October 18, 2023 - In a shocking turn of events, last week bankruptcy Judge David Jones of the Southern District of Texas (SDTX) abruptly announced his resignation. The resignation came following revelations that Jones has since 2017 been living with a prominent Houston bankruptcy lawyer who represented debtors in many high-profile bankruptcy cases over which he presided. Jones was the chief judge of the SDTX bankruptcy court and one of two judges on its complex-case division. Since January 2020 that court has presided over a third of all complex-bankruptcy cases with liabilities over $1 billion. Jones himself handled 17% of all such cases during that time including some of the highest profile and contentious bankruptcies, such as Serta and Neiman Marcus. Jones’ resignation raises many important questions: What will happen to the cases he was running at the time of his resignation? Did his relationship affect his rulings, and, if so, will those decisions be subject to reconsideration? Finally, will the SDTX bankruptcy court continue to be a sought-after venue? If not, where will all those cases migrate?
The answer to the first question is clear: The cases Jones was handling have been assigned to the two remaining judges in the complex-case division, Marvin Isgur and Christopher Lopez. Judge Isgur, previously one of the two members of that division, stepped away last year and has now returned. Judge Lopez joined the group when Isgur stepped away.
As Debtwire notes, whether a court’s final decision is subject to reopening is subject to a two-pronged test. First, it must be clear that the judge should have disqualified himself or herself because his or her “impartiality might reasonably be questioned.” In situations where judges should have disqualified themselves, the Supreme Court has ruled that a new, unconflicted judge may, but is not required to, vacate the judgments of the conflicted judge. . We believe that parties to some of the more contentious cases before Jones are likely to test this path. Indeed, the “Excluded Lenders” in the Serta case recently submitted a reply brief case asking the Fifth Circuit to reverse Jones’ decision on “open market purchases” and remand to the Southern District of New York given Jones’ resignation.
We have written extensively about the phenomenon of “bankruptcy judge shopping,” explaining how distressed borrowers are often able to strategically choose not just the venue in which to file (that used to be the goal), but actually the judge who will handle the case. Perhaps the most conspicuous examples of this trend were in Westechester, New York, where filing there assured that your case would be heard by Judge Robert Drain (who has since retired), and Houston, Texas, which got your case in front of either Jones or Isgur. While many academics have bemoaned this system, arguing that it corrupts the bankruptcy process, it is unlikely to change anytime soon. Rather, the question becomes, where will the SDTX cases go? Likely candidates include Delaware and the Southern District of New York, whose robust bankruptcy courts have until recently presided over the bulk of large, complex cases, and “new kids on the block,” such as New Jersey, where Judge Michael Kaplan is presiding over several recent complex cases. With Jones’ resignation, the glory days of SDTX may be over.
