The US bankruptcy scandal takes place in a Texas border town

Judge David Jones returned to a federal court in Texas last Thursday, but the man who once served as a kingmaker in the nation's largest corporate restructurings was not wearing his royal robes on the bench in Houston.

Instead, he was sitting in the back row of a courtroom 350 miles away in Del Rio, a dusty city near the Mexican border. Once known for his imperious temperament, he now watched quietly as a handful of the 15 or so lawyers in the room took over the talking.

Jones is one of four defendants accused in a civil lawsuit of masterminding a multi-year conspiracy to pay large legal fees to two law firms: the international firm Kirkland & Ellis and the Texas law firm Jackson Walker, where Jones' girlfriend and former law clerk Liz Freeman was a top partner.

Jones and Freeman initially failed to disclose their relationship. This was considered a serious breach of legal ethics and the rules of the judiciary, forcing Jones to resign and casting doubt on several cases in which he presided and Kirkland and Jackson Walker worked side by side. Even after being made aware of the close ties several years earlier, neither firm changed the information in their fee requests or made the issue public.

During the nearly five-hour hearing last Thursday, Alia Moses, the chief judge of the Western U.S. District of Texas, repeatedly asked the defendants' lawyers – Jones, Freeman, Jackson Walker and Kirkland – how one of the court's brightest minds could not see the need to dismiss cases presented before him by his partner and her law firm.

“Judge Jones should not have presided over these cases, period,” she said.

Moses will now decide whether the organized crime case is compelling enough to proceed with evidence and trial. But the hearing in rural Texas was itself a humiliating case for a group of firms and individuals who once collectively determined the fate of iconic American companies such as JCPenney, Neiman Marcus and Chesapeake Energy.

The scandal is also forcing prominent law firms and Wall Street to think about how powerful actors can disrupt the legal order in U.S. bankruptcy proceedings.

The plaintiff who filed the suit, Michael Van Deelen, has been chasing Jones for years. He was derided as a “serial plaintiff” because of his extensive history of filing lawsuits and had gotten into trouble for physically threatening opponents, according to defendants' filings. Van Deelen was a small shareholder in the billion-dollar energy company McDermott, which filed for bankruptcy in Houston in early 2020.

McDermott's restructuring plan meant a loss for shareholders like Van Deelen – who sued, claiming the zero he received was unfair. He later received an anonymous tip in 2021 about a relationship between Jones and Freeman and requested that Jones be removed from the case. Several courts rejected that request, considering Van Deelen's evidence flimsy at the time.

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

Moses acknowledged that it would be an uphill battle for a minor creditor in a bankruptcy case to pull off such a large case. A lawyer for Freeman argued that the terms of McDermott's bankruptcy settlement allowed only the debtor company, not individual creditors, to sue later in the case. In addition, the lawyer said Van Deelen could not prove that a different, supposedly unbiased judge would have provided better compensation.

A lawyer for Jones also argued on Thursday for the “absolute immunity” of judges. This applies even if Jones made a mistake by not disqualifying himself from the McDermott case.

Moses, however, kept returning to the idea that Van Deelen had been treated shabbily by Jones and Freeman, at one point asking how Freeman's attorney would react if it emerged years later that she, Moses, had been compromised by a relationship with Van Deelen's attorney. A federal appeals court had previously found “sufficient cause to believe that Judge Jones engaged in misconduct” in response to a complaint about his conduct.

As the trial continues in the racketeering case and in bankruptcy court – where the Justice Department is seeking to recoup at least $13 million in fees awarded to Jackson Walker in cases involving Freeman – cracks are emerging between the four men, who were previously accused of being close friends.

Jackson Walker said Freeman was forced to resign from the firm in 2022 after it was revealed that she falsely told the firm in 2021 that her relationship with Jones was in the past – although she later continued to be employed as a contract attorney.

Kirkland, in turn, said it was unreasonable to conduct an independent review of Jackson Walker and Freeman's potential conflicts of interest.

Based on calculations from the bankruptcy filings, Van Deelen estimated in his complaint that Kirkland earned more than $162 million in fees from cases before Jones in which the firm served as lead counsel and Jackson Walker served as co-counsel.

In the recovery case in bankruptcy court, Jackson Walker wrote in a brief filed in May that Jones himself pressured Kirkland's lawyers to make misleading statements that downplayed his relationship with Freeman. The Financial Times reported last year that Kirkland's lawyers had long been aware of Jones' relationship with Freeman.

Moses did not announce any rulings at the end of Thursday's hearing. She acknowledged that her legal experience is in criminal cases rather than civil cases, often the drug trafficking and human trafficking cases that are common at the U.S.-Mexico border. During Thursday's hearing, she wondered aloud why Kirkland, which has a significant office in Houston, needed to hire Jackson Walker as local counsel in the first place.

As Moses asked questions about the bankruptcy proceedings, it sometimes almost seemed as if Jones wanted to comment from his seat in the back row.

Jones declined to comment after Thursday's hearing as he and his attorney lingered on the sidewalk across from the Del Rio courthouse.

Kirkland, Jackson Walker and an attorney for Freeman also declined to comment.

Van Deelen's lawyers – against whom Kirkland is seeking sanctions – said they felt vindicated that Judge Moses had so far seemed to listen to them. “Judge Moses has honestly made our job easier,” said Mikell West of the Bandas law firm.

Anna Harden

Learn More →

Leave a Reply

Your email address will not be published. Required fields are marked *