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Category: Practice Area: Bankruptcy / Restructuring

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

$4M Interim Fee Request ‘Only the Beginning’ in Kwok Chapter 11

October 18, 2023

A recent Law 360 story by Brian Steele, “Paul Hastings Seeks $3.9M in Kwok Ch. 11 Fees and Costs”, reports that attorneys with Paul Hastings LLP have sought additional fees and costs of nearly $3.9 million for overseeing the Chapter 11 bankruptcy of Ho Wan Kwok during July and August, continuing to make good on their promise that a previous $12 million fee request was "only the beginning."

In an interim fee application filed in the U.S. Bankruptcy Court for the District of Connecticut, counsel for Chapter 11 trustee Luc A. Despins – himself a Paul Hastings attorney – asked for $3.76 million in fees and more than $146,000 in reimbursements for the firm.  The application notes that Despins filed or prosecuted several adversary proceedings during the fee period and gained access to tens of millions of dollars in escrow funds.  A "substantial portion of the fees" resulted from obstructive acts by Kwok and his associates, the application argued.

"During the fee period, the trustee and Paul Hastings continued the investigation into the financial affairs of the individual debtor and his corporate 'shell game' to shield companies and assets under his ownership and/or control from his creditors," the application said.  "Given the vast network of companies affiliated with the individual debtor, and the fact that these companies or their assets are located around the world, the trustee's investigation was, and continues to be, extensive."

Kwok filed for Chapter 11 protection in Connecticut in February 2022, claiming less than $100,000 in assets and more than $376 million in liabilities.  He was arrested in March 2023 on allegations that he operated a multifaceted $1 billion scheme of securities fraud, wire fraud and money laundering.  Once among the richest men in China, Kwok fled in 2014 amid corruption charges that he claimed were trumped up. He later gained a social media following as a critic of the Chinese government.

In its first interim fee application filed in May, Paul Hastings sought $12.3 million in attorney fees plus costs, noting that the request was "only the beginning" and adding that "what could initially have been perceived as a $100 to $150 million case has now turned into a case involving assets and claims many multiples of that."  The second application sought more than $8.2 million.  To date, Paul Hastings has collected $18.7 million for its work on the case, according to the application.

The debtors in the case are Kwok and two of his companies, Genever Holdings LLC and Genever Holdings Corp., the latter of which is based in the British Virgin Islands.  All three filed for Chapter 11 protection at different times, and a Connecticut bankruptcy judge is administering the cases jointly.  Paul Hastings represents Despins as trustee and the Genever entities.

During the fee period, the firm said that it recorded a total of 3,031.6 hours by attorneys and paraprofessionals.  The application lists 22 docket numbers linked to the case, including 11 adversary proceedings.  Paul Hastings has worked to minimize costs by delegating work to junior attorneys, paraprofessionals and lower-cost local counsel, according to the application.  The latest requested amount does not include a firm-wide hourly rate increase that went into effect Aug. 1; it also excludes pay for 21 timekeepers who billed less than five hours, and it incorporates a reduction to Despins' hourly rate from $1,975 to $1,860.

Other firms and organizations filed separate requests Monday for fees and costs in the case.  Despins' and Genever's local and conflicts counsel, Neubert Pepe & Monteith PC, is seeking more than $285,000, while British Virgin Islands counsel Harney Westwood & Riegels LP wants about $480,000.  Claims and noticing agent Epiq Corporate Restructuring asked for roughly $99,000 in fees and $7,500 in expenses, and Pullman & Comley LLC, which represents the official committee of unsecured creditors, requested about $88,000.

$89M in Professional Fees in Crypto Broker Voyager Chapter 11

September 13, 2023

A recent Law 360 story by Hilary Russ, “Kirkland Lands $28M in Fees in Crypto Broker Voyager Ch. 11”, reports that a New York judge approved nearly $89 million in fees for lawyers and other professionals — including $28 million for debtors' counsel Kirkland & Ellis LLP — working on the bankruptcy case of defunct crypto broker Voyager Digital, despite an outburst from an angry creditor.

U.S. Bankruptcy Judge Michael Wiles granted the final fee applications from 17 different law firms, financial advisers, investment bankers, agents, consultants and tax services providers employed by the debtors and the official committee of unsecured creditors.  An additional $1.3 million was granted to cover total professional expenses since the start of the case.

Amid the spectacular crash of the cryptocurrency industry, Voyager filed for Chapter 11 protection in July 2022 after crypto hedge fund Three Arrows Capital defaulted on a $650 million loan, casting the brokerage and trading platform into a liquidity crisis.  In April, the company pivoted to a liquidation of its $1 billion in assets after a purchase agreement with Binance.US collapsed.

Plan administrator Paul Hage is now liquidating remaining crypto assets for Voyager customers who did not make full withdrawals, with more than 500,000 checks to go out to creditors in coming weeks, his lawyer Darren Azman said during a telephonic hearing.  In the next couple of weeks, ex-Voyager clients should also be able to access a new customer portal, similar to a revamped Voyager app, where they can find their historical transaction information and get updates.  "We're working very hard on this," Hage said during the hearing. "It is not an insignificant undertaking."

Professional fees have been garnering increased attention in the extremely complex crypto cases.  Fees in five big crypto bankruptcy cases — FTX, Voyager, Celsius Network, BlockFi and Genesis Global — have topped $700 million altogether since last year, according to a New York Times analysis published last week.  The final fee requests in Voyager's case did not face any objections.  But two former clients of the platform, who represented themselves during a hearing, questioned some aspects of professionals' work and unsuccessfully requested a delay in payouts.

Sixth Circuit: Bankruptcy Attorney Fee Cuts Denied Due Process

August 23, 2023

A recent Law 360 story by Alex Wittenberg, “6th Circ. Says Bankruptcy Court’s Atty Fee Cut Denied Rights”, reports that a Tennessee bankruptcy court violated two attorneys' due process rights by slashing their fees by more than $60,000 without proper notice or an opportunity for a hearing, a Sixth Circuit bankruptcy appellate panel ruled, saying the move functioned as a sanction. 

The panel said in its opinion that a hearing on the fees held by the U.S. Bankruptcy Court for the Western District of Tennessee was unfairly sprung on an unsuspecting Glankler Brown PLLC lawyer, who wasn't prepared to answer questions about the fee application because there were no objections filed to it.  Local rule and the express language of the hearing suggested that no hearing would be held on a matter to which no party had objected, the panel said.

Yet the court proceeded with a hearing anyway, telling the Glankler Brown attorney, Michael P. Coury — who was only in the courtroom for a separate matter heard earlier — that it would consider the issue despite the absence of objections.  "There is no reason to think that anyone other than the bankruptcy court expected a hearing to occur when Glankler had already submitted its certification that no objection was filed," the Sixth Circuit panel said.  "Glankler simply had no reason to suspect there might be a hearing on the fee application."

The court had decided to cut the fees for Glankler by 25% in part because its client's earlier bankruptcy case was dismissed for bad faith, a move that amounted to a sua sponte sanction for which Glankler received no notice or hearing – violating due process, the panel found.  The panel moved to vacate the bankruptcy court's order on the fee reduction.

The decision stems from a bankruptcy case involving debtor Island Industries Inc., for which Glankler served as counsel. Island Industries filed for Chapter 11 in February 2022.  Shortly after, a separate company, Sigma Corp. brought forth an adversary action alleging Island violated trade secret acts, according to the opinion.  A U.S. District Court then withdrew the reference to that action from the bankruptcy court, assuming jurisdiction over the trade secrets dispute.  Sigma then moved to dismiss Island's bankruptcy case, arguing it was filed in bad faith, and the bankruptcy court dismissed it in November 2022.

A month later, Glankler filed its final application related to compensation, with about $249,000 for fees and $7,800 for expenses, according to the opinion.  The law firm said roughly $100,000 of the fees related to its work on the bankruptcy case, while $150,000 were for the trade secrets case.

Judge: Fee Examiner Needed in Kidde-Fenwal Chapter 11

July 28, 2023

A recent Law 360 story by Jeff Montgomery, “Del. Judge Calls For Fee Examiner in Kidde-Fenwal Ch. 11”, reports that a Delaware bankruptcy judge took the rare step of ordering a fee examiner up front for a larger-than-usual proposed unsecured creditor committee assembling around the Chapter 11 of fire protection and suppression venture Kidde-Fenwal Inc. and affiliates.  Ruling from the bench, U.S. Bankruptcy Judge Lori Selber Silverstein said the court would require an examiner to avoid duplication of work in the case, involving one of the companies at the center of massive multidistrict litigation targeting the sale and use of toxic firefighting foams.

"There are billions of dollars in claims here, and albeit this case may have been presented as, 'Let's get to a sale ... Let's sell the company, distribute the assets' — it's a complicated case that's going to involve many issues," said David J. Molton of Brown Rudnick LLP, counsel to the committee.  Proposed on Thursday was the retention of Brown Rudnick and Stutzman Bromberg Esserman & Plifka PC as co-counsel for the committee, along with Hogan McDaniel as Delaware counsel, Gilbert LLP as special insurance counsel, KTBS Law LLP as special counsel, Houlihan Lokey Capital Inc. as investment adviser and Province Inc. as financial adviser.

"The complexity and size of prepetition litigation is demonstrated by non-comprehensive 10-figure and 11-figure settlements within the [aqueous film forming foam] multidistrict litigation," Molton said.  Judge Silverstein said Kidde-Fenwal would likely have ended up with a fee examiner appointment anyway.  On Thursday, however, the judge said she will select the examiner "from the get go."

"I understand it's a tricky issue," Judge Silverstein said.  "The committee is entitled to choose their counsel and pick their team.  I don't think, though, that they're entitled to hire everybody they want to hire because either they can't agree or they simply think it would be nice to have more rather than less."  The appointee "will be charged not only with general fee examiner issues but monitoring the sharing of tasks that the committee assigned to its various counsel.  Not interfering, but letting me know."

Judge Silverstein's fee examiner order followed an objection from the Office of the U.S. Trustee, which argued in part that the "committee has not met its burden to demonstrate that the services of three law firms which substantially overlap are reasonable and in the best interest of the debtor's estate."