Two Unanswered Questions for 2025

A lot of important things have happened in the world of bankruptcy this year. But a number of significant matters await resolution in 2025 – if not beyond. Following is a description of two such matters:

Will Legal Actions in the Jones-Gate Scandal Ever Conclude?

In late 2023, Bankruptcy Judge David Jones in the Southern District of Texas admitted in response to reporting by the Wall Street Journal that he was living with a lawyer whose firm frequently appeared before him. As the scandal unraveled, it turned out that Judge Jones had approved millions of dollars in legal fees for his romantic interest and her law firm. He even mediated disputes in which she represented one of the parties. After the Fifth Circuit found “probable cause” that he committed serious ethical violations, Judge Jones resigned.

In November 2023, the United States Trustee (UST) began filing 33 actions to disgorge or deny more than $20 million in fees that Jones awarded to the Jackson Walker (JW) law firm where his romantic interest had been a partner. The UST alleged multiple legal violations by JW, including conflicts of interest, failure to disclose, and other ethical breaches.

Most observers thought that this matter, called Jones-gate by some pundits, would be handled with dispatch so the scandal did not fester any longer than necessary. But it is not turning out that way, to say the least. Here is a run-down of some of the pending matters:

• The Motion to Withdraw the Reference has not been decided after thirteen months. If granted, this motion would transfer the JW fee actions to the district court and lend greater independence and credibility to the judicial decisions. Even Jackson Walker initially entered into a stipulation with the UST in favor of withdrawal of the reference before the bankruptcy court signaled its reluctance to give up the cases. Subsequently, the chief bankruptcy judge filed a recommendation to the district court opposing the motion. After holding the matter for many months, the district judge who would decide the motion transferred the matter to the chief judge of the neighboring Western District of Texas. Meanwhile, the 33 motions remain undecided as the bankruptcy judges in the court where Jones was chief judge oversee the litigation. (One bankruptcy judge did recuse after handling some of the cases for about 10 months.)
• Pre-Trial Proceedings remain bogged down. Among other things, the bankruptcy court spent many weeks deciding whether the former judge and court personnel could be deposed and forced to turn over documents. Additional discovery disputes also slowed down progress. Other unexpected, if not contrived, issues have been raised and not yet decided. It might be expected that a respondent such as JW which faces an eschatological challenge would seek to confuse and delay, but the court’s tolerance, if not encouragement, is puzzling. Finally, a hearing to resolve a host of preliminary matters was scheduled for late April – about 18 months after the litigation commenced. (Professional Fee Matters Concerning the Jackson Walker Law Firm (case no. 23-00645)(Bankr. S.D. Tex.)
• Trials on the merits and remedies will not be held until an undetermined date after the pre-trial proceedings finally wrap up. The bankruptcy court will decide JW’s culpability and sanctions. At least one judge has raised the issue of whether clawed-back fees can be returned.

It is highly ironic that this fee disgorgement dispute may end up taking two years or more to resolve by the same bankruptcy court that has prided itself on confirming mega-chapter 11 cases in as little as one day.

Can Venue-Shopping Get Even Worse?

A lot has been written about the loose bankruptcy venue laws that seem to let corporate chapter 11 debtors file about anywhere they choose regardless of their state of incorporation or where their base of operations or assets are located.

Just when one might have thought it could not get worse, Red River Talc filed in the Southern District of Texas (case no. 24-90505). The parent company in this case is the behemoth Johnson & Johnson (J&J) corporation which seeks a third-party release for its alleged asbestos liability. The venue problem is that this is the third bankruptcy case filed in three districts over three years seeking essentially the same relief. The Third Circuit twice has ruled that previous filings were made in “bad faith” because the debtor itself was a shell without any “financial distress” of its own. In a transparent attempt to evade the Third Circuit decisions, J&J incorporated Red River Talc (as the successor entity to the previous debtor known at LTL) in Texas so it could file in the SDTX under the place of incorporation prong in 28 USC 1408. The UST and creditors moved for transfer of venue under the interests of justice and convenience of the parties standards contained in section 1412. The bankruptcy court said “no,” it was keeping the case.

Unrestricted venue options in U.S. bankruptcy courts may be going international.  Intrum AB is a Swedish company that incorporated an affiliate on the eve of bankruptcy, putatively so it could defeat more stringent legal requirements under Swedish insolvency law.  (Case no. 24-90575 Bankr. S.D. Tex.).  The court scheduled a confirmation hearing for mid-December, just a few weeks after filing.  That was about eighteen times faster than it scheduled a hearing to resolve preliminary matters in the UST’s action in the Jackson Walker fee dispute. 

After Intrum was welcomed into U.S. bankruptcy court, another Swedish company filed in Houston. Northvolt AB, case no. 24-90577 (S.D. Tex.), admitted that its main asset is a retainer held by its bankruptcy law firm. The company also admitted that it formed a Texas entity three days before filing because “the parties concluded that Texas was the preferred United States venue.”

Even prominent Fifth Circuit Judge James Ho and Northern District of Texas Judge District Judge Reed O’Connor, who have expressed misgivings about imposition of proposed national case assignment rules, have decried what Judge Ho called alleged “forum selling” in bankruptcy cases. As Judge Ho said, “We expect lawyers to favor their clients. We expect judges to favor nobody.”

Question for 2025: Is it possible that the Southern District of Texas will retain or exceed its position as the number 2 bankruptcy filing haven in the United States (behind only Delaware) while the Jones-gate scandal goes unredressed?