The 2020 bankruptcy reorganization of JC Penney is facing renewed scrutiny after revelations of a personal relationship between then-Chief Judge David Jones and a partner at a law firm frequently appearing in his court. A group of bondholders, led by Eric Moore and Barnett Capital, has moved to challenge the restructuring, alleging improprieties that unfairly benefited select creditors.
Key Allegations
Moore and Barnett Capital, holding over $300 million in JC Penney bonds acquired post-bankruptcy, claim the restructuring was a “multibillion-dollar heist.” They argue the deal funneled control of JC Penney to H2 Capital Partners, Simon Property Group, and Brookfield Asset Management at the expense of other creditors and shareholders.
The contentious 2020 reorganization involved a $900 million debtor-in-possession (DIP) loan, which critics allege facilitated a low-cost takeover by the DIP lenders. The restructuring plan divided JC Penney into two entities:
- A retail operations arm led by Brookfield and Simon.
- A real estate holding company, “PropCo,” controlled by H2 Capital Partners.
Critics, including bondholders left out of the deal, argue that JC Penney had sufficient assets to repay creditors and leave equity for shareholders, a claim dismissed by the court in favor of the approved plan.
Scandal and Its Fallout
The personal relationship between Judge David Jones and Elizabeth Freeman, a partner at Jackson Walker—a firm representing JC Penney during the bankruptcy—has become central to the controversy. Jones resigned from the bench in 2023 after confirming the relationship, which was reportedly known among Freeman’s colleagues during the case.
Implications of the Scandal:
- Justice Department Investigation: The DOJ is seeking to recover over $30 million in legal fees paid to Jackson Walker in cases overseen by Jones.
- Creditor Allegations: Moore alleges that the relationship influenced the court’s decision-making, citing comments from other attorneys who reportedly avoided challenging the plan to avoid antagonizing Jones.
Broader Impact
The JC Penney case is emblematic of broader concerns in high-profile bankruptcy proceedings, where DIP loans and insider relationships can skew outcomes. A 2023 analysis by economist Kenneth Ayotte estimated a 545% return on the DIP loan, raising questions about its fairness and the precedent it sets for future cases.
JC Penney has dismissed Moore’s claims as “inaccurate and illogical,” defending the integrity of the restructuring. However, the revelations about Jones and Freeman have prompted calls for a closer examination of the case and its outcomes.
As the scandal unfolds, it highlights the need for greater transparency and accountability in bankruptcy courts, particularly in cases involving significant public interest and economic impact.
