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

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.

A recent Law 360 story by Rick Archer, “FTX Examiner Says $200M in Fees ‘Remarkable’ But Justified”, reports that the fee examiner in the FTX Chapter 11 case has told a Delaware bankruptcy judge that the professionals in the case have racked up more than $200 million in bills since November, a figure she said was "remarkable" but justified by the chaos created by the cryptocurrency giant's collapse.  In a report, fee examiner Katherine Stadler said the charges so far from the law firms and financial consultants retained by FTX and its unsecured creditors are for the most part justified by the professionals' scramble to deal with the "smoldering heap of wreckage" left by FTX.

"Without question, the fees incurred to date are remarkable, but so is the professionals' performance," Stadler said.  FTX filed for bankruptcy on Nov. 11 after weeks of turmoil caused by the failure of its FTT digital token, which led to a run on the bank as customers rushed to withdraw their cryptocurrency holdings from the platform.  Subsequent internal investigations revealed that about $65 billion in FTX assets were transferred to Alameda Research — a cryptocurrency hedge fund founded and controlled by former FTX CEO Sam Bankman-Fried — through a back door in the platform, leaving a shortfall in customer funds.

Stadler said the size of the case and the alleged role of management malfeasance in the collapse were both unremarkable.  "What makes these cases extraordinary, however, is the largely unregulated financial system in which the debtors (and other similar financial technology companies) operate, combined with their global scope, the complete absence of corporate records, and the non-existence of even the most basic corporate governance," she said.

As a result, the firms involved found themselves in an "'all-hands-on-deck' crisis," she said, resulting in missteps like deploying teams that later proved to be too large and retaining experts that ultimately were not needed, but nothing "wholly unreasonable in the moment."  "They did not have the luxury of carefully considering staffing decisions, developing the most efficient teams, or deploying resources with military precision," she said.

The report specifically dealt with the first 90 days of the case, during which 242 attorneys billed nearly 35,000 hours, Stadler said.  She reported that a total of about $88.8 million in fees and expenses had been billed through Jan. 31, including $42.1 million from FTX counsel Sullivan & Cromwell LLP and $28.5 million from its financial adviser, Alvarez & Marsal. Paul Hastings LLP, lead counsel for the unsecured creditors committee, billed $5.5 million. The committee's forensics investigation consultant, AlixPartners, billed $3.2 million.

Stadler recommended that a total of $85.1 million in fees and expenses be approved at the fee hearing scheduled for June 28.  She also recommended that a $2.4 million bill from Ernst & Young for tax services for FTX be deferred to the next fee application period, saying she had not completed her review, and said the other firms had stipulated to about $1.3 million in reductions of their bills.

A recent Law 360 story by Craig Clough, “Paul Hastings’ $12M Kwok Chapter 11 Fee Bill ‘Only The Beginning’,” reports that, calling it one of the most "complex and challenging" individual Chapter 11 cases ever filed, Paul Hastings LLP asked a Connecticut bankruptcy judge for $12.3 million in attorney fees covering eight months of work on exiled Chinese billionaire Ho Wan Kwok's case, adding the request is "only the beginning."

An interim fee application covering fees from July 8 through Feb. 28 done on behalf of the bankruptcy trustee in Kwok's case also includes nearly $349,000 in expenses for the firm, which said it took the case on a contingency basis and waited until the trustee recovered enough to pay the amount requested in the application, including two luxury yachts and $33 million held in escrow.  Kwok, also known as Guo Wengui, declared Chapter 11 bankruptcy in February 2022, citing $100 million to $500 million in liabilities, and he was arrested in March on allegations that he operated a multifaceted $1 billion fraud scheme.

"These Chapter 11 cases likely rank among the most complex and challenging Chapter 11 cases ever filed by an individual debtor," Paul Hastings said.  "The lead debtor — Mr. Ho Wan Kwok — is at the center of a vast maze of companies and assets purportedly owned by the individual debtor's family members or close business associates, but who, in reality, have no financial interest in, or control over, the companies and assets they purport to own because, in reality, the individual debtor owns and controls these companies and assets."

Trustee Luc A. Despins of Paul Hastings and the firm have faced a number of challenges in the case outside its complexity, including street protests of the firm orchestrated by Kwok and death threats against Despins, according to the filing.  "While the trustee and Paul Hastings will not be intimidated by these actions, they did require Paul Hastings to incur, among other expenses, hundreds of thousands of dollars in cyber security measures," Paul Hastings said.  "To be clear, Paul Hastings is not seeking reimbursement of these expenses in this application."

A recent Law 360 article by Tyler Brown, Jason Harbour and Justin Paget of Hunton Andrews Kurth LLP, “How Ch. 11 Ruling Ends War Between National, Local Rates” reports on a recent ruling on hourly rates in Chapter 11 cases.  This article was posted with permission.  The article reads:

On Oct. 18, the U.S. Bankruptcy Court for the Eastern District of Virginia approved the professional fee applications in the Nordic Aviation Capital bankruptcy cases, including the rates of each of the professionals as appropriate market rates.  This settles any remaining uncertainty in how professionals' hourly rates will be considered for approval in bankruptcy courts in the district. In particular, the bankruptcy court noted that

[m]uch ink has since been spilled differentiating so-called "local" rates from "national" rates. The distinction is much ado about nothing.  The market for professional services cannot be predetermined by geography alone.

Instead of relying on geography alone, the bankruptcy court stated that

the plain language of the Bankruptcy Code directs the Court to consider the "customary compensation charged by comparably skilled practitioners in cases other than cases under [Title 11]."  The Court must, therefore, look at whether the rates charged are consistent with those set in the relevant market.

To determine the relevant market, the court noted that the market rate will be set for the most part by the amount clients are willing to pay for professional services.  The factors clients may consider in the selection process might include the reputation of the professional, the specialization of the professional, the need for the professional's experience and expertise, the stakes of the transaction and the time pressures of the engagement.

The court also stated that a good understanding of the relevant market in any given case could be gleaned from the rates of professionals other than those engaged by:

    The debtor;

    Debtor-in-possession financing budgets;

    Monthly operating reports of the debtor;

    Information required by the U.S. trustee program guidelines; and

    The checks and balances built into the fabric of the reorganization process to police the market.

The bankruptcy court also reiterated that the applicable factors for approving professional fee applications are those enumerated in Title 11 of the U.S. Code, Section 330(a)(3), and the Johnson factors.

Additionally, the bankruptcy court noted that in applying the Johnson factors, "it must heed the Fourth Circuit's admonition against per se rules beyond those legislatively mandated," noting that the court cannot "abdicate the equitable discretion granted to it by establishing rules of broad application which fail to take into account the facts of a particular case and the overall objectives of the bankruptcy system."[6]

After identifying the applicable legal standard, the bankruptcy court addressed the evidence that was relevant to the approval of the professional fee applications, including the rates of the professionals.  As the fee applications were uncontested, the court stated that it issued the memorandum opinion to provide guidance to practitioners on the facts they need to develop in support of fee applications filed in bankruptcy cases pending before that court.

In taking the unusual step of issuing a lengthy memorandum opinion for uncontested fee applications, the bankruptcy court put to rest what one commentator recently suggested was a war between national and local rates in the Eastern District of Virginia in mega Chapter 11 cases.  The issue arose in connection with the appeal of the plan confirmation order in the Mahwah Bergen Retail Group Inc. cases on unrelated grounds.

After vacating confirmation in that case, the U.S. District Court for the Eastern District of Virginia ordered that the bankruptcy court issue proposed findings of fact and conclusions of law on any further fee applications in the case and questioned whether attorney rates should exceed the prevailing market rates in the Richmond division of the Eastern District of Virginia.

The district court's order created uncertainty as to how the bankruptcy court might subsequently analyze the rates of professionals from outside the Richmond division.  That uncertainty was short-lived.  Importantly, the memorandum opinion represented one of the bankruptcy court's first opportunities to address professional fee applications in a large Chapter 11 case since the entry of the district court order adopting the bankruptcy court's report and recommendation in the Mahwah Bergen bankruptcy cases.

In the memorandum opinion and the bankruptcy court's report and recommendation, two bankruptcy judges from the Eastern District of Virginia have extensively detailed the legal precedent in the U.S. Court of Appeals for the Fourth Circuit and the appropriate factual predicates for approving market rates.

In sum, the memorandum opinion provides comfort to all practitioners, including those from outside the Eastern District of Virginia, that the appropriateness of attorney rates in cases filed in the district will continue to be assessed through application of the factors identified in Section 330(a)(3) and the Johnson factors on a case-by-case basis, without any additional requirements or per se rules.

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