The Justice Department's U.S. Trustee office is asking the Jackson Walker law firm to give back at least $13 million in attorney fees it received while serving as counsel for dozens of high-profile bankruptcy clients, including Neiman Marcus and J.C. Penney, alleging the compensation is tainted because of an undisclosed intimate relationship involving the bankruptcy judge.
Former U.S. Bankruptcy Judge David Jones resigned from his legal post last month after a federal appeals court filed a formal ethics complaint against him for failing to disclose a yearslong romantic relationship with an attorney who had cases before his court. The ethics complaint identified the lawyer as Elizabeth Freeman.
Freeman had been a partner at Jackson Walker during a time in which the firm was involved in at least 26 cases before Jones' court in the Southern District of Texas, according to the U.S. Trustee. Seventeen of those cases involved approximately $1 million in fees billed by Freeman, the U.S. Trustee alleged.
The U.S. Trustee's office argues the previously undisclosed relationship created an "unlevel playing field" for every party involved in those 26 cases — and possibly more — and compromised the integrity and administration of the bankruptcy system. The U.S. Trustee filed motions earlier this month seeking a return of fees paid to Jackson Walker and to force the firm to withdraw its motions for compensation.
Jackson Walker filed a preliminary response Monday to the trustee's motions, saying the law firm was deceived by Freeman and did not have confirmation of an ongoing relationship between the attorney and the bankruptcy judge until 2022. Freeman joined Jackson Walker as an income partner in the bankruptcy group in mid-May 2018 and was promoted to equity partner at the beginning of 2021.
Freeman left Jackson Walker to start her own law practice called The Law Office of Liz Freeman at the end of 2022. An attorney representing Freeman declined to comment when contacted by CoStar News. Jackson Walker declined to comment beyond its court filings.
Bankruptcy Judge Marvin Isgur signed an order last week for a status conference about the motions to be held in Houston on Dec. 12 at 1:30 p.m. The U.S. Trustee's office and Jackson Walker are expected to argue a recommendation to the court on the legal fees.
Complex Cases
Jones was one of the nation's busiest bankruptcy judges for complex cases. He was appointed to his position in the U.S. Bankruptcy Court of the Southern District of Texas in 2011 and created a special pool for complex cases in 2016 in which all Chapter 11 cases designated as complex were assigned to either Jones or Judge Isgur instead of being randomly assigned to any bankruptcy judge in the district.
Jones oversaw the early pandemic bankruptcies of Neiman Marcus, J.C. Penney and Stage Stores in which those retailers completely reshaped their real estate portfolios. Jackson Walker served as local counsel for all three retailers in Jones' court with a retention application for the law firm approved in June 2020 for each debtor, according to the U.S. Trustee's motion.
Jackson Walker was awarded more than $1 million in fees for its work as local counsel for J.C. Penney's bankruptcy case, including $286,159 billed to Freeman, and $380,573 in fees for Neiman Marcus' case with $49,910 billed to Freeman, the U.S. Trustee's filing alleged. Neiman Marcus filed for bankruptcy on May 7, 2020, and emerged four months later, while J.C. Penney filed on May 15, 2020, and emerged in January 2021.
Jackson Walker said in its court filing this week that the law firm's management first heard about an alleged romantic relationship between Freeman and Jones in March 2021. The law firm "immediately asked" Freeman to confirm or deny the allegation and she denied it but "admitted to a past relationship which had ended" around March 2020, according to the filing.
Jackson Walker said it retained "a prominent ethics expert regarding the matter" and set up certain safeguards regarding Freeman’s future involvement in Jones’ cases. Jackson Walker told Freeman that she could not work on any matters assigned to Jones and that the law firm would deduct Freeman's compensation as an equity partner from any profits associated with work that was performed by Jackson Walker in cases pending before Jones, according to the filing.
The U.S. Trustee's overview of bankruptcy cases assigned to Jones that Jackson Walker worked on while Freeman was a partner at the law firm does not list any fees billed by Freeman after March 2021, according to the motion.
Jackson Walker said it then heard about the possible relationship between Freeman and Jones again in 2022 and questioned Freeman, who "ultimately admitted that the relationship had resumed," according to the filing. Jackson Walker said it concluded that the only solution was for Freeman to leave the law firm.
Jackson Walker argued the law firm acted responsibly while "dealing with a very difficult and challenging set of circumstances," according to the filing, and that the U.S. Trustee's motions "are premised upon incorrect and incomplete facts."
The U.S. Trustee's office is a Justice Department agency that oversees bankruptcy cases to ensure estates are administrated properly. The office oversees the distribution of all professional fees, including legal fees, even after a bankruptcy case is confirmed by a judge. The trustee's office also works to protect creditors, who are legally entitled to the assets of a debtor's estate.