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Category: USTP

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

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."

USTP Wants SCOTUS to Wait on Trustee Fee Ruling

July 24, 2023

A recent Law 360 story by Vince Sullivan, “Trustee Asks High Court To Wait On Petition For Fee Remedy”, reports that the Office of the U.S. Trustee asked the U.S. Supreme Court to hold off on its petition for certiorari until other cases seeking rulings on how to address trustee fee overpayments under an overturned fee schedule can be adjudicated, saying it hopes to achieve a nationwide remedy to the issue.  U.S. Trustee William K. Harrington said the Second Circuit was wrong to order the refund of $375,000 in payments made to the U.S. Trustee's Office by debtor Clinton Nurseries between 2018 and 2020, when the fees were increased by an amendment that was later found to be unconstitutionally non-uniform by the Supreme Court in Siegel v. Fitzgerald.

The petition cites other rulings on this issue finding that refunding overpayments is preferred over seeking increased fee payments from debtors who benefited from the lower fee schedule, or in doing nothing and only changing the payment program prospectively.  The trustee argues that while there is no split among circuit courts yet, resolving the question left open by Siegel would create a remedy that could be deployed nationwide.

"If the court, however, prefers to await the potential development of a circuit split, it should, at a minimum, hold this petition, as well as those in other cases presenting the same question, for as long as that question remains pending before other courts of appeals," the petition said.  "That would preserve the court's ability to effectuate a nationwide remedy if it later grants review."

A petition seeking similar relief in the case of debtor John Q. Hammons Hotels & Resorts has already been accepted by the high court, and there are hundreds of cases with the same issue of finding an appropriate remedy currently in the Second Circuit, where the Clinton Nurseries case originated.

During oral arguments in the Siegel case, attorneys for the trustee's office said the total amount of excess fees paid by debtors during the relevant period was as high as $324 million.  The trustee fee schedule was altered by a 2017 law designed 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 only to the 88 districts that employ the U.S. Trustee system, which is funded by the U.S. Department of Justice primarily through the fees charged to Chapter 11 debtors.  The hike was designed to help sustain the department's trustee fund and was triggered in the first quarter of 2018 because the 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, and 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 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.

USTP Balks at Hourly Rate in J&J’s Chapter 11 Bankruptcy

May 24, 2022

A recent Bloomberg Law story by James Nani, “DOJ Balks at J&J Unit’s Plan to Hire Katyal at $2500 an Hour” reports that the Department of Justice’s bankruptcy watchdog is opposing a bankrupt Johnson & Johnson unit’s proposal to retain former acting solicitor general Neal Katyal at nearly $2,500 an hour to work on its Chapter 11 case.

LTL Management LLC, which was created by the healthcare giant to house and limit its liability from its talc products, is proposing to retain Katyal, a partner at Hogan Lovells US LLP, at a rate as high as $2,465 an hour, the US Trustee said in its objection.   Hogan Lovells’ hourly rates for its partners are “significantly higher” than the rates of the seven other law firms LTL Management has retained, the US Trustee said.  LTL hasn’t shown the rates are reasonable or in the best interest of the bankruptcy estate, the Trustee said.   Katyal would act as special appellate litigation counsel for LTL, according to LTL’s application to hire Katyal.

Earlier this month, the U.S. Court of Appeals for the Third Circuit agreed to hear several appeals by asbestos victims who are trying to end LTL’s bankruptcy.  The Third Circuit’s review will include the New Jersey bankruptcy court’s decision earlier this year denying tort claimants’ motion to dismiss the Chapter 11 case.  The tort claimants argue LTL’s bankruptcy—which would address lawsuits from its talc product users who allege they developed cancer—was filed in bad faith.

LTL told the bankruptcy court it needs experienced counsel in connection with the appeals. Hogan Lovells “provides exceptional appellate litigation services,” LTL said.  In light of the appeal’s complexity and “anticipated intensity,” hiring Hogan Lovells is “appropriate and warranted,” LTL said.  The US Trustee argued that law firms LTL has already retained, such as Jones Day and Skadden Arps Slate Meager & Flom LLP, have helped the company and are familiar with the case.  But their hourly rates are lower, it added.

SCOTUS to Rule on Chapter 11 Bankruptcy Fee Increases

January 10, 2022

A recent Reuters story by Maria Chutchian, “Supreme Court to Determine Constitutionality of Bankruptcy Fee Increases,” reports that the U.S. Supreme Court said it will review a dispute over a recent increase in fees that Chapter 11 debtors are required to pay the federal government.  The issue, which stems from a 2017 law that hiked the government fees that most large companies in bankruptcy must pay, has divided top appellate courts across the country.

The law's imposition of higher fees in most, but not all, U.S. bankruptcy courts has caused uncertainty over the legal status of around $324 million in fees imposed under the law, according to the U.S. Trustee, which serves as the U.S. Department of Justice’s bankruptcy watchdog.

The underlying lawsuit was brought by Alfred Siegel, the trustee who oversaw Circuit City’s liquidation process.  He argued that the 2017 law violated the U.S. Constitution’s Bankruptcy Clause, which requires bankruptcy laws to be uniform, because it hiked fees for Chapter 11 debtors in most states but failed to do the same for Alabama and North Carolina.  Those two states use a different government entity, known as the Bankruptcy Administrator program, to perform similar duties as the U.S. Trustee in large corporate bankruptcies.

The law was eventually amended to include Alabama and North Carolina, but Siegel argued in his September petition to the Supreme Court that companies that filed for Chapter 11 in those two states were still permitted to go several months without being subject to the same fee increases that were imposed in the other states.  The government argued in its response that the constitution’s bankruptcy clause gives Congress flexibility in creating new statutes that govern bankruptcy court administration.

The law has been challenged in several districts with conflicting outcomes.  The 4th U.S. Circuit Court of Appeal, which ruled in Siegel's case, and the 5th Circuit have upheld the law while the 2nd and 10th Circuits have deemed it unconstitutional.  Though they oppose each other’s interpretation of the law, the U.S. Trustee and Siegel both asked the Supreme Court to weigh in on the case.