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9Questions — Cliff White, former head of US Trustee Program — Keeping two-judge Texas panel a ‘big mistake’

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9Questions — Cliff White, former head of US Trustee Program — Keeping two-judge Texas panel a ‘big mistake’

Max Reyes's avatar
  1. Max Reyes
8 min read

9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Until earlier this year, Judge David R. Jones was a fixture in the distressed debt world, overseeing many of the most high-profile restructuring cases in one of the most popular legal venues for them in the US — the Southern District of Texas Bankruptcy Court

Then, allegations surfaced that he had a live-in relationship with Elizabeth Freeman, a restructuring lawyer whose firm Jackson Walker argued cases in his courtroom. Thousands of cases were reassigned as a result, but the two-judge panel that made Jones such an important fixture within the bankruptcy world remains intact

We spoke with Cliff White, who used to lead the US Trustee Program  the Federal bankruptcy regulator. He is now an executive vice president with professional services firm AIS Infosource, but emphasized that the opinions he expressed were his own personal views.

1. What do you make of the 5th US Circuit Court of Appeal's decision to end its ethics inquiry into Judge Jones's failure to disclose his relationship with a local bankruptcy attorney?

It was not surprising that the Circuit Court dropped its investigation after Judge Jones announced his resignation. That has been done in other cases involving judges who leave the bench after their alleged misconduct is uncovered. 

Some have pointed out that the Circuit Court possessed authority to continue the investigation for purposes of making broader improvements in bankruptcy practices within the Circuit. Some also have suggested that suspicions that lawyers and others had knowledge of the alleged misconduct justify continuing the investigation. Although I am sympathetic to calls for continued court review, I think the Circuit acted within its discretion.

But that only makes it more important that the facts be ferreted out through other avenues, including ongoing litigation that has been brought against Judge Jones by creditors, and legal actions taken by the US Trustee to reconsider the fees awarded to the Jackson Walker law firm where Jones’s romantic interest worked.

This sad controversy gives the integrity of the bankruptcy system a big black eye. The fairness and transparency of a large number of proceedings before Judge Jones may be called into question. A lot of people find bankruptcy mysterious enough, so the specter of a secret personal relationship influencing a judge’s decision on the merits of a case is extremely harmful.

2. How will this impact the list of important cases, such as Serta Simmons and Wesco Aircraft, that potentially have appeals?

It depends on the relief requested. So far, there are claims filed against Judge Jones in the district court seeking damages — and nearly 20 cases filed by the US Trustee, the “watchdog” of the bankruptcy system, challenging fees approved by Judge Jones for the Jackson Walker law firm. There are also a few other actions pending, including one in which the court appointed a mediator to re-do the mediation earlier conducted by Jones.

When judges are disqualified after deciding a matter, the violation may be cured by appellate review or having lower court judges reconsider decisions before an appeal.

The district court transferred the lawsuits filed in that court, which seek damages against Jones, to a district judge in another district. That lends greater objectivity and makes sense to me. But the bankruptcy judges are holding on to the litigation pending in their court. 

The US Trustee asked for what is called a “withdrawal of reference” so the district court would take the cases out of bankruptcy court. Jackson Walker even agreed. But so far the bankruptcy court is resisting. I think that is unwise. It is not a question of whether a bankruptcy judge who sat alongside Judge Jones could be unbiased, but a question of public perception and confidence in the bankruptcy system.

3. How would this impact investors who are seeking to overturn bankruptcy rulings due to the scandal?

It is a high hurdle to convince a court to reconsider and reverse a previous decision. In light of the disturbing revelations here and concerns about judicial bias, I expect more motions to be filed, but maybe not a whole lot more.

If a matter is reconsidered, courts could order parties to re-litigate issues, in some cases maybe through an evidentiary hearing. In other matters, a new judge could decide based on the record already compiled in the case file. 

Theoretically, that could disturb provisions of a plan and affect competing creditor rights and payments. But I think success will be more likely before consummation of a plan. I can easily see clawbacks against Jackson Walker and perhaps against those who may have had knowledge of Judge Jones’s relationship and did nothing. Any new money brought into the estate would be distributed in accordance with the plan.

4. How will the two-judge panel survive in Texas in light of this?

It is hard for me to see how the panel survives, but public statements by the District and Bankruptcy court suggest they may dig in. With all due respect to those judges whom I hold in the highest regard, they are making a big mistake. I suspect the Circuit Court, which is superior to those courts, may have a more open mind. 

When the spotlight was shined on two other districts that had rules that promoted judge-shopping, the rules were quickly changed back to a more conventional random-assignment system.

I recently read a comment from one practitioner saying that there are only a few judges capable of understanding complex Chapter 11 matters. Based on my personal observation over decades of practice, that is palpably false.

5. You’ve criticized forum-shopping in the past, and said this sort of panel contributes to it. How did this practice become so common in bankruptcies, and do you think this situation will do anything to curb it?

I joined with practitioners, scholars, and professional organizations in a public letter asking for the elimination of the special panel. I think these efforts will grow. 

The Judicial Conference (presided over by the Chief Justice), if not the Congress as well, may take notice. The Creditor Rights Coalition has been on the record for a while asking for judge-shopping reform, and the Commercial Law League of America, which represents smaller Main Street creditors, has long been a vocal proponent of venue reform.

Judge-shopping, in large part, is made possible by an overly lenient bankruptcy venue statute that allows debtors’ lawyers to file a case in almost any district in the country. Under current law, a company can incorporate a shell affiliate on the eve of bankruptcy and the parent company can bootstrap that filing. Add to that a local rule that designates one or two judges to preside over large cases within the district and, voilà, you have judge-shopping.

I will not question anyone’s motives, but it sure looks bad when a big law firm appears to hand-pick its own judge. Houston is the main hold-out in contrast to two other prominent districts that changed their rules within the last couple of years.

It is worth noting that within a week after the Jones scandal broke into the news, mega-case filings in Houston dropped off dramatically. This may be a temporary reaction from cautious blue-chip firms wishing to avoid controversy and waiting to see how the dust settles.

6. Do you think this will open up other bankruptcy courts as the preferred venues for future corporate restructurings?

It already has. New Jersey was already becoming popular because there is only one Judge in the Trenton division and it is not hard to manufacture a presence there. That judge  who is very smart and capable, and with complete integrity  has written opinions advocating for bankruptcy courts to replace the district courts in handling many mass tort cases. Not surprisingly, New Jersey has gotten some big cases that might have otherwise gone to other districts.

7. The Justice Department’s bankruptcy monitoring unit is challenging around $13m in fees that Jones approved for Jackson Walker across several cases. Do you expect the clawback request to go even higher, and what does that process look like?

So far, my former office has filed only in cases that remain open. They publicly identified at least nine other closed cases in which Jackson Walker or Freeman received at least $5 million. So, yes, final resolution probably will cause the number of cases and amounts to go higher.

The US Trustee has been very surgical in limiting relief to fees paid. That makes sense to me as a bankruptcy practitioner. But beyond Jackson Walker, the fees of other firms conceivably could come into play at some point. And beyond money, there may be disclosure and ethics issues that ultimately will have to be resolved.

8. I wanted to pivot quickly to another big story in the bankruptcy world — the Supreme Court hearing Harrington vs. Purdue last week. What did you think of oral arguments, and do you think we have a good idea at this point about how the court might rule?

This case has been called the most important bankruptcy case in the last thirty years. It raises issues about the breadth of bankruptcy court authority, whether bankruptcy will replace the tort system, and the unfairness of denying non-consenting victims their day in court. All this because the Sacklers, who never filed a bankruptcy case of their own, conditioned their contributions to the settlement fund on immunity from lawsuits, even for fraud claims.

At oral argument, the Justices asked two main questions: where is the statutory authority for the bankruptcy judge to cut off the rights of victims to sue the non-debtor Sacklers; and is there any hope of a deal without giving the Sacklers the release they demand. 

These questions came from Justices from both the so-called conservative and liberal blocs. The Purdue Pharma case involved an objection to the plan filed by the US Trustee during my watch as Director. So I may be a tad biased. But, after listening to the argument and then reading the transcript, I think a 9-0 decision against Purdue Pharma is possible and at least 6 to 3 against Purdue Pharma and the Sacklers is likely.

9. On a lighter note, we’re nearing the end of the year. Will you be going on vacation or doing anything fun to celebrate the holidays?

The Christmas tree is up, there are decorations throughout the house, and I have even finished my holiday shopping. My three granddaughters are more than excited. Nothing can possibly be more joyous and fun than that.

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