.”[2] Even more pointed, Canon 3C provides that recusal considerations applicable to a judge’s spouse “should also be considered with respect to a person other than a spouse with whom the judge maintains both a household and an intimate relationship.”[3] Canon 4 applies to extrajudicial activities such as speaking engagements and fund raising activities, and Canon 5 provides that judges should refrain from political activities.
There is a strong argument that Judge Jones violated the first three canons in overseeing the cases listed above without disclosing his personal relationship with Ms. Freeman. However, not every violation of the Code will lead to disciplinary action. According to the Code “[w]hether disciplinary action is appropriate, and the degree of discipline, should be determined through a reasonable application of the text and should depend on such factors as the seriousness of the improper activity, the intent of the judge, whether there is a pattern of improper activity, and the effect of the improper activity on others or on the judicial system.” Here, there appears to be a significant pattern of impropriety dating back to the time in 2017 when Judge Jones allegedly began living with Ms. Freeman. According to the Federal Judicial Center (FJC), violation of the canons can result in temporarily suspending case assignments, providing informal counseling, or issuing censure or reprimand. Also, the Judicial Conference may recommend to the House of Representatives that the offending judge be impeached. According to the FJC, there have been only 15 judicial impeachments in US history, and only eight US judges have been convicted and removed.
Given Judge Jones’ resignation, the more pressing question is the extent to which impropriety may have affected his rulings and what consequences that may have on the finality of those rulings. Section 455(a) of title 28 of the US Code provides that a federal judge must disqualify himself in any proceeding in which his or her impartiality “might reasonably be questioned.” As discussed above, particularly with respect to the first three canons, it appears that there is a strong case that Judge Jones’ impartiality might reasonably questioned in cases where Jackson Walker served as counsel while Ms. Freeman was employed at the firm. The Supreme Court has explained that “[s]ection 455 does not, on its own, authorize the reopening of closed litigation” but “Federal Rule[ ] of Civil Procedure 60(b) provides a procedure whereby, in appropriate cases, a party may be relieved of a final judgment.” Federal Rule 60(b) provides that, upon a motion and “just terms,” a court may relieve a party or its legal representative from a final judgment, order, or proceeding for a number of enumerated reasons, including “any other reason that justifies relief.”
The case of Liljeberg v. Health Services Acquisition Corp is instructive.[4] In that case, after a bench trial, a district court judge ruled in favor of a party to a real estate transaction, with such ruling benefitting a private university that was not a party to the action. However, the university had negotiated with one of the parties and had an interest in the outcome of the dispute. After the ruling, the losing party learned that the district court judge had been on the board of trustees for the university at the time that he issued the ruling, and moved to vacate the judgment under Rule 60(b)(6). The case ultimately made its way up to the US Supreme Court, which ruled that the judge should have disqualified himself for several reasons pointing out that a judge’s recusal obligation is not grounded in actual impropriety – but rather, the “appearance” of impropriety. In these situations, the Court explained, “a new, unconflicted judge may, but is not required to, vacate the judgment or any decisions rendered by the conflicted judge.” The Supreme Court then explained that when “determining whether a judgment should be vacated for a violation of § 455(a), it is appropriate to consider the risk of injustice to the parties in the particular case, the risk that the denial of relief will produce injustice in other cases, and the risk of undermining the public's confidence in the judicial process.”
The US Court of Appeals for the Second Circuit (Circuit Court) recently applied this analysis in a case involving ExxonMobile Oil Corporation. In that case, Judge Edgardo Ramos of the US District Court of the Southern District of New York held between USD 15,001 and USD 50,000 in stock in Exxon's parent company when he ordered TIG Insurance Company to arbitrate a coverage dispute with Exxon and later awarded Exxon prejudgment interest when confirming the arbitral award.[5] After Judge Ramos issued his judgment and TIG appealed that judgment, the district court clerk notified the parties that it had been brought to Judge Ramos' attention that he owned stock in Exxon at the time he presided over the case.
The parties did not contend, and nothing supported a finding, that Judge Ramos was aware of his conflict at the time. Regardless, TIG moved in the district court to vacate the judgment. The case was reassigned to Judge Mary Kay Vyskocil, who denied the motion to vacate Judge Ramos’ rulings, and TIG appealed Judge Vyskocil’s ruling to the Circuit Court. In 2022, the Circuit Court ruled that Judge Ramos’ failure to recuse himself was “indisputably a serious error.” The Court then considered “first whether Judge Ramos's conflict of interest required Judge Vyskocil to vacate the judgment and restart the entire case anew.” The Court held that vacating the judgment was not required because TIG suffered “little risk of injustice” due to the fact that this issue presented (i) “purely legal questions of contract interpretation: whether the Policy includes a binding arbitration agreement, and whether the language of the Policy waives the parties’ rights to prejudgment interest” and (ii) Judge Vyskocil considered the legal issues afresh and rendered an independent decision after reviewing the record. The Circuit Court then undertook its own review of the two legal issues. It ultimately agreed that arbitration was required, and therefore affirmed the propriety of the arbitration ruling, but remanded to the district court to calculate the appropriate interest accrued through the date of judgment.
Next steps in affected cases
At least one case is already seeing the ripple effects of Jones’ resignation. Jones was the mediator in the Chapter 11 case of Tehum Care Services, where Freeman represented creditor YesCare. That mediation ultimately yielded a USD 37m settlement with creditors. The US Trustee in that case filed an objection to the disclosure statement on Friday, questioning the “very propriety of the settlement and plan itself.” Since then, several other creditors have filed objections to the disclosure statement, questioning the settlement due to Jones’ and Freeman’s involvement.
Other judges have taken note. At today’s first day hearing in the newly filed case of Rite Aid, Judge Michael Kaplan of the US Bankruptcy Court for the District of New Jersey told the parties that his son, Jonathan Kaplan, is a managing director at Evercore, which represents an ad hoc group of noteholders in that case. Judge Kaplan did not reference Jones by name, but noted “we’ve all learned how important disclosure is in our courts.”
Given that most of Judge Jones’ cases have been reassigned, we would not be surprised if disgruntled parties on the losing end of Judge Jones’ rulings in the affected cases move to have the rulings vacated. Decisions on those requests likely would entail a substantive review of the rulings and an analysis of the harm to the moving party and the risk of harm in future cases. To the final point, there is an argument the risk of harm in future cases is arguably minimal here, because Judge Jones is no longer on the bench.
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[1] The Chief Justice of the United States (currently, Justice John Roberts) is the presiding officer of the Judicial Conference. The Judicial Conference members include the chief judge of each judicial circuit, the chief judge of the Court of International Trade, and a district judge from each regional judicial circuit.
[2] Emphasis added.
[3] Emphasis added.
[4] Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 863 (1988).
[5] ExxonMobil Oil Corporation v. TIG Insurance Company, 44 F.4th 163 (2d Cir. 2022).
