Top Texas Firm Entangled in Bankruptcy Judge’s Ethics Trouble

A Texas law firm tied to a prominent bankruptcy judge’s alleged ethical misconduct is seeking to keep its status as a go-to firm in one of the country’s busiest bankruptcy courts.

The Justice Department’s bankruptcy watchdog has accused Jackson Walker of failing to disclose potential conflicts of interest after a onetime partner at the firm, Elizabeth Freeman, was alleged to be in a romantic relationship with bankruptcy Judge David R. Jones, who regularly oversaw the firm’s cases. The allegations have put Jackson Walker in an unusual position for a firm that’s known in bankruptcy circles for its role as the right hand of corporate restructuring powerhouse Kirkland & Ellis for its Houston-based cases.

The US Trustee late last week challenged at least $13 million in fees the firm earned while representing clients before Jones in the US Bankruptcy Court for the Southern District of Texas.

Jones presided in at least 26 cases where Jackson Walker was awarded compensation and expenses while Freeman worked at the firm and lived with Jones in an intimate relationship, the US Trustee said in court filings. The firm has said it made sure that Freeman wouldn’t work on or bill for any cases Jones was overseeing once it learned of the relationship allegations in March 2021.

“This is a strong and diverse firm with more than 130 years of history,” Jackson Walker said in a statement Monday. “The firm has some of the most respected and proven bankruptcy professionals in the industry, and while none of this is pleasant, this is an isolated incident that won’t impact our ability to continue to provide excellent bankruptcy representation.”

Jackson Walker carved out a brisk business as a local counsel in the busiest bankruptcy venue in the country. In that role, it was expected to be familiar with local customs and judges and take care of any necessary matters for out-of-town law firms serving as lead counsel to large corporate debtors.

“The last thing that I ever want to see is that someone loses business over this, because it seems like a very isolated incident and it really should not be considered as a reflection of the firm itself,” Richard H. Golubow, managing partner at corporate bankruptcy boutique Winthrop Golubow Hollander LLP, said.

But if the US Trustee’s call to disgorge fees is granted, it could create “tension in the partnership,” as the firm figures out how to pay back funds it likely distributed to partners, Golubow said.

“It’s a very, very difficult situation to to deal with internally,” he said.

Reputational Effects

It’s too early to say what impact the disclosures will have on Jackson Walker’s reputation in the long-term, as key questions still remain about who knew what, and when, said Donald Workman, head of BakerHostetler’s Washington restructuring practice.

For now, the disclosure issue appears to be contained to just one part of the firm’s practice and in many ways has already been resolved, Workman said. Freeman left the firm in 2022, and Jones recently announced his resignation.

“That sin has already been repented,” Workman said. “She’s not there and the judge is gone.”

Jackson Walker’s bankruptcy practice relies heavily on serving as local counsel for debtors in the Southern District of Texas, which means being well-versed in local dynamics, customs, and practice, said Samir Parikh, a bankruptcy professor at Lewis and Clark Law School. That means it is expected to keep its head down and not cause trouble, multiple lawyers said.

“They don’t want other people outshining them. They want them to serve their function, keep the train on the tracks,” Workman said.

But there’s a precedent for firms that have taken a serious hit to their reputations but continued to thrive, Parikh said. Vinson & Elkins, for example, faced stiff criticism for its work as Enron’s outside counsel before the company collapsed.

Vinson ultimately paid paid $30 million to Enron’s bankrupt estate to avoid a possible lawsuit alleging that it overlooked warning signs about problems with the company’s accounting processes. At the time, there were rumors that Vinson & Elkins wouldn’t survive — but that hasn’t been the case, Parikh said.

“They’re oftentimes able to withstand that and thrive thereafter,” he said about such firms.

‘Phantom Income’

The US Trustee’s efforts to make Jackson Walker give up $13 million in fees from its bankruptcy work could prove to be a sticky problem for the firm. Much of that money has likely already been distributed to partners, two attorneys said, although they noted that each firm handles partner distributions differently.

“Allowing the tainted fee orders to stand would send a message that professionals avoid consequences for their misconduct unless they are ‘caught’ in real-time,” the US Trustee said in court papers.

The $13 million disgorgement would likely have to be covered by partners unless the firm is able to set money aside in anticipation of the payout, Workman said.

Many of the cases under question, like Neiman Marcus Group LTD LLC and Westmoreland Coal Co., were wrapped up years ago. That makes it all the more likely Jackson Walker has already passed along those fees to partners.

“All of those partners got paid based upon what’s really phantom income,” Golubow said.

The firm brought in about $403 million in gross revenue last year, according to data compiled by The American Lawyer. Its bankruptcy practice is one of several, including energy law and appellate practices.

The Kirkland Question

Kirkland & Ellis is the engine behind Jackson Walker’s business in the Southern District of Texas. The mega firm has consistently partnered with Jackson Walker as local counsel on large cases it has filed in the district.

A key question for Jackson and Walker’s bankruptcy business is whether that relationship remains, Golubow said.

“I am going to assume that they are going to run into multiple levels of problems, one is most likely going to be just a breakdown in the relationship with Kirkland, and it’s going to be based upon this issue,” Golubow said.

Kirkland didn’t respond to a request for comment.

But Kirkland has made at least one gesture of confidence in Jackson Walker since the relationship between Freeman and Jones became public. Kirkland client SmileDirectClub last month asked the US Bankruptcy Court for the Southern District of Texas to allow it to employ Jackson Walker.