Interview with EOUST Director Lawrence Friedman
ABI: What new initiatives do you plan or have underway as the director of the Executive Office?
Larry: As you know, the number-one initiative of the program is civil enforcement. We are starting to see the results of it at all levels. In a nutshell, it amounts to cleansing the system of the abusers, so that honest debtors can get the relief they need efficiently. We have made significant progress, and the effort will continue to be refined as we go forward. In the first year we had $159 million in debts not discharged, fines and sanctions, and fees disgorged, reduced and withdrawn as a result of our civil enforcement and other efforts. We will continue to refocus our time and our energies in the area of civil enforcement to improve those results even more.
ABI: So you would characterize that as a strength of the current program that you hope to enhance during your tenure?
ABI: Are there other program strengths that you hope to build through new initiatives?
Larry: We will evaluate our statutory duties, such as oversight of trustees and our work in chapter 11 cases. We will take a fresh look at things that will make us more efficient and will enhance our objective, which is maintaining the integrity of the system by adding transparency to it and thus instilling more confidence in it.
ABI: You mentioned a fresh look. You come from a trustee background. How will that change the relationship that the Executive Office has with those that it supervises?
Larry: I would point out that one prior director and a number of U.S. Trustees, both past and present, were chapter 7 trustees as well. So I wouldn't say my background necessarily changes the outlook. It wasn't my objective to come here and put forth all the programs that I thought, as president of NABT (National Association of Bankruptcy Trustees), trustees should be entitled to. But my experience does bring a certain understanding and perspective. The insight that I can bring to certain issues may allow us to clarify and refocus the type of oversight that we perform.
ABI: If you had to create a bumper sticker for your term of tenure as director, what would it say?
Larry: I'd say, "Raise the Bar."
Larry: Well, we want to raise the bar that is the ideal standard of the profession, not just the standard of current practice. That phrase comes from a mantra I've been chanting for a long time, which grew out of trying to raise the bar in regard to the thoroughness and credibility of schedules. I think it applies to everything we do here. We want to raise the bar so that people are shooting to maintain the highest level of integrity possible. I don't think anybody argues anymore about whether the bar should be raised. The question now is how high should the bar should be set. I'm happy as long as people agree the bar needs to be raised; I'm less concerned about where they want to set it. I just want everybody working to raise it. It is something you can carry on and do a little more of each year and build on what you start.
ABI: Let's move on to some "hot button" issues within the program. Let's talk about appointment and reappointment of regional trustees. When the U.S. Trustee Program went permanent in 1986, wasn't it understood that trustees can expect to be replaced when there is a change in the administration?
Larry: I don't want to speak for what others perceived the understanding to be. By statute, U.S. Trustees serve a five-year term subject to the right of the attorney general to replace them, period. Former Attorney General Reno issued an order clarifying that U.S. Trustees are without civil service status.
ABI: I agree; as someone who was on Capitol Hill at that time, I remember the words "for cause" coming out of the statute. So, what is the nature of the appointment process for the current administration? What qualifications is the department looking for? Are there any political tests for office, for example?
Larry: My experience is that the attorney general takes very seriously the individual's qualifications and expertise to serve in these appointed positions. I like to pride myself by saying they did that with me. I didn't come from any background that had the ability to raise a lot of money, give a lot of money, support campaigns or anything like that. I did well in private practice, but not that well. So, I pride myself in thinking that when the attorney general appointed me, the department sought out who they thought was the best able to carry out their mandate for the program. They have done the same with regard to the appointment of U.S. Trustees.
ABI: What recent U.S. Trustee appointments have been made?
Larry: The attorney general's most recent appointment was Diane Tebelius in Region 18, who took office Dec. 30, 2002. Immediately prior to that was Ilene Lashinsky in Arizona, which is Region 14, and Mary May in Region 20, Wichita. In addition, Habbo Fokkena was appointed in Region 12, headquartered in Cedar Rapids; Nancy Gargula in Region 10, Indianapolis; Michael Bolen in Region 5, New Orleans; and Saul Eisen in Region 9, Cleveland.
ABI: And there are some U.S. Trustees in the regions that will be held over?
Larry: There are some that are currently serving under that portion of the statute that says that they serve until they are replaced.
ABI: The point is that there wasn't a wholesale replacement of every person that was in the middle of their term.
Larry: No, there has not been any wholesale replacement.
ABI: Let's move on to another area that gets into the issue of whether decisions are made in Washington on a national basis or are appropriately localized within the region. What is the office's philosophy on what issues should be decided by Washington?
Larry: There is no overriding policy that says we are centralizing anything. It's my belief that the Executive Office should serve as a place to set national policies, and to coordinate efforts throughout the program, because I think it's fair for anyone in the system to be able to have some degree of predictability with regard to whatever issue they are dealing with. In order to ensure or to facilitate that kind of atmosphere, it's necessary to coordinate certain things through a central office to the extent that we can be helpful and there are issues that can be dealt with in that fashion. It also makes us more effective and allows us to consolidate our resources. There are a number of issues that strike in different parts of the country at different times. Take bankruptcy petition preparers, for example. Some preparers are Internet-based while others physically move across district lines and travel the country. By being able to share information—again facilitating it through the Executive Office—we are able to let one region know what other regions are doing to address a problem. We can also target our litigation in a more comprehensive manner, instead of engaging in piecemeal efforts. Just like raising a family, you want some consistency, and you do that by sharing information.
ABI: How about the large public company cases that have been filed; how have they affected the Executive Office, and what changes have you had to make to try to deal with some of the issues that come up in the mega cases?
Larry: One of the things that we try to do in the mega-case area, and I assume now we are talking about the not-solely billion dollar cases, but multi-billion dollar cases, is to lend support. In certain instances, the Executive Office has assembled teams of professionals to support offices handling some of these mega-cases. For the most part, the major issues that we are involved in arise very early on in the case. We are pretty experienced in dealing with first-day orders, employment orders, committee formations and the other issues that typically come up in the first couple of weeks of a case. The other issues that linger involve the overall progress of the case, monitoring professional fees and reviewing the disclosure statement and plan.
ABI: Let's get into some of those areas. Let's talk about examiners first, examiners who have been appointed most recently in both Enron and WorldCom on the mega-case level. Is there a developing set of guidelines or protocol for when such an appointment would be appropriate?
Larry: It is very fact-specific. Any time you have a large public corporation where there are allegations or admissions of wrongdoing; there are going to be issues about current management, particularly insofar as the integrity of the process is concerned. That is precisely why Congress enacted 11 U.S.C. §1104. In administering the statute, we evaluate many factors including accountability, integrity, fair-dealing, cost-efficiency and how the case is realistically likely to proceed. In some instances, the appointment of an examiner achieves our goal; in other situations, another remedy might be more appropriate. What we want to do is make sure there is transparency, accountability and objectivity in the process.
ABI: Does the involvement of other regulatory agencies such as the SEC (Securities and Exchange Commission) impact that decision?
Larry: The Code requires that we consult with parties in regard to the appointment of a trustee or examiner, so of course we would consult with the SEC when it is involved in a case. Insofar as how other regulatory agencies affect our decision, we would take into account any concerns they raise, especially regarding coordination and duplication so the trustee or examiner would not inadvertently interfere with an ongoing investigation. To me, that's just common sense.
ABI: Let's talk about another issue that has come up in the bigger cases—that is the treatment of employees, retirees and those who have a claim for continuing health or medical benefits. With Enron, for example, the court approved a fairly significant payout to former employees well beyond their wage claim. Does the U.S. Trustee Program have a position on these matters, or is it all case-specific?
Larry: These matters are case-specific. The law imposes upon us a myriad of duties and obligations, and in order to do the job effectively, we have to pick our battles and use our resources wisely. If we don't weigh in, it is often the case that the issues are being adequately addressed by the parties most directly affected.
ABI: So if the parties agree, the U.S. Trustee isn't going to have an independent ground to object?
Larry: Of course not. Agreement among the parties has never foreclosed the U.S. Trustee from objecting if he or she thought it was necessary or appropriate to do so.
ABI: What about the flip side of the employee issue? That is the retention of key personnel as a company files for chapter 11. The financial packages that are being offered to executives that were in charge of the company on the way into chapter 11 have received a lot of attention, particularly vis-a-vis the claim of the now-former retirees and employees and the like. What is the view of the program on how to scrutinize those retention packages?
Larry: There is obviously some benefit in retaining someone who is critical to a company; to have them stay to shepherd the company through a reorganization. The issue becomes: What is the criteria for determining whether or not they really are key? The concern is that the exception becomes the rule. But there isn't a policy with regard to opposing key-person retention agreements. There is concern and resources are allocated to make determinations as to whether these exceptions are appropriate so that the case is soundly administered to benefit the creditors.
ABI: So, it is a case-by-case resolution?
Larry: Clearly, it is a case-by-case resolution.
ABI: But what criteria are evaluated to determine what side of the scale you come down on?
Larry: If someone has some unique expertise or if it's going to be grossly inefficient to start from square one with a new financial officer, and there isn't an allegation of wrongdoing about that officer, one could make the argument that the officer is a key person. What it comes down to is this: Will it be more efficient to bring somebody new in, or do you need that person to instill some credibility and continuity to ensure the success of the reorganization? Also, this is the type of issue where notice to all parties would be especially important since the lenders, stockholders, employees and creditors would all have the experience and therefore a special interest in participating.
ABI: How do you scrutinize fees when a case is national in scope? Is there a difference compared to smaller cases, and how do you determine that?
Larry: First of all, the analysis is the same. We don't perform our duties differently because a case is smaller or larger than another. We have the same obligation, which is the overriding objective we have been talking about throughout this interview. Second, fees have always been an enormous challenge for the bankruptcy system, dating back many years. But the magnitude of the fees we have seen in recent cases makes it more difficult to get control over and evaluate. As a result, in some cases, fees are being dealt with by fee review committees and in other cases by creditors' committees and fee-review firms. While the fees may be very high, the real question has always been, "What is the cost-benefit analysis?" Our program is trying to get a handle on how you do that analysis, how you get all parties involved in reviewing fees and what the test or tests ought to be.
ABI: Let's discuss indemnification and whether there is a national litigation campaign to assert a per se rule against indemnification. What is the U.S. Trustee position on indemnification?
Larry: In our view, there is no authority for indemnification, and there are serious practical issues with indemnification of professionals. We are challenging a number of these provisions. There have been courts that have ruled in our favor. In some cases, professionals have consented to relief, while in others, we have given some ground on our position. We are as interested as the industry in what the Third Circuit will have to say in the United Artists case and in how this area of the law develops.
ABI: Are you suggesting that your role here is more to clarify the law rather than to establish some particular legal position on indemnification?
Larry: Until we have some binding precedent on this issue, we will continue to seek clarification of the law on this issue. Our position reflects what we believe is best in terms of sound bankruptcy policy and administration. If the courts ultimately disagree, then we will enforce the law as interpreted by the judiciary.
ABI: We talked about trying to police the high fees in the biggest cases. You mentioned that there was a fee review committee in Enron. Is that an appropriate way to go in these big cases?
Larry: There is no easy answer to how best to police professional fees. I think all approaches should be explored within the confines of the law. Judge Gonzalez obviously thought a committee was appropriate. He should be commended for his interest in containing fees, and we'll see how it comes out.
Joe Guzinski: We have experimented with a number of different approaches: The fee committee was one Judge Gonzalez has done, [and] we've experimented with fee examiners and with electronic types of fee review. We are trying a number of different approaches. I know we haven't settled on any one that entirely seems to fit the bill for everything.
ABI: Let's talk about some consumer cases and consumer issues. We had a close call in terms of the final enactment of the reform bill that has been pending for six years. Obviously much of the bill is aimed at the 97 percent of the cases that are filed by individual debtors. There are many new responsibilities that would be imposed on the U.S. Trustee program in the bill. The first question is: How ready would the office be within 180 days to implement all of those new responsibilities?
Larry: If legislation were to come down, we would be ready. We have drafted implementation plans. They would need additional work, but I am confident we will be prepared to go forward within the first 180 days. It will, of course, require funding. Further, it will require close work with the Bankruptcy Rules Committee because the Judicial Conference is responsible for issuing many new and revised rules to implement the bill including, in particular, national forms for means testing. Until such time as the bill becomes law, we are continuing with our civil enforcement efforts to curb abuses. By doing so, I think we also put ourselves in a good position to implement the reform bill because there are many areas in the bill that can addressed by current law. I don't think anybody can argue that there is a sense in Congress that there needs to be some reform, and there is a sense that there should be more scrutiny and there is a sense that there are abuses that need to be dealt with. Our unit is responsible for how and in what form to do that. The law allows currently for a number of processes for dealing with those congressional concerns, and to the extent that they are already on the books we are going forward with refocusing our efforts to implement this civil enforcement initiative. As I mentioned before, it is having dramatic results.
ABI: What about requirements that are new to the bill, such as the requirement that your office certify debt or credit counseling services? That's not something that is currently done and would be a new requirement. How difficult a task would that be for your office to prepare?
Larry: It's a question of looking at a particular industry and doing what is necessary to instill confidence, add transparency and ensure integrity. We can and do apply these three key words to everything we do. It will not be easy, but I think it's perfectly feasible and we have a plan to do it.
ABI: You mentioned the amount recovered through the civil enforcement initiative and the fact that the number is so big and was produced within just a year. Does that give you a sense that those critics of the system in Congress, who say that the consumer bankruptcy system is too forgiving of debtors, have a point if this much can be retrieved under existing law through the civil enforcement initiative? In other words, do those who seek reform have a point, since this is money that, but for an aggressive civil enforcement initiative, would have been uncollected by unsecured creditors?
Larry: Clearly there is a point to be made that there is money to be recovered through enforcement of the law. I think the debate in Congress is do we want to change the law, and what is the best way to ferret out the abuse, streamline the system and get the honest debtors through. We will enforce whatever law Congress puts on the books and we will get results because there is fraud and abuse in the system.
ABI: What is your estimation of the level of that fraud and abuse?
Larry: I can't put a number on it. We are attempting to measure the effectiveness of our efforts, and will put those results together with a report of significant accomplishments that we started this year. I'll be anxious to work with ABI and others to get the word out as to what those numbers are and what they mean. Something we haven't talked about is that I will be hosting some director's symposiums down at the National Advocacy Center. This would provide a useful forum to exchange ideas on topics such as this.
ABI: Do you have a prediction on the fate of the legislation in a new Congress?
ABI: If your office had a wish list for things to include, what would be the top few items?
Larry: There is a short list of some very specific things that I think could be done to further enhance our civil enforcement efforts and would be wonderful for cleaning up the system. We may soon go forward with some proposals to the Bankruptcy Rules Committee. It's an opportunity to put forth our positions. Unfortunately, it would be premature for me to discuss them right now.
ABI: Let's ask it this way. Are you satisfied that the existing law and procedures that you have in place are adequate to address consumer fraud and abuse of the bankruptcy system?
Larry: I'm comfortable that the program is positioned well to enforce the laws that are on the books and to enforce those laws that may come down the road. There is a problem with fraud and abuse in the system. It is not merely perceived, as some would have you believe; it is not infinitesimal. It is worthy of being dealt with, but how and when? The answer is for me, as head of this program, to use the resources at our disposal to best apply the law that's in effect today, and if that changes, we'll work with the laws as amended.
ABI: I'm curious about the efforts to try to ensure that debtors pay what they are able to pay and whether or not the office's approach is moving toward the more objective means testing that's similar to what's in the bill now, or is it a more subjective basis like you see in court decisions now? Is the civil enforcement initiative moving close to the objective means-testing that would be the effect of the bankruptcy reform act?
Larry: I would say that the civil enforcement approach that the program is taking is wide-ranging and being dealt with in many different ways. Let me give you some examples. Many of our offices are reviewing most, if not all, of the chapter 7 petitions filed in the bankruptcy system today. In order to flush out the best way to deal with the issues that arise based on that review, we have let each of the offices develop civil enforcement plans that address the concerns they have in their area. All of them are identifying slightly different issues; it's kind of a search now for the best-practices approach based on these varying approaches. In Brooklyn, for example, they reviewed every chapter 7 with very basic criteria that involves high unsecured debt levels. Based on their screening criteria, they came up with a large number of petitions that raised questions, and when those inquiries were made, the results were dramatic. Now, this gives me an opportunity to tell you one other thing. This is not a "gotcha" kind of a program. We are not out there looking for problems so we can say "aha, we gotcha." That is not the issue. The issue is to change the behavior. And you can do that in a number of ways. We'd like to think that our people pick up the phone and call debtor's counsel to say that there are some issues that we would like to have clarified. If the discussion results in a conclusion by the parties that maybe they filed under the wrong chapter, or maybe the case ought to be dismissed and we get that result, then that's a win. If necessary, we'll go to court. Of all the pleadings we've filed in the last year, we are on average winning 90 percent or more of them. So we are picking our battles, we are making sure that our facts are right and then we are aggressively pursuing the results. Compliance and consent is one way, litigation is another way. In addition, part of our efforts have been to prepare our attorneys. We're honing and refining their litigation skills so they can go forward with this process. I can tell you again, the results are dramatic and they show we are achieving tangible results. I look forward to the program's civil enforcement initiative going forward in the years to come, refining our efforts and being able to capture and report those results.
ABI: In the consumer area, to what extent do you perceive the behavior patterns and problems to be—attorney-based vs. debtor-based?
Larry: That's a good question. They both exist. For example, the level of sloppiness that exists in schedules in general is an area of concern. As an attorney, you could not appear in district court before an Article III judge and make arguments that support inaccurate documents. Why should we accept that level of practice in the bankruptcy system? We should adhere to the same standards that apply to attorneys who practice before the federal district court and be subject to Rule 11 sanctions. That's my issue.
ABI: The issue of petition preparers has been a major issue in some parts of the country and not much of an issue in others. Could you speak to the office's approach to the petition-preparer problem? How big is it? What are you doing to address it?
Larry: It does fall within civil enforcement. In some areas, like Los Angeles, petition preparers are a large part of the practice. There are serious issues of consumer protection, fees and the rendering of legal advice. Some of those are state issues with regard to the unauthorized practice of the law. However, the program has taken on some of the more egregious problems that have come up. There have been a couple of very significant decisions that have come down. For example, in a case out of Idaho called In re Doser involving a franchisee of We the People, the court found that certain acts by the franchisee constituted the unauthorized practice of law and amounted to a deceptive and unfair practice under 11 U.S.C. §110. There are other issues pending against We the People and other petition preparers. There was an Internet company that sold clever tips about bankruptcy, suggesting how people could avoid putting Social Security numbers on their petitions and thereby escape having the bankruptcy reported on their credit report, and how they could solve most of their problems by filing bankruptcy to get the benefit of the automatic stay and then let the case be dismissed. There have been some very humorous subjects that have come up too. One that comes to mind is where we went after a petition preparer who was disbarred from the practice of the law as a bad practitioner. When he then set up shop as a petition preparer, we went after him because his fees were too high, and his answer was "I ought to get more money because I used to be a lawyer, after all." Bad petition preparers represent a large problem, and we are addressing it and getting very good results.
ABI: A major consumer issue right now is identity theft. To what extent are social security numbers being reflected inaccurately on petitions, and what efforts can be undertaken there to try to insure the accuracy?
Larry: Last year we identified 8,005 cases of inappropriate or wrong Social Security numbers, I'm not saying they were all fraudulent or even a significant number were fraudulent. But they were wrong, and a number of those belonged to innocent people who might have had their credit impugned as a result of those errors. That's a significant number, and if I can do something to fix that, I will. We instituted a national debtor I.D. program about a year ago. Debtors are required to produce a Social Security card or proof of their Social Security number along with a photo I.D. at the §341 hearing. We require the private trustees to look at every one of them and report to us any problems. We found a surprising number of errors. Some of them are blatant and intentional and those are dealt with pretty swiftly and severely. For others, we make sure the bankruptcy record is corrected and that credit reporting agencies are notified. There is good cooperation among law enforcement with regard to the debtor I.D. program.