Aug. 14, 2024, 3:30 AM CDT
A bankruptcy court excluded the US Trustee Program, the guardian of the public interest in bankruptcy cases, from a sealed hearing Aug. 7 related to the program’s efforts to claw back millions of dollars in legal fees approved by former US Bankruptcy Judge David Jones in various Chapter 11 cases. That unusual move may find some support in judiciary policy, but could undermine the role of the US Trustee Program—the bankruptcy system’s “watchdog”—particularly in a case that hinges on non-disclosure issues.
The background of the Jones case is well known among bankruptcy professionals. Jones resigned from the bench in the Southern District of Texas last year after admitting to a long-term, undisclosed relationship with a bankruptcy attorney who was a partner at the law firm Jackson Walker, which regularly filed cases in Jones’s court.
The US Trustee Program is seeking to have Jackson Walker disgorge more than $13 million in legal fees that Jones approved in bankruptcy cases filed by Jackson Walker. Chief US Bankruptcy Judge Eduardo Rodriguez of the Southern District of Texas is tasked with handling pretrial disputes related to the US Trustee Program’s efforts.
After learning from the US Trustee’s office that Jones, Jackson Walker, and their respective attorneys held a private, off-the-record meeting, Rodriguez ordered anyone who attended this meeting to appear before the court. He then sealed the hearing to determine whether this meeting violated federal judiciary policy and an earlier court order, both of which authorize only Rodriguez to decide the scope of questions Jones may answer in connection with the investigation about the undisclosed relationship. The bankruptcy court also indicated it intends to unseal portions of the hearing following review of the record. The US Trustee’s attorney was excluded from attending the sealed portion of the hearing.
The US Trustee Program, a division of the Department of Justice, is bankruptcy’s monitor. Congress created the oversight agency in the 1980s to restore waning confidence in the bankruptcy system. The program’s mission is to ensure the integrity and efficiency of the bankruptcy system, and it carries out this mission by monitoring the conduct of participants in bankruptcy cases and identifying and investigating abuse of the system.
Transparency is vital to the integrity of the bankruptcy system. Mandatory disclosures permeate our bankruptcy laws and are required from the debtor, the debtor’s professionals, and other stakeholders at virtually all stages of a bankruptcy case. It’s a veritable “fishbowl of disclosure.” Transparency carries special weight in bankruptcy because participants need access to information to effectively represent their interests and maximize value in cases.
Section 107 of the Bankruptcy Code provides for sealing in certain clearly defined circumstances, such as when disclosure would expose an individual to identity theft or similar harm. In all cases, however, sealing should be rare and narrowly tailored to account for the exceptionally strong transparency and disclosure norms required for the bankruptcy system to function effectively.
Here, the bankruptcy court’s justification for sealing the hearing is The Guide to Judiciary Policy, which precludes federal judicial employees from commenting, testifying, or producing records “without the prior approval of the determining officer.” This policy reserves to Rodriguez the authority to decide the scope of any questions Jones can answer or any records he can produce.
On balance, some measure of sealing seems appropriately calibrated to the circumstances. Compliance with federal judiciary policy is a compelling justification for imposing limited restrictions on public access to the hearing. Based on reports, the bankruptcy court sealed the hearing to determine whether Jones, Jackson Walker, and their respective attorneys discussed sensitive information that would violate this federal judiciary policy and the court’s earlier order. This course of action is understandable given the need to quickly ascertain why Jones and Jackson Walker met, and whether any sensitive information had been revealed without the requisite bankruptcy court approval.
The court’s decision to seal the hearing isn’t immune from critique. High ethical standards and transparency are essential to maintaining public confidence in the bankruptcy system. Here, allegations of improper nondisclosure and ethical wrongdoing are the reason for the US Trustee’s efforts to disgorge fees in these cases. The exclusion of the US Trustee’s attorney is extraordinary given this context.
Because the program has a statutory interest in making sure the bankruptcy system isn’t abused, perhaps the US Trustee could have attended the hearing as a representative of the public interest even though the public-at-large was barred. Even the appearance of secrecy could undermine the credibility of the bankruptcy courts in the Southern District of Texas to adjudicate matters arising out of significant ethical breaches that occurred under their roof.
The US Trustee and the broader public soon will have access to the unsealed portions of the hearing and presumably the opportunity to address matters revealed in that record. But the later unsealing of the hearing may not be sufficient to avoid perceived harm to the credibility of bankruptcy courts and the bankruptcy system.
The opportunity to review the record of the hearing later, once unsealed, is altogether different from participating in the hearing as an interested party. By denying the US Trustee’s attorney access to the hearing, the bankruptcy court limited to some degree the program’s ability to monitor developments in a matter that the US Trustee initiated pursuant to its mandated oversight role.
Real-time access to participate in the hearing, for the US Trustee, as guardian of the public interest, may better preserve public confidence in the Southern District’s handling of this matter and ultimately the bankruptcy system as a whole.
The case is Professional Fee Matters Concerning the Jackson Walker Law Firm, Bankr. S.D. Tex., No. 23-00645, hearing 8/7/24.