The bankruptcy judge and the U.S. Trustee in Houston disagree over withdrawal of the reference in proceedings to decide whether law firm Jackson Walker LLP must disgorge fee awards because a partner at the firm was having an undisclosed, intimate relationship with the judge who made the awards.
In a report on December 21, Chief Bankruptcy Judge Eduardo V. Rodriguez recommended against withdrawal of the reference. The U.S. Trustee objected to the report, contending that “withdrawal of the reference is necessary to restore the public’s confidence by avoiding the appearance of bias that otherwise will unnecessarily distract from the merits.”
JW Consents to Withdrawal
The relationship was disclosed in October and resulted in stories nationwide. The Fifth Circuit issued an ethics complaint, which resulted in the judge’s resignation. The complaint alleged that the relationship had been ongoing for six years, during which time the judge granted millions of dollars in compensation to the firm, including time spent by the partner who was living with the judge.
The firm had not disclosed the relationship, and the judge had not recused himself.
The U.S. Trustee filed motions under Rule 60(b)(6) to vacate $13 million in fee awards to the firm in 17 cases. The U.S. Trustee has said that similar motions may be filed in as many as 18 more cases. Simultaneously, the U.S. Trustee moved to withdraw the reference.
According to the U.S. Trustee, the firm “agreed that there was cause for withdrawal of the reference to an Article III court, and it agreed to the U.S. Trustee’s motions” to withdraw.
The Recommendation Against Withdrawal
On motions to withdraw the reference, the local rule in the district calls for the bankruptcy court to issue a report and recommendation. Despite the firm’s consent, Judge Rodriguez recommended that the district court deny the withdrawal motion, because he found that five of the six factors in Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 998 (5th Cir. 1985), pointed toward retaining the disgorgement motion in bankruptcy court.
Among the Holland factors, Judge Rodriguez said that the U.S. Trustee’s motions dealt only with “disgorgement of fees to professional persons employed pursuant to §[§] 327(a) & 330 [that] are clearly core matters pursuant to 28 U.S.C. § 157(b)(A) and (E).” He also concluded that withdrawal would not expedite the process, because the bankruptcy court “is intimately familiar with the facts and legal issues presented in the UST’s Motion for Relief from Final Judgment.”
“In sum,” Judge Rodriguez said, “the balance of the Holland factors . . . strongly weigh against permissive withdrawal of the reference.”
If the district court were nonetheless to withdraw the reference, Judge Rodriguez recommended against transferring the matters to the chief district judge for the Western District of Texas. Observing that efficiency “would be hindered by withdrawal and transfer,” he said that the “Southern District of Texas Bankruptcy Courts are more than capable of disposing of these matters in an orderly, timely, and impartial manner.”
If the district court were to grant withdrawal but not transfer the matter to the adjoining district, Judge Rodriguez recommended that the district court “then immediately refer the instant miscellaneous proceeding back to this Court to decide how all pretrial matters should be handled and decided.”
The U.S. Trustee’s Objection to the Report
The U.S. Trustee filed an objection to the report and recommendation on January 4, saying that the “repeated ethical failures have raised widespread and legitimate concerns about the fairness and impartiality of proceedings in the Bankruptcy Court for the Southern District of Texas.”
The government’s bankruptcy watchdog said that withdrawal “is necessary to restore the public’s confidence by avoiding the appearance of bias that otherwise will unnecessarily distract from the merits of [the disgorgement] Motions if they are heard by this district’s sitting bankruptcy judges.”
The U.S. Trustee said that “the most compelling cause for withdrawal” was “neither presented in Holland America nor squarely addressed by the Bankruptcy Court.” The government was referring to “the need for someone other than a fellow bankruptcy court judge to preside over litigation to restore the public’s confidence that a former bankruptcy judge and colleague undermined.”
The motions to vacate the fee awards “will require the three bankruptcy judges [in Houston] to adjudicate not just the propriety of Jackson Walker’s and Ms. Freeman’s conduct but also the propriety of the conduct of their former colleague,” the U.S. Trustee said. In other words, the U.S. Trustee was saying that “judges who have shared a courthouse . . . should not sit in judgment about the legality of one another’s conduct, even if they believe they could do so fairly and impartially.”
Beyond the Holland factors, the U.S. Trustee said that the “most significant reason for seeking withdrawal of the reference (and referral to a judge in another district) is the need to avoid even the appearance of bias and partiality,” because “the very integrity of dozens of the largest chapter 11 cases filed in the United States since early 2018 has been compromised.” [Emphasis in original.]
Looking ahead, the U.S. Trustee said that “discovery of all relevant facts may well require depositions of some bankruptcy court personnel” and that “a bankruptcy judge should not adjudicate issues regarding its own staff even if the judge believes he could do so impartially.”
The withdrawal motion was originally assigned to District Judge Keith P. Ellison, who recused himself. The matter is now before District Judge Andrew S. Hanen. The docket does not indicate whether there will be a hearing in district court.
Observation
As the U.S. Trustee said, the “very integrity” of dozens of the country’s largest bankruptcy cases “has been compromised.”
With regard to the appearance of impropriety, it’s not just the possibility that bankruptcy judges in Houston might go easy on those who violated their ethical obligations. Rather, observers also might wonder whether Houston judges would mete out undeservedly harsh punishment on those who brought the court’s integrity into question.
The foregoing are the opinions of this writer, not ABI.
The report and recommendation and the objection are in In re Professional Fee Matters Concerning the Jackson Walker Law Firm, 23-04787 (S.D. Tex.).
The bankruptcy judge and the U.S. Trustee in Houston disagree over withdrawal of the reference in proceedings to decide whether law firm Jackson Walker LLP must disgorge fee awards because a partner at the firm was having an undisclosed, intimate relationship with the judge who made the awards.
In a report on December 21, Chief Bankruptcy Judge Eduardo V. Rodriguez recommended against withdrawal of the reference. The U.S. Trustee objected to the report, contending that “withdrawal of the reference is necessary to restore the public’s confidence by avoiding the appearance of bias that otherwise will unnecessarily distract from the merits.”