Bankruptcy Judge Tasked With Scandal Cleanup of ‘Adopted Son’

HOUSTON – In Houston’s close-knit bankruptcy court, judges David R. Jones and Marvin Isgur often stood in lockstep. Former law partners, they transformed Houston from a backwater into a boomtown for high-dollar bankruptcies.

Isgur boasted, with a father’s pride, of how Jones revolutionized the Southern District of Texas’ bankruptcy system. He hired Jones out of law school, worked with him for years in private practice, and has called Jones his “stubborn adopted son.”

And now that Jones, 62, has resigned following the disclosure he approved millions in legal fees for a firm employing his live-in girlfriend, it will be Isgur who decides in many cases whether that firm can keep those fees.

The US Trustee in Texas moved to clawback at least $13 million from the firm, Jackson Walker, and Isgur is the judge slated to decide many of those fee disputes.

He has already gone on record questioning whether the US Trustee has the legal power to take back Jackson Walker’s fees.

“It looks like people are protecting themselves,” said former bankruptcy judge Bruce Markell, a professor of bankruptcy law at Northwestern Pritzker School of Law. “It does not look good.”

Even in a district where conflicts of interest have drawn national attention, the specter of Jones’ longtime mentor sitting in judgment of the hometown ethics controversy strikes some observers as alarming.

Read More: Sex, Secrets Trigger Downfall of Star Texas Bankruptcy Judge

Ultimately, the chief judge of the US District Court for the Southern District of Texas will decide whether matters shift to another court.

For months, Houston’s chief bankruptcy judge, Eduardo V. Rodriguez, has resisted the government’s efforts to move the dispute.

While Rodriguez is handling pre-trial issues, Isgur and fellow bankruptcy Judge Christopher M. Lopez remain poised to oversee the bulk of trials and disputes over fees and sanctions in the cases involving Jackson Walker and Jones’ girlfriend, Elizabeth Freeman.

Standing outside his courtroom this month, Isgur told Bloomberg Law he couldn’t discuss the Jones controversy or the fee issue.

“I’m really not going to answer any questions,” he said. As to the prospect of his ruling on the Jackson Walker fee cases, Isgur said: “It’s not really my decision. It’s a court decision.”

Isgur, 72, said he soon plans to step away from taking new large Chapter 11 cases but doesn’t plan to retire. An appeals court inquiry into Jones’ actions concluded Isgur didn’t know about the judge’s relationship with Freeman. On May 22, Jackson Walker asserted Jones requested the relationship be kept quiet about a year before news of the romance publicly broke.

At least twice, Rodriguez has pushed back against US efforts to move the dispute away from the district’s bankruptcy judges. “The Southern District of Texas Bankruptcy Courts are more than capable of disposing of these matters in an orderly, timely, and impartial manner,” he wrote in a December court report.

Rodriguez, reached as he entered the Houston bankruptcy courthouse on May 20, said he couldn’t comment on active cases and pointed Bloomberg Law to the court docket.

A Jackson Walker spokesman said the firm declined to comment on the fee dispute or whether it felt Isgur could impartially rule on the issues. Lopez didn’t answer interview requests.

In the spirit of transparency, the cases should be moved to another court, said Nancy Rapoport, a University of Nevada, Las Vegas law professor who has studied the controversy.

“There’s a world of difference between, ‘can the judges in the SD Texas bankruptcy court review the fees?’ and ‘should they do it?’” Rapoport wrote in an email.

Judge’s Fall Triggers Fee Fight

Jones helped make the Southern District of Texas bankruptcy court friendly to distressed corporations and catapulted it to become one of the most prolific venues for large Chapter 11s in the country. With those cases came massive legal fees for local and national law firms.

But then in November, he resigned after revelations he approved millions of dollars in fees for Jackson Walker while Freeman was a firm partner and lived with him. Neither Jones nor Freeman, who now operates her own firm, responded to multiple interview requests.

Since then, Kevin Epstein, the US Trustee overseeing Texas’ regional bankruptcy districts, has embarked on a campaign to examine at least 33 cases in which Jones ruled upon or mediated matters involving Jackson Walker.

Epstein has asked the courts to reverse approvals of Jackson Walker’s compensation and employment. As a sanction for the firm’s “unethical conduct,” the US Trustee, whose office resides in the Department of Justice, wants the fees returned to creditors.

Of the $13 million that Jones directly approved, at least $1.1 million in fees were attributable to Freeman. Counting cases in which Jones mediated, the US Trustee has questioned more than $18 million in fees Jackson Walker was awarded.

For months Epstein has sought to have the fee disputes heard by a US district court, suggesting a judge in the Western District of Texas, instead of the Houston bankruptcy court.

It’s a process called “withdrawing the reference,” which Epstein argues in court documents is “necessary to restore the public’s confidence by avoiding the appearance of bias.”

In Houston, that quest has encountered dead-ends and months of delays.

It’s been several months since the US Trustee sought to move the cases and vacate fees for Jackson Walker and Freeman without any success.

Clifford J. White III, a former director of the US Trustee’s office, criticized the courts for “slow walking” the cases “while the credibility of the bankruptcy system is burning.”

Moving the cases out of the “scandal-ridden” bankruptcy court will enhance public confidence in the integrity of the system, said White.

“Neither recusal nor withdrawal … suggests any shortcoming by the presiding judges,” White said. “It simply shows a recognition that any doubts, fair or unfair, about impartiality must be removed.”

In Isgur’s Court

Yet the cases remain squarely in Houston’s bankruptcy court.

As early as August, Isgur is scheduled to weigh whether the US Trustee can clawback fees Jackson Walker was paid in the bankruptcies of Neiman Marcus, Seadrill Partners, and Strike LLC. Jones awarded Jackson Walker about $1.5 million in those cases, of which about $78,000 came from work Freeman performed, court records show.

And in the months afterward, Isgur is slated to rule on other cases in which Jones was involved and Jackson Walker was counsel.

In December, Rodriguez recommended against the US Trustee’s motion to move the cases out of Houston’s bankruptcy court. In his report, he reasoned that keeping the cases in the court is justified because the fee disputes are core bankruptcy matters, and moving them to a district court wouldn’t expedite the process or make economic sense.

Rodriguez’ recommendation landed with Randy Crane, chief judge of the US District Court for the Southern District of Texas. Crane, who didn’t respond to interview requests, will decide whether the issue moves to district court.

Crane previously told Bloomberg Law he reported the allegations against Jones to Chief Judge Priscilla Richman of the US Court of Appeals for the Fifth Circuit and participated in the initial inquiry into Jones’ conduct. Richman issued a scathing public complaint against Jones, presaging his resignation.

Crane has already transferred cases involving Jones. After the romance news broke in October, he redirected any lawsuits filed against Jones to the chief judge in the US District Court for the Western District of Texas.

The US Trustee said the fee disputes could be moved to the same court. Rodriguez, in his recommendation to reject the transfer, contends the US Trustee failed to show how that would serve justice.

As it tries to move the cases out of Houston, the US Trustee has cited a survey conducted last year by a Rice University professor and commissioned by a creditor attorney seeking to recuse Isgur. The professor surveyed 150 registered voters in the Southern District of Texas, asking participants in December 2023 if they thought Isgur could be impartial in hearing the motions seeking relief against Jackson Walker.

About 81% said they didn’t believe Isgur could be impartial. The survey results, with an error rate of plus or minus 8%, were “very strong,” Rice political science professor Mark P. Jones told Bloomberg Law. “The judges themselves are not good … arbiters of whether someone’s impartial or not because they know the actors too well.”

Rodriguez called the survey “not evidence of anything.”

Markell, the Northwestern bankruptcy professor, said the matter could also be moved, by a change of venue, to bankruptcy judges in the Northern District of Texas.

“There are easy ways to dispel any appearance of impropriety,” he said.

Recusal Request Denied

While all parties wait on a ruling from Crane, key decisions in the fight over whether Jackson Walker can hold onto millions of dollars in fees remain in Houston’s bankruptcy court.

In December, Rodriguez denied a creditor’s motion to recuse Isgur in the Chapter 11 case of former hand sanitizer company 4E Brands Northamerica LLC.

The chief judge ruled against Barry Green, representing the estate of a 4E unsecured creditor. Green argued Isgur’s involvement presented the appearance of impropriety because of his long friendship with Jones, who had originally presided over the case and granted Jackson Walker’s application as counsel for 4E.

Rodriguez said he understood “the vital importance of maintaining an impartial judiciary that is free from even an appearance of impropriety.”

But he ruled there was no evidence Isgur knew of the secretive relationship between Freeman and Jones — and that Isgur and Jones’ friendship didn’t establish an appearance of impropriety.

Still, the two were close. Aside from working together in private practice for years at boutique firm Kirkendall & Isgur, Isgur has spoken of bringing Jones out sailing with a law firm client. Isgur’s daughter, a well-known conservative podcaster, has previously called Jones a family friend.

“Everything I am and everything I know I owe, at least in part, to him,” Jones said of Isgur in 2022.

Rodriguez’ ruling allowed Isgur to continue handling the 4E case.

Since taking the case, Isgur has twice ruled that Green lacks standing to litigate against Jackson Walker, finding that only 4E’s plan agent has that authority. A win for Jackson Walker, the ruling means Green and his attorney, Johnie Patterson of Walker & Patterson PC, won’t be able to pursue their own discovery against the law firm.

Notably, Isgur at a 4E hearing in April also questioned the US Trustee’s standing to disgorge Jackson Walker fees.

“I’m not sure that the US trustee has standing to collect the money,” the judge said.

At the same hearing, Patterson challenged the narrowing of who could be involved in seeking to clawback fees from Jackson Walker.

“It’s going to a small room where they’re trying to kick as many people out as they can. They’re gonna do a deal and that will be the last we hear of it,” he said.

Temple University law professor Jonathan Lipson said Houston’s bankruptcy judges should welcome the chance to have an outsider clear the air. That, he said, could isolate the problem to Jones.

“As a matter of optics, none of this looks very good,” Lipson said.

Bloomberg Law is investigating US bankruptcy courts. If you have information about questionable practices in the courtroom or relationships among judges and lawyers, send tips to James Nani or Ronnie Greene. Click here for information on sending confidential news tips to Bloomberg Law.