Mon 06/10/2024 16:27 PM
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Legal Analyst: Karen Leung

“Everybody’s coming into court with not-so-clean hands,” U.S. District Judge Alia Moses said June 6 during a key hearing in Van Deelen v. Jones. Judge Moses often returned to this point during arguments on motions to dismiss former McDermott shareholder Michael Van Deelen’s lawsuit against former judge David R. Jones stemming from Jones’ undisclosed romantic relationship with Elizabeth Freeman.

The judge repeatedly suggested that Van Deelen - whose filing of the complaint against Jones exposed the relationship and led to Jones’ resignation from the bench - had not been given a “fair shake.” Van Deelen’s equity was canceled in the McDermott chapter 11 cases under the company’s prepackaged plan, and his motion seeking Jones’ disqualification was denied, Judge Moses observed.

Van Deelen alleges that he sought Jones’ recusal in 2021 after receiving an anonymous message in the mail about Jones’ relationship with Freeman. At the time, Freeman was a partner at law firm Jackson Walker, McDermott’s co-counsel with Kirkland & Ellis. Judge Moses questioned why the relationship was not revealed to the public before Van Deelen filed his RICO suit. “How does anybody think it’s fair to be keeping this quiet? How?” the judge asked.

In his complaint, Van Deelen alleges that Jones and the other defendants - Freeman and law firms Kirkland & Ellis and Jackson Walker - fraudulently concealed and profited from the relationship in a yearslong scheme. However, the defendants argue that all 11 of Van Deelen’s claims should be dismissed because he has not plausibly alleged they violated the Racketeer Influenced and Corrupt Organizations, or RICO, Act, Texas law and the Fourth Amendment to the U.S. Constitution.

Last week, Reorg sent readers a high-level summary of the hearing and analyzed the first part of the hearing, when Judge Moses addressed Jones’ argument that Van Deelen’s claims are barred because Jones’ actions were protected by judicial immunity - Jones’ only argument for dismissal. Today’s story focuses on arguments by Freeman, Jackson Walker and Kirkland, who each filed their own motions to dismiss the case.

As Reorg has reported, Judge Moses, chief judge of the Western District of Texas, made clear that she believes Jones should have disqualified himself from “day one” of the McDermott case because of his relationship with Freeman.

The judge looked to 28 U.S. Code section 455, which says that a judge “shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” Judge Moses emphasized that Jones had a duty to step away from McDermott due to his conflict of interest and that when Van Deelen filed a motion seeking Jones’ recusal or disqualification, it “should have been granted. Period.”

Although Judge Moses said the bankruptcy process was “taint[ed]” by Jones’ failure to disqualify himself, she also challenged Van Deelen’s standing to sue - one of the central arguments the three other defendants advanced. As Jackson Walker’s counsel Jennifer Brevorka of Rusty Hardin & Associates said, the plaintiff fails to allege he was harmed by the defendants and lacks standing to sue under Article III of the U.S. Constitution. Van Deelen’s complaint “cloaks the harm as a harm to the estate,” Brevorka argued, instead of alleging the defendants harmed Van Deelen specifically.

“Anything that could be viewed as a shareholder derivative claim is not appropriate,” Judge Moses remarked. “That’s the hard part of this case. Is he raising someone else’s claims,” she added. During an exchange with Van Deelen’s attorney, Mikell West of Bandas Law Firm, the judge asked, “How does he have standing to bring claims on behalf of the company? That’s what most of your complaint is on.”

Judge Moses noted that one of the remedies that Van Deelen requests is the disgorgement of fees paid to Jackson Walker and Kirkland. “Isn’t that for the company to do?” she suggested. West answered that his client has withdrawn his claims alleging breach of fiduciary duty and seeking disgorgement of the law firms’ fees. However, he insisted that Van Deelen has been injured because “he suffered damages just bringing his claims at all to a corrupt courtroom.” West said, for example, that Van Deelen spent money on litigation and experienced “mental anguish” and emotional distress from Jones’ “harsh” orders.

In the McDermott chapter 11 cases, Van Deelen was painted as a vexatious, aggressive pro se litigant whom Jones eventually barred from the courtroom.

Responding to West, Jackson Walker’s counsel asserted that if Van Deelen is abandoning his fiduciary duty claims against the law firms, then the Texas law claims against them are “dead in the water” as well.

While faulting Jones and Freeman for hiding their relationship, Judge Moses asked if Van Deelen could show that the fate of his equity in the McDermott bankruptcy would have been different “but for that disclosure.” She commented, “That’s the difficult part of this case, because I can’t say that the result would have been different with a disinterested judge.”

Van Deelen requests leave to amend or supplement his complaint if the court finds it “deficient in any regard.” During the June 6 hearing, West again argued that new information on the Jones-Freeman relationship has been uncovered since the amended complaint was filed in January, justifying an amendment.

West noted that in the U.S. Trustee’s separate litigation to disgorge Jackson Walker’s fees (which spans numerous cases), Jackson Walker revealed that Freeman and Jones pressured the firm to make “misleading” statements about the relationship. West also highlighted allegations in a separate RICO suit filed by Morton S. Bouchard III, the former CEO of oceangoing barge company Bouchard Transportation Co., that Kirkland partner Ryan Bennett “told him they needed to file Chapter 11 in Houston because they had a friendly judge.”

Judge Moses reserved judgment on the motions to dismiss and Kirkland’s motion for sanctions against Van Deelen and his attorneys at Bandas Law Firm, discussed below. She thanked counsel for coming to her courtroom in Del Rio, Texas, adding that she “will be heading to Houston to hear some of these matters.”

Standing and Litigation History

On behalf of Jackson Walker, Brevorka told the court the firm had moved to dismiss Van Deelen’s lawsuit on “no fewer than 15 different grounds” but focused her argument on his standing to sue. Brevorka argued the economic harm the plaintiff allegedly suffered during the McDermott bankruptcy - the cancellation of his equity - was “predetermined” because “this was a prepack plan that decided to wipe out equity” before the company ever “stepp[ed] into court.” That harm cannot be traced to nondisclosure of the Jones-Freeman relationship, she asserted.

Judge Moses asked if “the reorganization was just a ‘rubber stamp’” since the case was prepackaged. The judge said that she had to consider “if it was a fair process in light of what everyone knew was going on in the background - what everyone could have known.” With Brevorka, she reviewed Van Deelen’s litigation history:

  • In March 2020, Van Deelen objected to confirmation of the McDermott plan;

  • In July 2020, Van Deelen filed suit against three McDermott officers in Texas court. That action, sometimes called “lawsuit B” by counsel, was ultimately removed to the bankruptcy court, where it was rejected by Jones;

  • Van Deelen’s motion seeking Jones’ recusal in lawsuit B was assigned to Judge Marvin Isgur. Judge Isgur denied the motion, finding the anonymous mail inadmissible as evidence. Judge Isgur also sealed the letter, although Brevorka said that Van Deelen’s allegations on the Jones-Freeman relationship were clear enough during the public hearing on the recusal motion;

  • In January 2023, the U.S. District Court for the Southern District of Texas affirmed Judge Isgur’s recusal decision on appeal;

  • Van Deelen’s appeal of the recusal ruling is now pending before the U.S. Court of Appeals for the Fifth Circuit;

  • In October 2023, Van Deelen filed his RICO complaint against Jones. The complaint was sealed by U.S. District Judge Keith Ellison before being transferred to Judge Moses.

Judge Moses questioned several of these decisions. Again noting that Van Deelen’s recusal motion “should have been granted,” she asked, “You’ve got a motion to recuse against a colleague,” based on allegations in a letter. “You don’t hold a hearing to take evidence on whether it’s true?”

“That was the call that Judge Isgur made,” Brevorka said carefully. She added that on appeal, U.S. District Judge Andrew Hanen affirmed Judge Isgur’s decision after performing a “de novo review of every claim Mr. Van Deelen made.” Judge Moses was unsatisfied: “Why not have a hearing de novo on the motion to recuse as opposed to going with the record that didn’t develop” the evidence? Van Deelen’s allegations “turned out to be true,” she emphasized. “Why didn’t anybody look into it?”

On Van Deelen’s suit against the McDermott officers, Judge Moses also remarked that “Judge Jones shouldn’t have been presiding over this matter. Period.” She questioned why a suit raising Texas claims was removed to the bankruptcy court when, she said, “the bankruptcy court doesn’t have dispositive authority” over state law claims. “How does the bankruptcy court enjoin direct causes of action” against the directors and officers, she asked Freeman’s attorney, Tom Kirkendall of the Law Office of Tom Kirkendall. Kirkendall is a former law firm partner of Judge Isgur.

Kirkendall said the lawsuit was removed to bankruptcy court because Van Deelen’s claims against McDermott officers were “derivative of estate claims.” Brevorka noted that Jones presided over the action after performing a “jurisdictional analysis.” But Judge Moses said, “Folks, it all goes back full circle. You’re all going back to the same forum that is being complained of.”

On this point, the judge said, “You try to seek redress elsewhere, it gets returned to the court that has the conflict.” That same court entered an order exculpating Jackson Walker, she added, and “this vast circle doesn’t give a good impression.”

Kirkendall suggested Jones had treated Van Deelen fairly, describing Jones as “extremely patient” when he considered Van Deelen’s confirmation objection. This was sometimes “difficult” because Van Deelen “didn’t act well,” according to Kirkendall.

Judge Moses stressed that Van Deelen’s litigation “wouldn’t have been necessary if the proper thing had been done from the beginning” and the recusal motion had been granted. However, she added, “I’m not saying it would have changed the reorganization plan.”

Jackson Walker and Kirkland’s Liability and Co-Counsel Relationship

During Jackson Walker’s argument, Brevorka asserted that the firm had no duty to disclose a relationship it was unaware of - and that it had been “misled” by Freeman. Jackson Walker has disclaimed knowledge of the relationship until March 2022. When Jackson Walker first asked Freeman about the relationship in March 2021 after Van Deelen filed his recusal motion, Freeman said that the relationship was over and that she had never lived with Jones, according to Brevorka.

“If Ms. Freeman is liable, why don’t her actions make Jackson Walker liable?” Judge Moses inquired. “She was acting as your representative. She would make you liable,” she suggested to counsel. “Why does it matter whether anything is alleged against Jackson Walker outside of Ms. Freeman?”

She pressed counsel on why Freeman’s conduct would not be imputed to Jackson Walker “up to the time you received the denial.” Judge Moses asked skeptically, “[Van Deelen] doesn’t have a cause of action because Jackson Walker didn’t know what Ms. Freeman was up to?”

Later, Brevorka returned to the podium to note that when Freeman first joined Jackson Walker, Freeman completed a lateral questionnaire and did not list her relationship with Jones as a potential conflict of interest. However, Brevorka conceded that the questionnaire is not in evidence, and Judge Moses noted, “I can’t take judicial notice of facts that could be contested.”

John Hueston of Hueston Hennigan, counsel for Kirkland, called Van Deelen’s allegations against the law firm “outrageous.” He argued that in March 2021, Kirkland learned that Van Deelen, a “serial litigant,” alleged a secret romantic relationship based on an “anonymous letter.” Those allegations were then “investigated by Jackson Walker,” denied by Freeman and then “rejected by Judge Isgur” in a recusal decision affirmed by the U.S. district court, Hueston continued.

On those facts, Van Deelen tries to accuse Kirkland of a “conspiracy,” “bribery” and “deliberately concealing a relationship since 2017,” Hueston said, even though Kirkland had “nothing to disclose” when Van Deelen filed his motion to disqualify Jones.

Judge Moses asked why McDermott hired both Kirkland and Jackson Walker as co-counsel when both firms had offices based in Houston.

“What was the need for local counsel?” Judge Moses asked. “The need was that one connection, Ms. Freeman, was it not?” Hueston vehemently denied this, explaining that Kirkland and Jackson acted as co-counsel on many chapter 11 cases overseen by judges other than Jones. Still, Judge Moses suggested, “it is a little bit strange, wouldn’t you say?” Hueston said no, noting that Jackson Walker is the “biggest firm in Texas.”

When Judge Moses asked which firm had “brought [the other] in” to the McDermott engagement, Hueston answered there was no evidence on this in the record. Kirkland was, “at worst, a bystander” in the situation, he asserted.

Hueston noted that Van Deelen referenced a November 2023 Financial Times article to suggest that unidentified Kirkland partners were aware of the Jones-Freeman relationship. That article actually describes Kirkland partners acting in good faith, Hueston asserted.

Van Deelen’s objection to Kirkland’s motion to dismiss included the following excerpt from the FT story: “Jackson Walker said it had informed Kirkland about its 2021 inquiry into Freeman’s relationship with Jones. Multiple Kirkland partners told the FT that they were long aware of the romantic relationship between the pair, though did not know how advanced it was. The Kirkland lawyers assumed the pair had received clearance from a superior court or decided that it was not Kirkland’s place to intervene in Jackson’s retention application.”

Broadly, Hueston argued that “what’s at stake” in the Van Deelen suit is whether the court wants counsel to “go behind a judge’s back” to question disclosures, or impose an obligation to investigate a judge based on an “unsubstantiated rumor” about a different firm. This would undermine the “integrity of the judicial process,” he suggested.

Judge Moses agreed that the integrity of the judicial process “goes to the heart of this case.” She told counsel, “I’m wondering how many of you went out to investigate my background.” “Attorneys do that,” she said, smiling. “I’m not suggesting there’s a duty to do that.”

Kirkland Sanctions Motion

Hueston presented Kirkland’s motion requesting sanctions against Van Deelen and his attorneys at Bandas Law Firm for pursuing RICO claims against Kirkland, saying the plaintiff makes “factually meritless and legally defective” allegations against the firm. “Certainly, Kirkland recognizes something terrible has been unearthed,” Hueston said, but he argued that Van Deelen’s allegations are “not enough to convert a Bankruptcy Rule 2014 [disclosure] issue” into a case on “criminal racketeering.”

Hueston also cast Bandas Law Firm as a repeat offender, saying that “they’ve been filing RICO actions in many courts and often been sanctioned.” Judge Moses seemed to give this argument little weight, remarking, “the point is whether they should be sanctioned in this case, not for their conduct in other cases.”

Kirkendall, Freeman’s counsel, interjected to suggest that the defendants did not even flout the disclosure requirements of Bankruptcy Rule 2014, which “do not talk about relationships with judges.” Judge Moses responded, “That’s a real thin ledge to be hanging yourself on.” But Kirkendall continued to ask, “is this a judge disclosure issue or a professional disclosure issue?” He suggested, “it depends on the type of relationship.”

Judge Moses seemed puzzled by what Kirkendall was suggesting about the nature of the Jones-Freeman relationship. “I don’t think it’s in dispute anymore, is it?” she asked. “It’s absolutely in dispute,” Kirkendall answered. “You’re assuming all of the allegations are true.”

Anne Johnson of Tillotson Johnson & Patton defended Van Deelen and Bandas against the sanctions request. She argued that Kirkland seeks sanctions for the RICO claims specifically, but even if the court dismisses the RICO claims, “lack of merit is not a basis for sanctions.”

Johnson insisted that the case “comes down to what Kirkland knows” and when they knew it. “They say we were a bystander,” she told the court, and “they also say even if we did know, they had no obligation to disclose.” The circumstances “cast doubt” on Kirkland’s assertion that “they knew nothing,” Johnson said, and concluded that Van Deelen’s claims “should be given to a jury.”
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