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Category: Fee Clawback

Law Firm Steps Down From Case Amid Fee Ethics Probe

February 7, 2024

A recent Law 360 story by Clara Geoghrgan, “Jackson Walker Steps Down From 4E Ch. 11 Amid Fees Probe”, reports that Jackson Walker LLP, the firm at the center of a legal ethics scandal over the undisclosed relationship between a lawyer and a bankruptcy judge, has stepped down as Chapter 11 counsel to hand sanitizer maker 4E Brands Northamerica LLC as a Texas bankruptcy judge considers revoking $800,000 in legal fees paid to the firm in the case.

In the brief notice filed and signed by Jackson Walker attorneys Matthew D. Cavenaugh and Genevieve M. Graham, the firm told the court it no longer represents the debtor or its plan agent.  The announcement comes as the court is considering requests from creditors and the Office of the U.S. Trustee to order the return of legal fees in the case after it came to light that ex-Jackson Walker attorney Elizabeth Freeman was the live-in romantic partner of former U.S. Bankruptcy Judge David R. Jones, who oversaw the case.

4E is one of over a dozen cases where the Office of the U.S. Trustee, the U.S. Department of Justice's bankruptcy watchdog, is trying to claw back payments to Jackson Walker in cases overseen by Jones between 2017 and 2022 when Freeman worked at the firm.  Jackson Walker has represented 4E since it filed for bankruptcy in 2022.

During that time period, neither Jones nor Freeman, who left Jackson Walker at the end of 2022 to start a solo bankruptcy practice, disclosed that they were live-in-romantic partners.  In December 2023, the Office of the U.S. Trustee said it plans to file up to 35 disgorgement motions to recover tens of millions of dollars in legal fees Jones approved for the firm while Freeman worked there.  Jones resigned in October 2023, hours before the Fifth Circuit Court of Appeals issued a complaint against him stating there was probable cause that his actions rose to judicial misconduct.

4E, a Mexican subsidiary of consumer products maker Kimberly-Clark, filed for bankruptcy to wind down its business following a 2020 recall of its hand sanitizer products for potential methanol, or wood alcohol, contamination.  The company also faced a wave of personal injury and wrongful death litigation connected to the recall. In October 2022, 4E confirmed a Chapter 11 liquidation plan.  According to information from the Office of the U.S. Trustee in November 2023, Jones awarded Jackson Walker $859,462 in legal fees and $7,301 in expenses in connection with representing 4E.

Following Jones' resignation, the trustee and one of 4E's creditors, the estate of Joshua Maestas, who died after consuming 4E sanitizer, asked U.S. Bankruptcy Judge Marvin Isgur, who took over the case after Jones resigned, to order Jackson Walker to return fees from the case.  Judge Isgur, who survived a bid to remove him from the case due to his friendship with Jones, is currently considering the matter alongside a motion from 4E's official committee of unsecured creditors to amend the confirmed Chapter 11 plan.

SCOTUS Examines Proposed Retroactive US Trustee Fee Fixes

January 9, 2024

A recent Law 360 story by Vince Sullivan, “Justices Examine Proposed Retroactive US Trustee Fee Fixes”, reports that the U.S. Supreme Court scrutinized competing proposals for fixing a bankruptcy fee structure that was applied unequally for several years to debtors in different jurisdictions, asking how refunds of overpaid U.S. Trustee's Office fees or clawbacks of underpaid fees could be applied.  During oral arguments in Washington, D.C., justices focused on issues with the competing fixes proposed by the U.S. Trustee's Office and former debtor John Q. Hammons Hotels & Resorts, with some asking how it would be possible to claw back additional payments from debtors that paid lower fees for several years.

"This whole fight is about the clawback," Justice Sonia Sotomayor said when questioning the U.S. Trustee's Office counsel.  "Do you get a pass on trying to get the money from people who benefited [from the disparate treatment], or can you keep the fees from the people who withheld it? That's the whole issue."

The application of the new fee structure led to disputes between the U.S. Trustee's Office and debtors in most of the country who paid the higher fees immediately, because debtors in North Carolina and Alabama don't utilize the trustee system and thus didn't pay the increased fees until a 2020 act of Congress brought the fee structure into uniformity nationwide, as required by the Constitution.

The U.S. Trustee's Office argued in its briefs that since that act of Congress brought the fee structure into uniformity, all that is needed for equality is to ensure the fees are equal going forward, regardless of whether a debtor's case is pending in a jurisdiction governed by the U.S. Trustee's Office or by a bankruptcy administrator.  Failing that, the office argued, clawing back the difference in fees that would have been paid by debtors in the administrator districts is the way to go.

As this court has recognized time and again, the touchstone of a remedial inquiry is congressional intent," attorney Masha G. Hansford of the U.S. Solicitor General's Office, representing the U.S. Trustee's Office, said during the hearing.  "Here, there's unusually strong evidence that Congress would choose to fix this constitutional violation by mandating uniformly higher fees."  A 2017 law altered the U.S. Trustee's Office fee schedule in an attempt to bolster the account used to fund the trustee program, which is sustained mostly by fees paid by Chapter 11 debtors.

The increase initially applied to the 88 districts that employ the trustee system, which is funded by the U.S. Department of Justice primarily through the fees charged to Chapter 11 debtors.  The hike was triggered in the first quarter of 2018 because the trustee fund balance dropped below the $200 million threshold established in the law.  Bankruptcy administrator districts in North Carolina and Alabama are funded by the judiciary, so rules in place before the hike permitted — but did not require — the administrator districts to charge the same fees as trustee districts.

It wasn't until October 2018 that these six districts adopted the fee increase. Congress amended the governing statute in 2021 to require the same fee structure regardless of whether a debtor filed in a trustee or an administrator district.  The trustee fees are charged based on the amount of disbursements made by a debtor to its creditors in a given quarter.  Before the increase, a debtor's maximum fee bill could only be $30,000 per quarter, but the 2017 law raised that cap to $250,000 per quarter.

Alfred H. Siegel, the liquidating trustee of former electronics retailer Circuit City, challenged the increase all the way to the Supreme Court, successfully arguing the disparate treatment ran afoul of the constitutional requirement to enact bankruptcy laws uniformly.  The justices, however, left it to the lower courts to determine the appropriate remedy for the constitutional violation.

During arguments, Justice Neil Gorsuch questioned the mechanics of ordering a clawback from about four dozen debtors in the administrator districts who paid lower fees than hundreds of debtors whose cases were pending in the trustee districts.  "That's premised on the idea that a court can compel this clawback," Justice Gorsuch said.  "Honestly, I haven't seen something like that before," he said.

Hansford said if the court rules in favor of the clawback remedy, then trustees could go back to the bankruptcy court and seek orders there that would essentially enable trustees to send debtors bills for the difference in fees.  Daniel L. Geyser of Haynes & Boone LLP, representing Hammons, said a proposal for clawing back fees not already paid would be virtually impossible and would fly in the face of both Supreme Court precedent and the authority of Congress.

"It is stunning for the government to ask this court, without a hint of authority from Congress, to impose this kind of profound retroactive cost on dozens of bankruptcies and hundreds or thousands of stakeholders across two separate states," Geyser said.  "That is a policy decision reserved for the political branches, and it is Congress' alone to make."

Justice Ketanji Brown Jackson asked whether Congress' subsequent action to bring all districts into uniformity by requiring the higher fees provided evidence of intent toward a remedy, and cut against the debtors seeking a refund.

Geyser said the 2020 amendment actually helps his case, because it sets out in the legislation itself that Congress believed the debtors in the administrator districts should have been paying the higher fees all along, but stopped short of requiring them to make retroactive payments to bring them in line.  "You would expect, then, if Congress were fine with this retroactive implication, a retroactive clawback, the next sentence would be, 'And now they have to pay those fees,'" Geyser argued.

But no such remedy was suggested in the 2020 act, and Geyser said the U.S. Trustee Office's clawback proposal would run afoul of several provisions of the Bankruptcy Code, including protections for final and unappealable confirmation orders.

Ethical Questions for Bankruptcy Judge on Fee Issues

November 3, 2023

A recent Law 360 story by Daniel Connolh, “US Trustee Moves to Reverse ‘Tainted’ Jackson Walker Fees”, reports that, in the ethics fallout involving former U.S. Bankruptcy Judge David R. Jones of the Southern District of Texas and his undisclosed intimate relationship with a Jackson Walker LLP bankruptcy partner, the federal agency that oversees the bankruptcy court system filed multiple motions to strip millions of dollars in fee awards from the firm.  Writing that "all orders awarding fees and expenses are tainted and should be set aside," the U.S. Trustee's Office for the region that covers the Southern District filed motions to undo fee awards in at least 11 cases, including the bankruptcies of J.C. Penney Co. and Neiman Marcus.

The trustee, Kevin Epstein, cited Jones' cohabitation with Elizabeth Freeman, a former Jackson Walker bankruptcy partner who now leads her own small firm.  The relationship was recently revealed through litigation and media reports, and led to a formal ethics complaint filed Oct. 13 against Jones, who has resigned.  "Judge Jones' secret relationship with Ms. Freeman created an unlevel 'playing field' for every party in interest in every case Jackson Walker had before Judge Jones, including this one, and in Jackson Walker cases mediated by Judge Jones," Epstein wrote in Thursday's motion in the J.C. Penney case.

In the J.C. Penney bankruptcy alone, Judge Jones had signed orders compensating Jackson Walker for its work as debtor's local counsel and awarded about $14,000 in expenses and about $1.1 million in fees, including about $286,000 billed by Freeman, according to a summary compiled by the U.S. Trustee's Office.  The precise dollar amounts of all the proposed fee reversals weren't immediately clear, but one section of Epstein's motion describes the general scope.

"Judge Jones presided over at least 26 cases, and perhaps more, where he awarded Jackson Walker approximately $13 million in compensation and expenses 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."  The U.S. Trustee's Office has filed proposed orders that call for the previous orders approving Jackson Walker's fees and expenses to be vacated.  If approved, parties would have 120 days to object to Jackson Walker's fees and expenses, and a hearing would take place.

The U.S. Trustee's Office has also moved to block a $1.3 million fee award to Jackson Walker in at least one case — the GWG Holdings Inc. bankruptcy — in which Judge Jones acted not as presiding judge, but as a mediator.  A recent document filed by the trustee highlights several other cases in which Judge Jones acted as mediator, rather than as judge.  Property records show that Judge Jones and Freeman had jointly owned a house in Houston since 2017. Earlier, Freeman had served as Judge Jones' law clerk.

In a previous interview, Wilkinson said the law firm first learned about a potential relationship between Freeman and Jones in March 2021, and took steps including consulting outside ethics counsel.  Wilkinson had forwarded an emailed statement: "Our firm acted in a timely fashion once we learned of this issue, including conducting a full inquiry and consulting independent outside ethics counsel for their guidance.  From the time we first learned of this allegation Ms. Freeman was instructed not to work or bill on any cases before Judge Jones.  We are confident that we acted responsibly."

The U.S. Trustee's recent filings say Jackson Walker didn't act responsibly.  "Notwithstanding Jackson Walker's admitted knowledge of the secret relationship between its partner, Ms. Freeman, and Judge Jones no later than March 2021, Jackson Walker never disclosed that relationship in any pending or subsequently filed case during the following 21 months while Ms. Freeman was a partner — or thereafter when she was working as a Jackson Walker contract attorney on bankruptcy cases after leaving Jackson Walker," Epstein wrote in the motion, which was signed by Millie Aponte Sall, assistant U.S. trustee.

And at least one court document suggests that Freeman was still indirectly participating in cases for Jackson Walker that were pending before Judge Jones after March 2021, by consulting with other attorneys.  A Fifth Circuit ethics complaint said that whether or not Freeman directly participated in a case before Judge Jones, she still stood to gain money.  The U.S. Trustee's Office has filed motions seeking to undo Jackson Walker's fees and expenses in the following cases, all in the U.S. Bankruptcy Court for the Southern District of Texas:

J.C. Penney Co. Inc., et al., case number 20-20184
Neiman Marcus Group Ltd. LLC, case number 20-32519
Westmoreland Coal Co. et al., case number 18-35672
Whiting Petroleum Corp., case number 20-32021
Stage Stores Inc., case number 20-32564
Chesapeake Energy Corp., case number 20-33233
Covia Holdings Corp., case number 20-33295
Tug Robert J. Bouchard Corp., case number 20-34758
Mule Sky LLC, case number 20-35561
Seadrill Partners LLC, case number 20-35740
Katerra Inc. et al., case number 21-31861

SBF Sues Insurer Over Coverage of Defense Fees and Costs

October 4, 2023

A recent Law.com story by Jane Wester, “Sam Bankman-Fried Sues Insurer to Cover Defense Costs in New York Criminal Trial, Other Litigation”, reports that indicted FTX founder Sam Bankman-Fried sued an insurance firm for assistance with his defense costs, one day before jury selection began in his fraud trial in Manhattan.  Bankman-Fried’s attorneys at Lewis & Llewellyn and Cohen & Gresser argued that the Continental Casualty Co., also known as CNA, has breached its contractual obligation to pay Bankman-Fried’s defense costs “on a current basis, without regard to whether payments may exhaust the policy limit.”

According to the complaint, Bankman-Fried’s companies held a CNA policy as a second-layer excess policy offering “a $5 million limit of liability, which attaches upon exhaustion of the $10 million in aggregate limits of the underlying insurance.”  The primary insurance policies and the first-layer excess policies have both been exhausted, according to the complaint, so Bankman-Fried is seeking reimbursement from CNA through the court after “numerous” requests for payment were unsuccessful.

The suit comes less than a year after FTX collapsed and filed for bankruptcy in November.  Bankman-Fried was arrested in the Bahamas in December at the request of U.S. officials and agreed to come to the United States to face charges; he spent approximately eight months on house arrest at his parents’ home in California before he was remanded to Brooklyn’s Metropolitan Detention Center for allegedly attempting to tamper with witnesses.

While Bankman-Fried’s current criminal trial is expected to last approximately six weeks, the insurance suit noted that that case is not the full extent of his legal troubles.  He is set to face another criminal trial for a group of severed charges in 2024 and is “further involved in more than a dozen civil and regulatory actions relating to FTX,” his attorneys noted.

His attorneys argued that CNA’s alleged breaches of the policy “have caused, and threaten to cause, substantial and irreparable harm” to Bankman-Fried, including the impairment of his defense.  They argued that Bankman-Fried has already incurred more than $75,000 in monetary damages for his efforts to obtain CNA coverage and out-of-pocket defense costs.  The suit seeks unspecified damages for CNA’s alleged breach of contract and alleged bad faith conduct, along with a declaration that CNA has a duty to pay Bankman-Fried’s defense costs “on an ongoing basis.”

Ex-CEO to Bankruptcy Court: No Legal Fee Clawback in Chapter 11 Case

June 8, 2023

A recent Law 360 story by Vince Sullivan, “Ex-Insys CEO Says Legal Fee Clawback Unsupported in Ch. 11,” reports that the former CEO of drugmaker Insys Therapeutics told a Delaware bankruptcy judge that he shouldn't have to return $6 million in legal fees the company advanced to him for criminal defense costs because he was partially successful in his defense, despite a conviction that came with jail time.  During oral arguments over a motion for summary judgment in Wilmington, an attorney for John Kapoor said the attempt to claw back the legal fees by the liquidating trustee of Insys focuses on money spent on the successful defense of certain counts in a federal indictment.

"We've clearly shown that much of the work they're seeking to recoup on has nothing to do with his count of conviction," Brian T. Kelly of Nixon Peabody LLP told the court.  "Just because he got a significant sentence on the ultimate indictment doesn't mean he wasn't successful early on in defeating portions of the first [indictment]."

Kapoor was convicted in May 2019 on racketeering conspiracy and other counts, after a 51-day federal trial on his part in what prosecutors said was a massive, illegal campaign to boost sales of Insys opioid products through bribery, kickbacks and insurance fraud.  His sentence included a 66-month jail term and nearly $60 million of restitution.  Liquidating trustee William H. Henrich is seeking to claw back about $6 million in legal fees advanced to Kapoor under corporate indemnification agreements, saying his conviction dissolved the indemnification obligation.

But Kelly argued that since the Insys advancements covered a period between July 2016 and September 2018, Kapoor's success in defending against certain counts in an original indictment during that time should defeat the clawback effort.  After that window, Kapoor paid for his own defense, Kelly argued.  "Not all the work that was being done had anything to do with what he was ultimately convicted of," Kelly said.  Some of the advanced funds were also used in defense of civil actions against Kapoor, Kelly argued, and should not be subject to clawback.

Trustee attorney Morgan M. Menchaca of Reid Collins & Tsai LLP said the two firms retained by Kapoor for his criminal defense — Paul Weiss Rifkind Wharton & Garrison LLP and Ropes & Gray LLP — only made appearances in the criminal matters involving Kapoor and did no identifiable work on the civil matters, for which Kapoor retained separate counsel.  She also said the argument that the trimming of the indictment represented some kind of successful defense for Kapoor doesn't comport with the strategies used by federal authorities in criminal proceedings.

"Kapoor's argument ignores the practical realities of what federal prosecutors do when they indict a criminal defendant," Menchaca argued. "They threw everything at the defendant in the first indictment."  The ultimate superseding indictment that was presented before trial included much more specific and narrowly tailored charges against Kapoor, she said, and led to his conviction on the racketeering count.

U.S. Bankruptcy Judge John T. Dorsey said he would take the matter of partial summary judgment under advisement, and that he would review the counsel engagement agreements between Kapoor and his attorneys before issuing a decision.