Texas Bankruptcy Scandal Draws Judge’s Concerns Over No-Recusal

A Texas court case involving two major law firms, a disgraced ex-bankruptcy judge, and the judge’s live-in attorney girlfriend left a federal judge deeply concerned, she said Thursday during the first hearing in the evolving scandal.

Alia Moses, chief judge of the US District Court for the Western District of Texas, said that it was “mandatory” for Jones disqualifying himself on any case his girlfriend, former Jackson Walker partner Elizabeth Freeman was involved in.

At one point, Moses cut off Freeman’s lawyer who said Jones didn’t have to recuse because the two weren’t married, saying, “this should have been very clear to any judge.”

The hearing marked the first court proceeding for the ex-judge in the scandal since a bombshell lawsuit rocked the bankruptcy world in October, unearthing a tightly-guarded romantic relationship between Judge David R. Jones of the US Bankruptcy Court for the Southern District of Texas and Freeman, his one-time clerk.

Moses said Jones failing to disclose the relationship gives her “heartburn just a little bit.”

The scandal has seemingly impacted Houston as a popular destination for bankruptcy firms—a reputation Jones helped establish through rule changes aimed at resolving complex cases with fast, consistent decisions. Jackson Walker regularly represented clients before Jones while it employed Freeman, who raked in $1.1 million in fees the judge approved while they kept their relationship under wraps.

Michael Van Deelen, the plaintiff, was a shareholder in a bankruptcy case that played out in Jones’ court. He’s alleging a conspiracy that wiped out his entire investment of 30,000 shares in McDermott International, Inc. stock. He’s seeking at a minimum costs he incurred as a pro se litigant to challenge Jones’ authority to hear the case.

‘No Doubt Unfair’

During a four-and-a-half hour hearing, Jones and Freeman asked Moses to dismiss claims, as did Jackson Walker, which has maintained that it acted appropriately when it learned of the relationship. Kirkland & Ellis, a bankruptcy giant that used Jackson Walker as local counsel in Texas, went further in asking Moses to sanction Van Deelen. The two firms represented McDermott in its bankruptcy.

Jones sat alone in the courtroom gallery, wearing a blue suit and red tie. He sometimes leaned forward in his seat to take in lawyer arguments. Other times he stared at his phone. He declined to comment after the hearing.

Freeman didn’t attend, nor did Van Deelen. Combined about 20 lawyers were present for Van Deelen and four defendants.

Moses didn’t rule from the bench. She said Jones should’ve disqualified himself from cases that Freeman worked on, but that she’s not convinced that his failure to do so impacted Van Deelen in the bankruptcy.

“That’s a difficult part about this case,” she said, adding the bankruptcy proceeding was “no doubt unfair.” Moses said she lacks authority to toss the McDermott judgment but it gives the potential for a judge to “misbehave, walk into court, issue an order, then be completely absolved” gives her pause, she said.

Moses questioned why Kirkland & Ellis, which maintains a Houston office, needed Jackson Walker’s assistance to litigate dozens of bankruptcy cases in Jones’ Houston court.

“The need was for that one connection, Mrs. Freeman, wasn’t it?” she said.

Kirkland portrayed Van Deelen as unhinged, saying his lawsuit advances a baseless conspiracy and continues a pattern of irrational behavior. The firm showed through court records Van Deelen was suspended from coaching a little league team for using profanity, and also barred from school property for using inappropriate language and obscene hand gestures at a wrestling match.

Van Deelen was fired from his job as a school teacher for assaulting the school’s principal, Kirkland said in a sanctions motion. He had been the subject of more than 24 student complaints for throwing students’ work away before grading it and for calling students clowns and animals, the filing said. Van Deelen’s attorneys say his past conduct is irrelevant to the facts in this case, and Moses likewise said she was focused only on the present case.

A lawyer for Jackson Walker called the conspiracy charge an “outrageous fallacy.”

Blockbuster Allegations

The hearing came two weeks after Jackson Walker dropped a blockbuster allegation shifting blame from the firm to Jones. A partner at the firm, Matthew Cavenaugh, said he was asked by Jones to file a potentially false court disclosure about his relationship with Freeman, the firm said in court papers.

The topic briefly came up Thursday before Moses mostly shut it down because it falls outside of the motions being argued.

Whether Moses lets the case proceed could forecast how she’ll rule in another case in the scandal involving many of the same participants. In that suit, the former CEO of petroleum barge company Bouchard Transportation Co. Inc. accused the two firms of filing multiple “misleading and dishonest” court papers in the company’s Chapter 11 case without disclosing the relationship between Jones and Freeman.

The Bouchard case, brought in February by former CEO Morton S. Bouchard III, borrows heavily from the conspiracy allegations alleged by Van Deelen. Both plaintiffs are represented by Bandas Law Firm PC.

Thursday’s hearing was held in Del Rio, a Texas border town that primarily occupies Moses’ docket with immigration matters. Del Rio is more than a five-hour drive from Houston, where Van Deelen filed the suit.

Moses inherited the case after Judge Randy Crane, chief judge of the Southern District of Texas, removed it from his district.

The case runs parallel to a probe from the Justice Department’s bankruptcy monitor, the US Trustee’s office, which is seeking to claw back at least $13 million in fees Jackson Walker earned in cases in which the firm failed to disclose the Jones-Freeman relationship.

Kirkland is represented by Beck Redden LLP and Hueston Hennigan LLP. Jackson Walker is represented by Rusty Hardin & Associates LLP. Van Deelen is represented by Bandas Law Firm PC. Jones is represented by McKool Smith PC. Freeman is represented by the Law Office of Tom Kirkendall.

The case isVan Deelen v. Jones, S.D. Tex., No. 4:23-cv-03729, 6/6/24.