Apollo Floats Damages Over Ex-Judge Romance in Energy Bankruptcy

Apollo Global Management and Fidelity Management & Research Co. said an ex-bankruptcy judge steered an oil and gas company’s bankruptcy deal that cost the lenders hundreds of millions of dollars—while hiding his relationship with an attorney involved.

The financial titans, in a filing Thursday in the US Bankruptcy Court for the Southern District of Texas, questioned the judicial mediation led by former Houston bankruptcy judge David R. Jones that led to a 2020 settlement in the bankruptcy of the former Sanchez Energy Co.

Apollo and Fidelity were among the secured lenders in the Sanchez Chapter 11 case, which began in 2019. On Thursday, they said they may have claims for damages against Jones, his live-in girlfriend Elizabeth Freeman, and her former firm Jackson Walker LLP for concealing the romantic relationship.

Jones mediated the case as a sitting judge while Jackson Walker represented Sanchez as co-counsel. Freeman was a partner at the firm at the time.

The filing is part of the expanding web of litigation related to Jones, who resigned as a Houston bankruptcy judge last year after admitting to a relationship with Freeman. She left Jackson Walker at the end of 2022.

The lenders, which also provided financing during the bankruptcy, said Jones pushed for the value of the estate’s potential claims to be decided after Sanchez’s Chapter 11 plan was confirmed. That advocacy ran “contrary to previous suggestions and agreements and directly benefitted Ms. Freeman and Jackson Walker,” the filing said.

“Absent such an agreement, Ms. Freeman would have had to represent the estate in a contentious contested confirmation hearing without additional compensation for her or Jackson Walker’s services, because Jackson Walker and all the estate’s professionals had already agreed to cap their fees,” the filing said.

The company exited bankruptcy in May 2020 without clarity as to how the equity would be divided up. The lenders were ultimately handed a loss last year when a judge said they could hold on to only about a 30% stake in the company, while unsecured creditors secured an almost 70% majority of the reorganized oil driller, now known as Mesquite Energy Inc.

“Had the DIP Lenders known about this relationship, they would not have participated in the mediation or agreed to enter into the settlement proposed by Chief Judge Jones,” the filing said.

The lenders now say they now have a right to know about any connections between Jones and the professionals in the Sanchez case and whether the ex-judge’s impartiality and fairness should be called into question. They also said they have a right to any funds that may be disgorged from Jackson Walker as a result of the scandal. Mesquite has separately said it also has an interest in the clawback of any legal fees.

The bankruptcy financing lenders and other litigants are entitled to know the truth to ensure the integrity of the federal bankruptcy court system, their lawyer Dennis L. Jenkins of Willkie Farr & Gallagher LLP told Bloomberg Law.

“With new and disturbing pieces of information that continue to come out on a routine basis, we are understandably concerned about the undisclosed romantic relationship between former judge Jones and Ms. Freeman,” Jenkins said.

Attorneys for Jones, Freeman, and Jackson Walker didn’t immediately respond to requests for comment Friday.

Counsel for several groups of senior secured noteholders and bankruptcy lenders include Willkie Farr & Gallagher LLP, Cole Schotz PC, and Jones Day. Wilmington Savings Fund Society FSB, the bankruptcy financing agent, is represented by McDermott Will & Emery LLP.

The case is Sanchez Energy Corp., Bankr. S.D. Tex., No. 19-34508, notice 8/15/24.