THE RABBI’S SON
Bankruptcy lawyer David Friedman on tough cases, humorous deal toys,
and how to handle power brokers like Carl Icahn and Donald Trump
INTERVIEW CONDUCTED AND EDITED BY ERIK LUNDEGAARD
David M. Friedman, who heads the bankruptcy
group at Kasowitz, Benson, Torres & Friedman,
almost became a rabbi. Instead he opted for the
law, and, over the last 30 years, has represented
individuals such as Carl Icahn and Donald
Trump, companies such as Borders, and various
committees in the Chapter 11 filings of Adelphia
and Enron. We spoke with him in June.
Q: Is there a huge upswing in demand for
bankruptcy lawyers during tough economic
times like these?
A: We tend to be about as busy from one year to
the next. While there are certain years in which
bankruptcy filings may increase, some of these
cases can last two or three years. So it tends to
flatten out over time because even in a year when
there’s nothing, you’re still completing the work
on cases that might have been filed a couple of
years earlier.
Right now the amount of Chapter 11 filings are
down—even though the economy is certainly not
doing well—because, until recently, there’s been a
favorable high-yield bond market so people have
been able to refinance their debts relatively easily.
It’s usually the liquidity markets, the capital markets,
that drive filings. When money is tight you see a lot
of filings. Just recently, the last six months or a year,
there was money out there to refinance, there’s a
large appetite for high-yield debt, so people were
able to refinance some of their problems. That may
change. It changes all the time. But if you just want
to look at the last few months, probably not the
busiest time for bankruptcy lawyers.
Q: How do cases come to you?
A: Different ways. The Borders case was one in
which we were invited to meet the management
by the company’s chairman, who, years ago, was
the chairman of Western Union. I had done the
Chapter 11 for Western Union, maybe 16 years
ago, but we had successfully reorganized Western
Union, it was a good outcome, he had good
feelings about us, we had done some other things
for him. That’s how we began that relationship.
Q: What percentage of Chapter 11 filings wind
up with the company surviving?
A: As an overall percentage, I would say 25
percent of companies that go into bankruptcy
will emerge in a healthy way. Most of those are
the biggest companies. But you have to look at
it across industries. Certain industries are more
challenged than others.
The financial services industry? I would say
100 percent of them die. Because there’s no way
you can continue to garner any kind of customer
confidence while you’re in bankruptcy. Lehman
Brothers filed for Chapter 11 but it died. It’s in the
process of liquidating. Every other significant
[financial services company], Drexel, a lot of the
mortgage companies that went bankrupt over the
last couple of years, Thornburg, they just liquidate.
Then the next most risky business, I would
say, is probably retail, because it’s very hard to
get trade credit in bankruptcy if you’re a retailer.
There’s a disconnect in the law between what the
law provides and what retailers need. Retailers,
almost all of them, lease their stores. Borders
has 600 stores and they lease them all. The law
basically gives retailers about nine months to
make a decision about whether or not to accept
or reject their leases. Nine months is usually
not enough time to make that decision because
vendors, and almost every retailer, lives and dies
on trade credit, and the suppliers are almost
always insistent upon making sure that the
retailers are on solid footing. In order to make
sure they’re on solid footing, they almost always
need to see how they perform in the fourth
quarter. Now retailers often file in the first quarter,
because that’s when they have the most liquidity:
They’ve sold off their inventory in December, they
have liquidity in January, and they want to get
enough of a runway, so typically they will file in
the first quarter of the year. The law doesn’t give
them enough time to get through Christmas.
Q: Any chance for a change in the law?
A: Nope. It’s not on anybody’s plate on Capitol
Hill. There’s no debtors’ lobby, but obviously
there’s a strong landlord lobby, and …
Q: And whoever has the lobby, wins.
A: Exactly.
Q: Do you tend to represent one side in
bankruptcies more than others?
A: I tend to represent bondholders more than
debtors. I’m glad I get to do both because things
get too boring when you’re on the same side.
Q: When a client brings a case to you, is there
something you look for—particularly if you’re
hoping to save the patient, as it were?
A: There are different types of cases that go
to different types of lawyers. Sometimes you
have these large bankruptcies that tend to be
corporate transactions—where the bankruptcy
is the vehicle by which the transaction is going
to get effected. A lot of times people don’t want
to acquire troubled companies unless they’re
run through a quick bankruptcy to clean out the
challenging liabilities.
Those are the kinds of cases we don’t get.
We tend to get the cases where there are real
conflicting agendas among the constituents. We
get the stuff where the client needs somebody
to be effective in court—to drive a particular
agenda—and defeat others.
