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Category: Fee Clawback

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.

Cannabis Company Doubles Down on Attorney Fee Clawback

February 22, 2022

A recent Law 360 story by Sarah Javis, “MedMen Doubles Down on Clawback on Bid for Ex-CFO’s Fees” reports that Cannabis company MedMen has doubled down on its efforts to claw back $612,000 in legal fees it was ordered to pay its former chief financial officer in his unsuccessful suit against the company, accusing the former executive of trying to "slant the record and rewrite the jury's verdict."  MedMen argued in a filing in a California state court that it is entitled to recoup the legal fees it paid to former CFO James Parker because a jury found he "breached his May 2018 employment agreement, stole MME USA's highly valuable trade secrets, and violated his duty of loyalty to the company."

Parker had argued in a Feb. 10 opposition filing that the company can't recoup his legal fees because, among other things, a provision of his employment agreement indicates the company will pay up to $500,000 of his legal fees per year "regardless of the outcome of the dispute."  But that argument is irrelevant, the company argued, because Parker's breaches excused MedMen from its duty to pay his legal fees.  "Parker naturally would like to fixate myopically on that phrasing, but those words have no legal effect given his preceding material breaches of the agreement containing that provision," MedMen argued.

Parker sued MedMen in 2019, alleging breach of contract, promissory fraud, retaliation and wrongful discharge in violation of public policy, and a claim for promissory fraud against the company's founders, Adam Bierman and Andrew Modlin. MedMen, in turn, filed counterclaims against Parker for breach of contract, breach of fiduciary duty, breach of duty of loyalty, misappropriation of trade secrets and conversion.  A California state jury in Santa Monica found in November that MedMen did not constructively discharge or breach Parker's contract, awarding no money to him after he sought a payout of more than $24 million.

MedMen previously raised its arguments about Parker's legal fees in a January motion, in which it argued the court's previous order for it to pay the fees "expressly recognized that, if successful, [MedMen's] counterclaims and affirmative defenses might 'eventually unravel the advancement provision' in [Parker's] May 2018 employment agreement, but deemed that 'an issue for another day.'  That day has finally arrived."

The company has filed a memorandum of costs totaling more than $1 million, including the $612,000 in legal fees, as well as just over $143,000 in deposition costs, most of which Parker also contested.  Parker argued among other things last month that MedMen could not ask for costs incurred defending against his unsuccessful claim that he was fired in retaliation, because California state law requires such an award only if the claim was frivolous.

Texas Court Lets Lawyer Keep Fees, Despite Unethical Fee Agreement

December 30, 2020

A recent Texas Lawyer story by Angela Morris, “Court Lets Houston-Area Lawyer Keep $70,000 Fee, Despite Unethical Contract, reports that a Houston-area attorney won’t have to pay back more than $70,000 in fees to two clients who argued the lawyer’s fee agreement was unconscionable, after Texas’ 14th Court of Appeals ruled that the clients’ defensive argument wouldn’t support a recovery.  But one of the justices on the three-judge panel disagreed, explaining that Bellaire lawyer Joe Alfred Izen Jr. had an unconscionable fee agreement with his clients, which breached the attorney’s ethical duties, and that it was right for the trial court to make him return the money.

“In Texas, attorneys are held to the highest standards of ethical conduct in their dealings with their clients.  As a result, attorneys must conduct their business with their clients with inveterate honesty and loyalty, and they must always keep the client’s best interest in mind,” said a concurring and dissenting opinion by Justice Jerry Zimmerer.  “The question of Izen’s fees must be viewed through that prism.”

Izen, who represented himself pro se in the appeal, didn’t immediately respond to a call seeking comment.  And Ralph Kraft, member in Kraft Lege Anseman in Lafayette, Louisiana, who represented Izen’s past clients Brian and Kimberly Laine, declined to comment.

Izen represented the Laines in a 2002 personal injury settlement agreement over Brian Laine’s injury at work, said the 31-page majority opinion by Justice Kevin Jewell, joined by Justice Bourliot.  His employer took care of him after the injury and initiated a settlement for two lump sum payments and a monthly annuity for 30 years, and then the Laines hired Izen to look over the settlement agreement.  The Laines also wanted Izen to research if they may have a claim against any third-party entities—but not to sue Brian Laine’s employer.

An attorney-client agreement between Izen and the Laines was for a 35% contingency fee of the settlement with the employer.  Izen testified at trial they paid him between $70,000 and $90,000 and eventually he expected nearly $229,000 total.  Izen wasn’t licensed to practice in Louisiana and he contracted with an attorney there to represent the Laines in litigation against a third-party entity.  However, Brian Laine eventually dismissed that litigation and he did not owe any contingent fee for it.

In 2007, Brian Laine terminated Izen’s representation because he didn’t need it anymore.  He also quit paying Izen 35% of his monthly annuity payments from the settlement with his employer.  In 2010, Izen sued the Laines alleging they still owed him 35% of the annuity payments.  In response, the Laines argued his fee agreement was unconscionable and filed counterclaims seeking the return of the fees they already paid him.

After a jury trial, the judge granted a directed verdict in favor of the Laines, ruling the fee agreement was unconscionable.  But Izen also got a favorable ruling dismissing the clients’ counterclaims because they weren’t filed within the four-year statute of limitations.  Later, the trial court ordered Izen to disgorge all his fees to the Laines and to pay prejudgment interest spanning back to 2002.  In the appeal, Izen attacked the notion that his attorney fee agreement was unconscionable.

The appellate court ruled that Izen’s work reviewing the Laines’ settlement agreement with Brian Laine’s employer, and going to a meeting where the parties signed the agreement, was representation with little risk or expense to Izen.  His work on litigation against the third-party entity did have some risk, that there would be no recovery—which did happen in the end.

The 14th Court rejected Izen’s “attempt to combine the two separate jobs he was hired to perform.”  He was insisting his 35% fee on the settlement wasn’t unconscionable because the money financed the third-party litigation.  “Any fees Izen collected under the guise of financing the litigation against the Louisiana third party defendants were collected under false pretenses in violation of an attorney’s duty of honesty and loyalty to his clients,” said the opinion.  “Izen is not entitled to any fee on the Louisiana third-party litigation because there was no recovery.”

The appellate court upheld a trial court ruling that said that the Laines should not have to pay Izen any more money under that agreement.  But it also determined that Izen shouldn’t have to pay back the fees the clients had previously paid him.

The clients didn’t file their counterclaims seeking fee forfeiture within the four-year statute of limitations, explained the ruling. It said they couldn’t get back the fees based on an affirmative defense that the agreement was unconscionable.  While the Laines’ defense did defeat Izen’s claims, it could not advance their own claims for relief, the ruling said.