By David Thomas

Sept 11 (Reuters) - Houston-based law firm Jackson Walker said Thursday that it has agreed to pay $1.4 million to resolve a lawsuit seeking to recoup legal fees the firm was awarded by U.S. Bankruptcy Judge David Jones for its work on JCPenney's bankruptcy.

The settlement marks the latest fallout from the October 2023 revelation that Jones had an undisclosed romantic relationship with a Jackson Walker partner, which sparked an ethics scandal and cast uncertainty over the firm's fees in dozens of bankruptcy cases in the Houston court.

The JCPenney settlement, which requires court approval, is the largest of at least six pending deals Jackson Walker has reached with its former bankruptcy clients. The Old Copper Company, a legal successor to JCPenney that remains in bankruptcy after the company sold its name and assets, said Thursday that the two sides entered mediation in June.

The settlements, totaling more than $3.7 million, are pending before U.S. District Judge Alia Moses, who is also overseeing a legal effort by the U.S. Trustee, the U.S. Justice Department's bankruptcy watchdog, to force Jackson Walker to disgorge all of the fees it was awarded by Jones.

Spokespersons for Jackson Walker and the U.S. Trustee declined to comment. Lawyers representing Old Copper did not immediately respond to a request for comment.

Old Copper sued Jackson Walker earlier this year, alleging the law firm covered up the relationship between Jones and its now-former partner Elizabeth Freeman. The company sought the disgorgement of all fees Jackson Walker was awarded by Jones.

The U.S. Trustee has opposed earlier proposed settlements between Jackson Walker and its former clients, arguing that the deals would allow the firm to keep some of the fees Jones awarded while also skirting bankruptcy rules.

Two of the settling ex-clients pushed back on the U.S. Trustee's opposition in filings to the court last week. They argued that the U.S. Trustee can proceed with its own claims against Jackson Walker without holding up their own settlements.

"There is nothing in the settlement prohibiting the U.S. Trustee from continuing to pursue its relief against JW," Seadrill Partners said in one of the filings. Lawyers for Seadrill did not immediately respond to a request for comment.

The U.S. Trustee last month asked Moses to set a trial date in its case against Jackson Walker.

Jones was once the busiest bankruptcy judge in the U.S. and presided over the bankruptcies of JCPenney, Neiman Marcus, Party City and Chesapeake Energy, among many others. He resigned from the bench in October 2023 after admitting to sharing a home with Freeman.

(Reporting by David Thomas)

((D.Thomas@thomsonreuters.com;))