The Story of Judge Jones, the Judge who Made Restructuring Cool Again
Welcome to the 58th Pari Passu newsletter.
After the complex Lumen Deep Dive of last week, today we have a lighter topic. We will learn more about the story of David Jones, the famous and inspirational restructuring judge who was recently at the center of a scandal that led to his resignation.
Introduction
In 2011, upon returning home from work, David Jones informed his wife that he had decided to resign from his $1mm/year position at Porter Hedges, a Texas-based law firm known for handling sophisticated transactions and complex litigation for companies. Instead, he opted to pursue a career as a federal bankruptcy judge, a role that came with an annual salary of $160,000 [1]. His wife was not happy with his decision, but David did not care, Jones’ objective was simple: to persuade large Texas companies to consider restructuring in Houston courts instead of filing for bankruptcy in Delaware and the Southern District of New York, as Enron, American Airlines, Radio Shack, and dozens of other large Texas businesses had done for the past 20 years.
Fast forward a decade, and Jones became the chief judge of the U.S. Bankruptcy Court in the Southern District of Texas (SDTX) and is widely regarded as the sole force that made Houston the most popular venue for complex corporate restructurings. His tenure was prosperous: having handled over 10% of all cases with over $100mm in liabilities since 2016 and almost 17% of all cases with over $1bn in liabilities since 2020, Jones helped make SDTX the go-to district for large companies that needed to undergo the bankruptcy process [2]. With very few large-dollar complex bankruptcies getting filed in SDTX prior to Jones' tenure, his bold attitude resulted in hundreds of millions of dollars in annual revenue for lawyers, bankers, and financial consultants in Houston, making him a revolutionary of sorts.
You might be wondering how a mere bankruptcy judge was so pivotal. From the famed liberalism of Ruth Bader Ginsberg to the staunch conservatism of Clarence Thomas, different Supreme Court justices can have different interpretations of the law. For example, some like Ginsberg, view the Constitution in a loose, evolutionary sense while others, like Thomas, prefer to interpret it exactly as it was written over two centuries ago. This same principle can be applied to bankruptcy law and the Bankruptcy Code, where the outcome of a case can depend on the type of judge presiding over it, which makes them quite important in the Chapter 11 process.
Houston, we have a problem
However, his "stardom" came to a screeching halt when it was revealed in October 2023 that he failed to disclose a romantic relationship with his former law clerk Elizabeth Freeman. An anonymous complaint stated that Freeman, who worked for a firm named Jackson Walker, was the "live-in girlfriend" of Jones, and how this trifecta created a scheme in which corporate bankruptcy filers would hire Jackson Walker to represent them and would receive favorable treatment because of the amorous relationship between Jones and Freeman. A Fifth Circuit investigation was underway, and both parties subsequently denied these claims, but Judge Jones officially resigned from his position on November 15th. Jones approved more than $1mm in legal fees for work in sixteen corporate cases billed between 2018 and 2022 by Freeman, and Jackson Walker billed more than $6mm from those cases [3].
The resignation meant that over 3,000 cases in Jones' docket had to be reassigned to Marvin Isgur and Christopher Lopez, his ex-colleagues [4]. Jones had also garnered a reputation for being a divisive figure who was overly debtor-friendly to ensure that the largest and most controversial cases continued coming to his court. A big reason why SDTX became so popular for corporate restructurings was because of Jones' philosophy of prioritizing expediency, leading him to allow some questionable creditor actions to go through. Some examples include the Serta, Incora, and Revlon cases. Today, his past and current cases are put in a precarious situation because different rulings might arise.
A particularly interesting precedent that Jones helped set are non-pro rata uptiers, which involve a select group of majority creditors priming other existing term loan lenders by amending the credit docs and creating new tranches of super priority debt above the existing term loans. These creditors then exchange their pre-existing secured debt into these super-priority tranches. This maneuver is particularly contentious because