The federal judge overseeing GWG Holdings' bankruptcy case has been removed because of his professional relationship with embattled former U.S. Bankruptcy Judge David R. Jones, a decision the chief bankruptcy judge attributed not to the GWG judge's "own actions," but to Jones's "abuse" of judicial authority.

U.S. Bankruptcy Court for the Southern District of Texas Chief Judge Alia Moses on Monday agreed to recuse U.S. Bankruptcy Judge Marvin Isgur from the Chapter 11 proceedings, noting the case is "one of many tainted by the undisclosed intimate relationship" between Jones and former Jackson Walker LLP partner Elizabeth Freeman.

GWG bondholders had asked the chief judge to recuse Judge Isgur from the case, arguing the judge had allowed Freeman to continue to be GWG's wind-down trustee even after her secret relationship with Jones — and her alleged scheme to secure millions of dollars in attorney fees — came to light. GWG is now shuttered.

In Monday's order, Judge Moses said the true extent of the "relationship and scheme continues to become known," and thus it's necessary for the court "to act to avoid actual impropriety and the appearance of impropriety." Sometimes judicial officers must be recused to avoid that appearance even if the court doesn't question that judge's impartiality, the chief judge said.

"The court finds such a recusal necessary here," she said.

According to Judge Moses, Jones directed every complex Chapter 11 case filed in the district to be assigned to either him or Judge Isgur. Jones and Judge Isgur used to be colleagues, she said.

"Unbeknownst to Judge Isgur, this assignment was part of the Jones-Freeman scheme," Judge Moses said, referring to the GWG case. "Judge Isgur now faces a professional conundrum, not because of his own actions, but because Jones abused the judicial authority entrusted to him."

She continued, "While this court believes Judge Isgur to be impartial, Judge Isgur's professional history with Jones is enough for a well-informed, thoughtful and objective observer to harbor doubts about his impartiality."

GWG bondholders have sued Jones over the secret romance, which was revealed in 2023. The company filed for bankruptcy in 2022 with more than $2 billion in liabilities, while also facing scrutiny by the U.S. Securities and Exchange Commission for its business practices. They said the Jones-Freeman scheme affected the restructuring.

Meanwhile, Jones has argued the bondholders are complaining about official actions he took while mediating the case, and his role entitles him to nearly insurmountable judicial immunity. Freeman, for her part, argued that her relationship with Jones was unconnected to her work for GWG's wind-down trust and said removing her from the case would impede her almost-completed work and creditor payments.

Judge Isgur has worked as a federal bankrupty judge since 2004. He's overseen the GWG case since its inception, according to Monday's order.

In their recusal motion, the GWG bondholders said Judge Isgur had a "close personal relationship with Jones and to some lesser extent, Ms. Freeman."

"Unfortunately, the imprints of malfeasance by Judge David Jones and his long-term, live-in girlfriend, Elizabeth Freeman, along with her former firm, Jackson Walker, permeate the docket," the bondholders said.

The U.S. Trustee's Office has also sued Jackson Walker looking to claw back $23 million the firm earned in fees from bankruptcy cases it handled in Jones' courtroom. While the office has not explicitly accused the firm of exploiting the relationship for nefarious purposes, it has said the failure to disclose the relationship is enough to void any fees tied to it.

Several other lawsuits have also accused outside firms of using Freeman and Jackson Walker to obtain preferential treatment from Jones.

On Tuesday, the former chief executive officer of Texas financial services firm Beneficient was arrested and charged with creating a fraudulent scheme to loot more than $150 million from GWG, for which he served as chairman. Bradley Heppner was charged with securities fraud, wire fraud, conspiracy to commit securities fraud and wire fraud, false statements to auditors, and falsification of records, according to a New York federal grand jury indictment unsealed Tuesday.

Heppner and others stole funds from GWG through the use of a shell company he controlled called the Highland Consolidated Limited Partnership, or HCLP, prosecutors said.

Judge Isgur couldn't be immediately reached for comment late Tuesday, and counsel for the bondholders didn't immediately respond to a request for comment.

The bondholders are represented by Mikell A. West and Robert W. Clore of Bandas Law Firm PC, and Shelby A. Jordan of Jordan & Ortiz PC.

The case is In re: GWG Holdings Inc., case number 4:22-bk-90032, in the U.S. Bankruptcy Court for the Southern District of Texas.