Court Opinion Review: Secrecy Begets Secrecy in the Jones/Freeman Affair, Bird Global’s Dubious Purdue Workaround, and DSG Small Ball Shambles On

Reorg’s Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Reorg as a whole. Today we consider the SDTX’s lack of transparency in investigations stemming from the Jones/Freeman mess, a Florida court creatively sidestepping Purdue and more desperate maneuvering for Diamond Sports Group.

Inquiring Minds Want to Know

What in the absolute behind-closed-doors is going on in the Southern District of Texas? We aren’t particularly interested in former judge David R. Jones’ extramarital affair or the extent of his interview, formal or informal, with Elizabeth Freeman’s former partners at Jackson Walker. What does grind our gears is the level of secrecy surrounding Judge Eduardo Rodriguez’s oversight of the U.S. Trustee’s attempts to disgorge fees associated with the shenanigans.

You know how cynical we are: We never really expected any of the law firms involved, or even Jones, to face any significant consequences here (no, 7.5 hours of ethics CLE does not count). But we expected Judge Rodriguez to be a little more transparent with the Jackson Walker fee disputes to at least give the impression that someone down there cares about transparency. Sunlight is the best disinfectant, and all that. Or maybe bread and circuses, for our purposes.

After all, Jones’ lack of transparency about his relationship is the actual issue here (and his relationship wasn’t the only thing he kept under seal for no apparent reason). Jones’ failure to disclose that he was in a relationship with a partner at Houston’s premier local counsel while presiding over and mediating in cases involving that firm threw many decisions in a crucial – albeit widely abused – jurisdiction into turmoil. The least Judge Rodriguez could do is let the public see the dirt before it gets swept under the rug.

At least Judge Alia Moses of the Western District of Texas had the common sense to chew Jones out (twice) before tossing Michael Van Deelen’s RICO suit, which actually started the dominos tumbling (at least once it escaped from Jones and Judge Marvin Isgur’s efforts to keep it – you guessed it – under seal). Judge Moses outlined on the record the “sprawling tapestry of ethical lapses by major players in the nation’s bankruptcy system” – ah, that’s the stuff – before concluding that, yeah, bad judge, but no liability.

Jones must have appreciated not only that result but also Judge Moses’ Jones-like skill at giving lectures on ethics and morality to parties about to be freed on their own questionable recognizance. Game recognizes game.

But at nearly every turn Judge Rodriguez, the chief judge of the court that is arguably on trial here, has denied us even the thin gruel to which we have become accustomed and slammed the courthouse doors shut to protect Jones and the chambers he ran as a personal fiefdom (and, apparently, dating service) from scrutiny.

It’s remarkable that, at least on the basis of the public record – an important caveat in this context – Judge Rodriguez has been most angry that lawyers involved in the case might have had an informal meeting with Jones aimed at hearing out his side of the story.

What is the legal basis for Judge Rodriguez’s indignation? The hallowed Judiciary Regulations adopted by the Judicial Conference of the United States in March 2003. Never heard of them? Neither had we. Seems America’s federal judges went and put themselves in a Cone of Silence to protect, well, themselves from having to disclose their precious secrets. And who applies these guidelines? Judges, of course! It’s an ouroboros of judicial shamelessness.

According to Judge Rodriguez, under the regulations “[f]ederal judicial personnel may not provide testimony or produce records in legal proceedings except as authorized.” You see, Jones would love to come out and tell us all exactly what happened, if it weren’t for those darn regulations!

What interest does these regulations protect, other than judges’ interest in not being forced to talk about what they’ve done in chambers? They are meant to “protect confidential and sensitive information and the deliberative processes of the federal judiciary.” God forbid the public and litigants know what judges are thinking! Wait, aren’t they supposed to tell us their reasoning and share their thought processes in published opinions?

Apparently not. Sure, we took Fed Courts too and understand the deliberative privilege and importance of ensuring draft opinions don’t see the light of day. But, we’d argue that the sensitivities involved in protecting a properly functioning judiciary ought to be revisited when the question is whether one part of the judiciary skidded off the tracks.

Regardless, it seems Judge Rodriguez is so worried Jones might actually say something, anything, about what happened that on Aug. 27 he announced he is going to personally oversee Jones’ deposition to make sure he doesn’t accidentally leak what brand of coffee capsules he used to brew. Why not just designate himself as the only person that can ask questions? Even better, he should just appoint himself as Jones’ agent to answer all the questions, on behalf of the judiciary.

It’s ironic that the Jones “informal interview” kerfuffle was prompted by the U.S. Trustee complaining about the interview to Judge Rodriguez. As best we can figure, the UST – which has generally been on team “open kimono” in this fight – raised the interview as a chit in discovery fights, only to have Judge Rodriguez go Incredible Hulk in defense of the hallowed Judiciary Regulations.

We’d add too that this all feels a bit like shuffling deck chairs on the Titanic, given widely reported federal criminal investigations into what we here at Reorg have settled on calling JonesGate.
Perhaps one day Judge Rodriguez will regret having decided not to hand over this bundle of filthy laundry to a district judge for laundering. That decision left those of us trying real hard not to be cynical scratching our heads.

It sure seemed like a decision based on the district court potentially being less willing to whitewash the mess. We won’t ever know – judicial privilege again! – but, charitably, maybe Judge Rodriguez was a bit worried about the Fifth Circuit’s apparent willingness to let this play out on the merits and wanted an extra level of appellate deference before things get to the baddies in New Orleans.

Certainly some of the parties involved in cases in the Houston court seem to be getting impatient with the Top Secret baloney: On Aug. 19, a Sanchez ad hoc group led by Apollo and Fidelity indicated they would like to add some real (read: monetary) heft to the U.S. Trustee’s efforts. Giving the UST and some pro se schlubs the Mushroom Treatment is one thing (god knows Jones didn’t ever give the UST the time of day), but Judge Rodriguez may find it tougher to keep the big-money players the Houston court really cares about (that’s you guys!) from finding out what happened in their sandbox.

This Bird Has Flown

Every once in a while we like to remind you that bankruptcy judges are absolutely brilliant at working around and even flat-out ignoring precedent from higher courts, including the U.S. Supreme Court. Usually we don’t get a great example of this just over a month after the higher court decision. Yet that is exactly what happened in the Bird Global case: On July 29 Judge Corali Lopez-Castro issued a decision “distinguishing” the June 27 Purdue Pharma decision prohibiting nonconsensual nondebtor releases in a way that could gut the high court’s decision entirely.

The Purdue ruling created a big problem for the Bird Global debtors: Their April 30 liquidating plan seemed to provide nonconsensual releases of tort claims against the asset purchaser, insurers and municipalities that allowed the company to leave what some Bird fleet managers have said were “near guaranteed to fail” electric rental scooters in ditches and on street corners. When she conditionally approved the disclosure statement, the judge warned the debtors they would have to reckon with an adverse decision in Purdue.

Tort claimants and the UST duly objected to the nondebtor releases on May 31, and the debtors responded with an amended plan on June 4 that upped the nondebtors’ total contributions to a tort claimants’ trust to $19.2 million. The amended disclosure statement included a specific Purdue warning:
 

Well duh. The class of tort claimants rejected the plan, setting up a confirmation fight. After a two-day trial, on June 12 Judge Lopez-Castro took the plan under advisement. Among other things, at trial the debtors presented evidence they say demonstrated that the $19.2 million would be sufficient to pay all of the tort claims in full.

Specifically, the debtors’ witnesses testified that “348 personal injury claims against Bird were settled from 2018 to 2023 – the entire life of the prepetition business – for $12.7 million.” Hey, $19.2 million is more than $12.7 million! Easy-peasy. Sure, the claimants asserted more than $100 million in damages, but those claims were “not tempered” by any analysis of liability, comparative negligence or other defenses that may be available.

Instead, the claimants simply demanded what they thought they were owed, under penalty of a $500,000 fine for filing a false claim. Those rascals didn’t even deduct for the debtors’ defenses! Counsel for the debtors admitted that their own evidence rested on “some level of speculation.” Maybe they should have actually filed a motion to estimate the total amount of the tort claims and, you know, followed the right procedure to mitigate that, but anyway.

The tort claimants called the debtors’ claims analysis “full of errors,” pointing out that the debtors’ witness on the issue failed to actually review any medical records or police reports or conduct any analysis of liability or damages for the specific claims asserted. Further, the claimants said, the witness relied on his “gut feeling” instead of a “true sample of claims.” Again: this would usually have to be done in a proper estimation proceeding.

Counsel for the insurers made the usual pre-Purdue arguments: If the releases were not approved, the insurers would bail, and the “vast majority” of tort claimants would “walk away with nothing” because “years and years of litigation” would ensue. Concern-trolling for tort claimants is certainly nothing new in nondebtor release cases – goodness knows the Sacklers (and the Purdue dissent) played the tort system “lottery” card.

Then the Supreme Court unequivocally banned nondebtor releases in the Purdue opinion. Well, that solves that, right? According to the high court’s majority decision, bankruptcy courts lack statutory authority to impose nondebtor releases on dissenting tort claimants. Whew, problem solved!

You would think the bankruptcy judge would appreciate that her decision just got a whole lot easier, but nah: She ordered the parties to file supplemental briefs on the impact of Purdue. The debtors and released parties then came up with a new theory: The plan actually does not include any nondebtor releases. No, silly people, the plan provides for a grand settlement of estate claims against the insurers and municipalities and the insurers’ and municipalities’ contingent and unliquidated indemnification claims against the debtors!

As part of that settlement, the plan proponents argued, the plan merely channels the tort claims to the trust – the claims still exist, see! The tort claimants just can’t bring them against the insurers or the municipalities, or ever recover more than $19.2 million in the aggregate. Totally different from Purdue.

The municipalities argued that “the Settlement and the Plan do not discharge claims of third parties – they simply provide the exclusive mechanisms for liquidation and payment of those claims by and through a compromise of controversies which maximize the value of property of the estate as augmented by contributions of the settling parties.” Oh, what a relief! Why are the claimants even objecting, then?

This is of course pure sophistry. The Purdue plan also involved a settlement of the estates’ potential fraudulent transfer claims against the Sacklers – the difficulty of recovering on those claims, thanks to the Sacklers’ contribution of the looted billions to offshore trusts, was the key issue at confirmation. The plan also resolved the Sacklers’ indemnification claims against the debtors. And the opioid claimants were also forced to assert their claims against a trust, with no further right to pursue the Sacklers.

That is exactly what happens in every single nondebtor release case. Yet the Supreme Court found the existence of a settlement of estate claims and liabilities totally irrelevant to the ability of the bankruptcy court to impose nondebtor releases on the opioid claimants. How can Rule 9019, which authorizes bankruptcy courts to approve settlements of estate claims, possibly provide the statutory authority the Supreme Court found lacking?

For some reason, the U.S. Trustee for the Southern District of Florida agreed with the proponents, asserting that Purdue did not “limit the ability of debtors to settle estate causes of action or dispose of estate assets.” Yeah, but is that all that is happening here? The UST made clear it was not objecting to confirmation on Purdue grounds because it “understands the channeling injunction contained in the Second Amended Plan” was “limited in its effect to the disposition of an estate asset” and did not “purport to resolve the independent, non-derivative claims of third parties.” Am I taking crazy pills?

The proponents also argued that Purdue is inapposite because it proposed a plan that would pay the tort claimants in full. At least that argument has some support in the Purdue opinion itself: The majority did say they were not opining on a plan “that provides for the full satisfaction of claims against a third-party nondebtor.” But: as we detailed above, there seems to have been a pretty serious dispute over whether the $19.2 million is sufficient.

Keep in mind that Rule 3001(f) of the Federal Rules of Bankruptcy Procedure (if they can use the rules, so can we!) provides that a filed proof of claim is prima facie valid. Under section 502 of the Bankruptcy Code, claims are presumed valid until a debtor objects (or seeks estimation). Bird Global did not do that. Instead, it presented some evidence at confirmation, and the claimants poked holes in that evidence. This is not how a court is supposed to determine whether a class of claimants is unimpaired.

And this wouldn’t be the first time “full payment” at confirmation ended up meaning “less than full payment many, many years in the future.” Remember how the PG&E plan was supposed to pay all wildfire claimants in full? Yeah, about that. As of July 31, four years after the PG&E fire claimants’ trust was formed, the trustee has distributed $12.66 billion on $19.54 billion of allowed claims, or approximately 64.8%. Turns out the $13.5 billion agreed estimation – yes, they did an estimation proceeding, in the district court – of allowed fire claims at confirmation seems to be off by just a tad.

But don’t take our word for it – check out an article by David Kuney, formerly of Sidley Austin and now at Georgetown Law, who wrote about “full pay” plans as a nonsensical rationale to avoid Purdue in the ABI Journal. We thought the whole point of academic gigs was to have summers off. Kuney notes that the same issue is heading for circuit court treatment in the context of the Boy Scouts cases.

The debtors also argued that their plan was different from Purdue because the settlement was structured as a “sale” of the insurance policies to the insurers for their trust contribution under section 363 of the Bankruptcy Code. “Purdue did not rule on, much less disclaim, settlements under Rule 9019 and sections 105 and 363, including settlements with a bar order. The Supreme Court only ruled on whether non-consensual, third-party releases may be provided in the specific context of a plan of reorganization and only with respect to section 1123(b)(6).”

There is a simple reason Purdue only rejected section 1123(b)(6) of the Bankruptcy Code as possible statutory authority for the releases: That is the only statutory provision the Purdue proponents advanced for the releases. They did not cite section 363 because it makes no sense – section 363 says nothing about nondebtor releases. It allows the debtors to sell assets free and clear of claims against the debtors.

Are the Bird Global debtors so much smarter than the Purdue debtors and their army of extremely high-priced lawyers that they spotted some foolproof way around the nondebtor release issue that never occurred to said high-priced lawyers? All Purdue needed to do was have the Sacklers sell their indemnification claims against the estate under section 363 in exchange for their trust contribution, and boom – all good?

Apparently yes. Judge Lopez-Castro concluded in an oral ruling on July 29 that the insurer releases did not implicate Purdue and, given the “broad” indemnification claims held by the nondebtors against the debtors, approval of the nonconsensual nondebtor releases in the plan was the “right” result. The debtors’ proposed channeling injunction and bar order is part of a settlement with the insurers and is part of a section 363 sale of the insurance policies, the judge said, and the debtors were not relying on section 1123(b)(6) as in Purdue. Also, Purdue did not deal with claims that would be fully satisfied, the judge said.

The judge’s supplemental order doubles down on the certainty:
 

Again: the Supreme Court concluded that the Sacklers’ indemnification claims against Purdue were totally irrelevant to the court’s authority to discharge nondebtors’ claims against the Sacklers. Footnote 7: “[B]ankruptcy courts have a variety of statutory tools at their disposal to disallow or equitably subordinate any potential indemnification claims the Sacklers might pursue.” That’s it.

The Supreme Court was not unequivocal in its conclusion that the Bankruptcy Code – not just section 1123(b)(6) – when viewed in its totality barred nonconsensual nondebtor releases. Addressing Purdue’s policy arguments: “So, yes, bankruptcy law may serve to address some collective-action problems, but no one (save perhaps the dissent) thinks it provides a bankruptcy court with a roving commission to resolve all such problems that happen its way, blind to the role other mechanisms (legislation, class actions, multi-district litigation, consensual settlements, among others) play in addressing them.”

Yet here we are: A bankruptcy judge just ignored all of that. But hey, Judge Lopez-Castro also said she “struggled” with the decision and “appreciates” the tort claimants’ desire to, you know, pursue their rights in real courts with jurisdiction and juries and stuff. ALL BETTER!

But Judge Lopez-Castro’s decision seems to be reaching a receptive audience on appeal. On Aug. 21, U.S. District Judge Rudolfo A. Ruiz II denied the claimants’ motion to stay the confirmation decision pending appeal, concluding that the bankruptcy judge was right. Judge Ruiz basically repackaged the Purdue dissent – with all the foofaraw about the UST just ruining this beautiful settlement and concern-trolling for the tort claimants – into a majority rule. The claimants’ stay requests “hijacked” the confirmation and effectiveness of the debtors’ plan, Judge Ruiz said, and any further delay would cause harm to the debtors and creditors, most notably the tort claimants.

As a result, unless the Eleventh Circuit stays confirmation the plan will be substantially consummated, effective appellate review will be denied under the doctrine of equitable mootness, and this dubious decision will stay on the books – and proliferate through the draft confirmation briefs and form banks of every debtors’ counsel. We’re concerned about saying this out loud lest the debtor-friendly judges find out, but: the Bird Global “exception” would completely swallow the rule from Purdue. There are always indemnification claims and estate claims against the released parties that can be settled, and you can always structure the settlement as a section 363 sale.

Getting a full-pay plan ruling is more difficult, but again – Judge Lopez-Castro made the full-pay finding on a scant record and outside the prescribed procedures for determining claims in bankruptcy (claims objections and estimation).

Once again, bankruptcy courts appear to be building a highway through an inconvenient neighborhood and daring the powers that be to knock it down, Robert Moses-style. But don’t worry, the Supreme Court will probably get back to the issue in 20 years or so – after “extraordinary” Rule 9019 nondebtor releases have once again become “standard” practice.

DSG Tries Again

“There are no layups in my court,” Judge Christopher Lopez insisted back in April in the Robertshaw liability management dispute. “Read my decisions – sometimes a plan is confirmed, sometimes cases get converted.” We managed to find a couple examples of debtors not getting their way in Judge Lopez’s court – Robertshaw would not be one of them! – including his decision directing the Diamond Sports Group debtors to pay MLB teams their full telecast rights fees. Now, the DSG cases seem to be setting up to truly test the Houston judge’s ability to bend over backwards for debtors.

When Judge Lopez issued his MLB rights payment decision in June 2023, we suggested that the only hope for Diamond Sports Group to reorganize would be a lottery-ticket recovery on the debtors’ litigation claims against former parent Sinclair Broadcast. When the debtors managed to secure a $115 million investment from and streaming partnership with Amazon and a $495 million settlement with Sinclair in January, we admitted we might have been wrong about the company’s prospects – though we also noted the debtors still had a lot of work to do to secure new agreements with league partners and distributors.

“All of this will probably get worked out in the end, either via negotiation or the well-established preference of bankruptcy judges for whatever debtors decide to call a ‘restructuring’ over scary, scary liquidation,” we predicted. And lo, it has come to pass – though what the debtors have decided to call a restructuring has gotten even more questionable.

According to media accounts, the Amazon deal is now kaput. And those negotiations with the teams and distributors weren’t exactly a slam dunk. Several distributors agreed to carry the debtors’ regional sports networks on a “fat” bundle, forcing consumers to take the RSNs to get the channels they really want – the secret to success in the broadcasting business – but Comcast balked, and on May 1 dropped the debtors’ RSNs – leaving MLB fuming and the NBA and NHL concerned.

The debtors came to some kind of agreement with Comcast in late July, but whatever the terms – even debtors’ nemesis MLB wasn’t allowed to see them – the debtors’ bankruptcy process was left in tatters. At a hearing on July 24, the first lien group announced that it no longer supports the debtors’ proposed plan based on the Amazon/Sinclair deals, three months after the disclosure statement was approved. According to the debtors, the first lien group now insists on payment in full, in cash, up to limits agreed in the January restructuring support agreement.

The loss of the Amazon deal and the first lien group’s heel turn made confirmation and emergence by the beginning of the NBA and NHL season in October impossible, so the debtors had to cut bruising deals with those leagues and the first lien group to buy more time.

The debtors tried their best to depict the new agreements with the NBA and NHL as “building blocks” toward reorganization, but the modified contracts are really “building blocks” toward a longer chapter 11 case. The league deals secure the debtors’ ability to broadcast a single season – allaying the leagues’ uncertainty for the coming year – while trying to secure a plan deal with the first lien group to survive beyond that.

There is little difference between those deals and the temporary cease-fire with MLB in February – really, there is little difference between those deals and the wind-down agreements with the NBA and NHL all the way back in November 2023, before the Amazon/Sinclair agreements “saved” a going-concern restructuring. There is some promise of extended terms if the debtors successfully confirm a plan and emerge by April 1, 2025, but we have to assume those are not friendly terms for the debtors, considering their extremely weak leverage with the leagues at this point.

The deal to buy time from the first lien group – in the form of a modification to the junior DIP from out-of-the-money junior funded debtholders – essentially gives the debtors until Nov. 15 to decide to liquidate or come up with a reorganization plan that pays the first liens in full up to a $647 million RSA cap. If they fail, then the debtors would have to immediately pay the first liens $215 million in cash from the Sinclair settlement, on top of the $350 million paid from the junior DIP proceeds and adequate protection payments to that point.

So, either the debtors confirm a plan that gets the first liens to $647 million (including the $350 million DIP payoff and adequate protection payments) on the effective date, or they get the first liens to $637 million (including the $350 million DIP payoff and adequate protection payments) by mid-November. That scuffling sound you hear is the frantic reshuffling of deck chairs.

Of course Judge Lopez approved the new buy-time deals earlier this week. And we remain convinced that he will confirm whatever jerry-rigged plan the debtors come up with rather than putting a bullet in this dying business in a dying industry and converting this turkey to chapter 7. What justification? Saving some jobs, maybe – though most employees other than the executives would likely be immediately rehired to provide the same services for whoever takes over broadcasting the games. Someone has to operate the strike-zone box.

More likely Judge Lopez would be motivated by another Robert Moses classic, the sunk-cost fallacy. The longer a failing business that should be liquidated remains in bankruptcy, accruing massive professional fees and clogging up the court’s docket, the more painful it is to pull the plug. No doubt the argument at confirmation when MLB contests feasibility – because MLB wants the rights back and has a plan to eventually make money off them, rather than holding them hostage and prolonging the agony for some imagined RSN renaissance – will be “but we’ve come so far!”

But assuming Amazon stays on the sidelines and no one else steps in to bail the RSN model out, it seems to us that if this dumpster-fire of a company, which has been using the bankruptcy process to hang on to broadcast rights it cannot effectively monetize for years now, does not deserve a trip to a farm upstate, then what debtor would ever deserve liquidation? Remember: Reorganization of viable businesses is just one of the goals of bankruptcy – and reallocation of valuable assets from nonviable businesses is another.