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4E Brands Northamerica LLC – U.S. Trustee, Citing “Foundational Infirmity” of Undisclosed Jones/Freeman Relationship on Integrity of Cases, Seeks Orders that Would Strip Jackson Walker LLP of $13mn in Fees; Draws Judge Isgur Deeper into Controversy


November 3, 2023 – Kevin Epstein, the United States Trustee for Region 7 (“U.S. Trustee”), has filed a motion [Docket No. 517] using the 4E Brands Northamerica LLC cases as a vehicle to obtain a Court order that would vacate fee orders relating to at least $13.0mn paid to Jackson Walker in at least 26 cases.

In moving to have the fee orders vacated, the U.S. Trustee notes: "The United States Trustee’s motion to vacate is not premised on mere legal error in the award of fees. Rather, it is premised on conduct that goes to the fundamental fairness and integrity of the bankruptcy proceeding itself as well as a fundamental deprivation of due process. The infirmity here is one so foundational as to render the Jackson Walker fee orders ripe for vacatur.

Due to the intimate, cohabiting relationship between Judge Jones and Ms. Freeman, Ms. Freeman and Jackson Walker were so connected to Judge Jones 'as to render it improper' for Judge Jones to have presided over or approved any Jackson Walker fee application, including those with fees billed by Ms. Freeman herself. Under the plain terms of Rule 5004, Judge Jones was not qualified to enter an order granting fees and expenses to Jackson Walker and Ms. Freeman."

The U.S. Trustee's motion provides as to background: "Judge Jones presided over at least 26 cases, and perhaps more, where he awarded Jackson Walker approximately $13 million in compensation and expenses under 11 U.S.C. § 330 and § 331 while Ms. Freeman was both a Jackson Walker partner and living with him in an intimate relationship. This includes approximately $1 million in fees billed by Ms. Freeman herself in 17 of those cases. Attached as Exhibit 6A–B is a list that the United States Trustee has compiled of affected cases where Judge Jones presided over proceedings awarding Jackson Walker compensation….Judge Jones also presided over three additional cases filed in 2017—which may be affected cases depending on the date Ms. Freeman joined the Jackson Walker partnership— potentially implicating an additional $850,000 in fees and expenses awarded to Jackson Walker. One case closed on September 29, 2017, with a Jackson Walker fee award on August 22, 2017. The other two had final fee awards for Jackson Walker in 2018, with final decrees closing one case on August 2, 2018, and another on March 31, 2021. See Ameriforge Grp., Inc., No. 17-32660 (filed Apr. 30, 2017, Bankr. S.D.Tex.); Seadrill Ltd., No. 17-60079 (filed Jul. 31, 2017, Bankr. S.D. Tex.); Expro Holdings US, Inc., No. 17-60179 (filed Dec. 18, 2017, Bankr. S.D. Tex.). These three cases are not included on Exhibit 6B [see below]."

What may attract the most attention in the U.S. Trustee's motion is a recitation of facts relating to an adversary proceeding which suggests that the relationship between Ms. Freeman and Judge Jones has long been known, including presumably by Judge Isgur who declined to action an allegation (and a requested recusal of Jones), not because the allegation was not true (hindsight settles that question) because it was not proven. What did Judge Isgur, who "found there was no admissible evidence to substantiate the allegations" in the adversary hearing, actually know and when?

The U.S. Trustee continues: "An intimate relationship between Judge Jones and Ms. Freeman was alleged in March 2021 in an adversary proceeding in the case of In re McDermott Int’l, Inc., No. 20-30336 (Bankr. S.D. Tex.), in which Jackson Walker was debtor’s counsel. In the adversary proceeding, a pro se plaintiff moved to recuse Judge Jones on July 23, 2020. Van Deelen v. Dickson (In re McDermott Int’l Inc.)….Jackson Walker represented the individual director and officer defendants in the adversary proceeding…..That recusal motion, as originally filed, did not raise the relationship between Judge Jones and Ms. Freeman as a basis for recusal….Almost eight months later and two days before the scheduled March 10, 2021, hearing, the pro se plaintiff filed an 'Addendum to Plaintiff’s Motion . . . to Disqualify Bankruptcy Court Judge David Jones . . . .'Plaintiff’s Addendum included an anonymous letter the pro se plaintiff said that he had received just days before accusing Judge Jones of 'corruption.'  The allegations in the letter related to an intimate relationship between Judge Jones and Ms. Freeman.

On March 9, 2021, Judge Jones contacted Judge Isgur and asked Judge Isgur to reassign the recusal motion to another judge; Judge Isgur entered an order that he would hear the motion to recuse….Judge Isgur also sua sponte ordered that “[t]he document filed at ECF No. 39 is sealed, pending the Court’s determination of whether there is credible, admissible evidence in support of the allegations . . . .” Id. That document remains under seal.

Judge Isgur denied the motion to recuse on March 10.  Audio recording of the March 10 hearing reveals that the pro se plaintiff was unable to authenticate the anonymous letter or establish that it was not hearsay, and Judge Isgur did not admit the letter into evidence. Judge Isgur also refused the plaintiff’s request for a continuance so that he could take depositions regarding the contents of the letter. Thus, Judge Isgur found there was no admissible evidence to substantiate the allegations in the anonymous letter."

Jackson Walker Fee Order Entered Open Cases (see Exhibit 6A to motion)Jackson Walker Fee Order Entered Closed Cases (see Exhibit 6B to motion)

Further Background

On October 27th, the wrongful death representative of the estate of two of the Debtor's general unsecured creditors filed a motion asking the Court to vacate its order approving the employment of Jackson Walker as the Debtor's counsel and approving Jackson Walker's fee applications, as well as seeking sanctions in connection with Judge David R. Jones' resignation from the bench when news of his personal relationship with former Jackson Walker partner Elizabeth Freeman became public [Docket No. 510].

The motion filed by Barry Green as Wrongful Death Representative of the Estate of Joshua Maestas, and Carolina Maestas, general unsecured creditors of the estate, states that Jones and Freeman, who was a bankruptcy partner at Jackson Walker from 2017 through December 2022, have lived in the same house since 2017. In addition, although Freeman left Jackson Walker in December 2022, the motion claims she "retained and utilized office space provided by Jackson Walker through at least 2023."

Green's motion says Jones' and Freeman's relationship "was, upon information and belief, generally known by at least a handful of lawyers at Jackson Walker," although Jackson Walker contends that "as an institution," it did not know about the relationship until March 2021.

The motion further provides, "Matthew Cavenaugh and other members of the Jackson Walker law firm have regularly appeared in the Judge’s court since 2017 and appeared in this case requesting employment as Debtor’s Counsel. On March 24, 2022, Jackson Walker requested permission to be employed as counsel for the debtor and debtor-in-possession… The Cavenaugh Declaration (dated March 24, 2022), fails to disclose the known relationship between the Jackson Walker Partner and the bankruptcy judge overseeing the case.

Mr. Cavenaugh signed the declaration under the penalties of perjury and more than a year after Jackson Walker acknowledges they were aware of the relationship. Jackson Walker as an institution admits to becoming aware of the relationship no later than March of 2021, however neither Mr. Cavenaugh nor Jackson Walker has provided any additional or amended disclosures to date.

In order for a firm to be employed by a debtor or debtor-in-possession, it must show that it holds no interest adverse to the estate, and further that it is disinterested. In addition to the disclosure requirements contained in section 327, Bankruptcy Rule 2014 requires additional disclosures regarding connections to all parties-in-interest in the case. Full disclosure is a continuing responsibility.

Jackson Walker failed to make full disclosure and has to-date failed to fully disclose to the Court and parties-in-interest regarding the relationship of their former partner and the judge. The remedy for such a failure to disclose is disgorgement and sanctions. Intentional failure warrants the harshest sanctions."

In addition to vacating the employment and fee orders, the motion argues that "Conversion of this case should also be considered due to the intentional failure to disclose."

Case Background

On October 31, 2022, the Debtor notified the Court that its Plan of Liquidation had become effective as of November 1, 2022 [Docket No. 362]. The Court has previously confirmed the Debtor’s Plan on October 27, 2022 [Docket No. 353].

On February 22, 2022, 4E Brands North America LLC (the “Debtor”) filed for Chapter 11 protection with estimated assets of less than $50k; and estimated liabilities between $10.0mn and $50.0mn. The Debtor was wholly owned by 4E Global S.A.P.I. de C.V. (“Global” and, together with the Debtor, “4E”), a subsidiary of Kimberly-Clark de México, S.A.B. de C.V.

At filing, the Debtor attributed its need to seek bankruptcy shelter to the discovery that some of its hand sanitizer had been contaminated with methanol, ethanol’s much more toxic alcohol cousin.

The Debtor was represented by: (i) Jackson Walker LLP as general bankruptcy counsel (ii) Province Inc. as financial advisor and (iii) Stretto as claims and noticing agent.

Judge's Resignation

On October 15, 2023 – Judge David R. Jones resigned from the bench in the U.S. Bankruptcy Court for the Southern District of Texas in light of a complaint filed as a result of a Fifth Circuit investigation into recent reports of an undisclosed relationship between Jones and former Jackson Walker partner Elizabeth Freeman, according to various media reports, including an article published by the Wall Street Journal.

According to the WSJ report, "Jones’s resignation from the U.S. Bankruptcy Court in Houston comes after the appellate court that appointed him found probable cause that he committed misconduct by failing to disclose his romantic relationship with bankruptcy lawyer Elizabeth Freeman. Jones told The Wall Street Journal earlier this month that he and Freeman have been in a relationship for years and live together at a home in the Houston area.

Neither Jones nor Freeman had previously disclosed their relationship in court while Freeman worked on major corporate reorganizations that he oversaw. The revelation of their relationship and Jones’s decision to resign raises uncertainty about past proceedings he handled in Houston’s bankruptcy court, a premier venue for troubled companies to restructure debt."

“I have always said that the bankruptcy process should be about the participants and the preservation of jobs,” Jones told the Wall Street Journal. “I have become a distraction to the good work that the court does. To end that distraction and hopefully return focus, I have resigned.”

The article further explains, "Jones approved more than $1 million in legal fees billed by Freeman over 16 corporate bankruptcy cases from 2018 to 2021 when they shared an address, the Journal found through a review of court records."

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The post 4E Brands Northamerica LLC – U.S. Trustee, Citing “Foundational Infirmity” of Undisclosed Jones/Freeman Relationship on Integrity of Cases, Seeks Orders that Would Strip Jackson Walker LLP of $13mn in Fees; Draws Judge Isgur Deeper into Controversy appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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