Interview with EOUST Director Lawrence Friedman

Editor's Note:

ABI
Executive Director Sam Gerdano interviewed Lawrence A. Friedman, the director
of the Executive Office for U.S. Trustees. Joseph A. Guzinski, general counsel
of the EOUST, and Prof. G. Ray Warner, ABI's resident scholar, also
participated.

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and sanctions, and fees disgorged, reduced and withdrawn as a result of our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?

Larry: Yes.

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."

ABI: Explain.

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?

Larry: No.

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.