The Rabbi’s Son

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.

These laws were changed in 2005. I don’t think Congress knew what they were doing when they did this, but they created some real, real changes.

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.

Q: Is that going on in the Borders case?

A: Borders, we’re just trying to keep it alive. We’re totally focused on saving jobs. We’re fairly indifferent to who gets what—with Borders.

And that’s the right way to look at a debtor case. When you represent a debtor, you’re really trying to keep the enterprise afloat and get as much value as you can to as many people. Obviously if you can save jobs in the process, that’s great.

The agenda-driven work is more when I’m on the creditors’ side. Typically in a capital structure you have banks, you have bondholders, you’ve got trade creditors, you’ve got subordinated bondholders, you’ve got equity, sometimes you’ve got preferred equity and common equity, and, you know, there’s not enough money to go around and everyone’s fighting with each other. In those circumstances, it’s a zero-sum game. So every dollar that goes to side A is a dollar less to sides B through E. In that environment, it requires a much more strategic and agenda-driven approach. That’s probably what we do more than anything else.

Q: And you have to be tough.

A: I think you have to be tough. But not obnoxious.

Q: You’ve represented some serious powerbrokers: Carl Icahn, Donald Trump. How do you handle them?

A: You have to give it to them straight. Successful people, especially those who have succeeded individually, tend to, like most people, surround themselves with people who tell them what they want to hear. You can’t be one of those people. You’re not serving your client if you just tell them how smart they are and how they’re always right. So I deal with them the way I deal with all of the other clients: I give them my best advice, I expect them to follow it, and if they don’t want to follow it, I tell them why they’re wrong.

Frankly, I’ve found that almost all clients appreciate that. That’s what they’re paying for. You can really hurt a client, like a Donald Trump or a Carl Icahn, if you tell them what they want to hear.

Q: Any memorable reactions when you were basically telling truth to power?

A: [Pause] I’m trying to think what I can tell you.

Q: Anything amusing?

A: I will tell you, as a separate avocation, I do create some of the funnier deal toys around after these things are over.

Q: Deal toys?

A: You ever see those Lucite things that people stick on their shelves after they finish a case or a deal? Little souvenirs that people make?

Q: Not really.

A: A lot of times when a [corporate] deal closes, somebody will put out a tombstone, but in a Lucite block, to commemorate the event. Usually they’re pretty dry. I tend to put out pretty funny ones.

Q: Example?

A: Adelphia was a massive amount of different groups of people fighting over a finite amount of money. The capital structure was so Byzantine that basically there were multiple arguments that almost anybody could make to drive a recovery from one side to the other—probably six or seven different sides—and all the people who were fighting were fairly wealthy, successful hedge fund operators that were all Jewish guys. I feel I can make fun of Jewish guys because I’m a Jewish guy and the son of a rabbi. When we settled the case, when everybody finally agreed after four years of fighting, I put in the deal toy a scene out of Fiddler on the Roof, where all these Eastern European Jews were dancing together at the wedding. That was commemorating the settlement.

Q: Your father was a rabbi?

A: Yes, on Long Island, not far from where I live now. He was a very successful rabbi, a large congregation of about a thousand families. He got up there every Saturday and spoke for 20 minutes about whatever was on his mind. People would sit quietly and listen to him. He had the skills to be a good lawyer, would’ve made a lot of money, but he had a higher calling.

Q: So what drew you to the law?

A: Well, there were two times in my father’s life—he passed away a few years ago—there were two times when I remember that he cried. The first time was when he lost his father. The second time was when I told him I was thinking of becoming a rabbi.

Q: [Laughs] How old were you when you made that declaration?

A: I was getting out of college. I was really interested in doing it. But he said to me, “You’re out of your mind, go make a living.” So I decided to become a lawyer. It really started off by process of elimination. When I was growing up, you either became a doctor or you became a lawyer. I spoke at a high school event for one of my kids and someone got up and said to me, “So when did you decide you wanted to become a lawyer?” and I said, “When I got a B- in organic chemistry.” It’s the truth.

I didn’t particularly enjoy law school, but I did enjoy practicing. Once I got to the point where I had real clients with real problems that were interesting and strategic, and they were willing to pay me for thinking and coming up with ideas and being an advocate in court, I found the whole thing, you know, fabulous. But I did back into it.

Q: Many lawyers have.

A: Right now [at Kasowitz, Benson, Torres & Friedman], we have 20, 25 summer associates, and we have a little brochure so everyone gets to know them, with a Q-and-A that asks why they decided to become lawyers. There are all these stock answers: “I want to advocate for those less fortunate”; “I thought it best fit my skills.” I’ve never seen anyone say, “I went to law school because I couldn’t think of anything else to do.” But it’s gotta be true for a large number of people. How many people in their early 20s really have a clue what they want to do?

Q: Do you remember your first big case?

A: In 1988 I had just become a partner at a firm that doesn’t exist anymore. It was called Gordon Altman. It merged into DLA Piper probably 10, 15 years ago.

I came in as a partner and one of my new partners had a very close relationship with Icahn. Two days earlier, Icahn had acquired 13 percent of the stock of Texaco, which had just gone into bankruptcy; and on my first day on the job this guy says to me, “Want to meet Carl Icahn, maybe represent him in this Texaco case?” Sure. So I go sit down with Icahn. We hit it off, I like him, he’s a very, very smart guy. So basically I’m representing the largest shareholder in the largest bankruptcy in history; I’m going to court on this every few days; I’m getting front-page coverage in the Journal and New York Times’ business section; I did a thing with Lou Dobbs on Moneyline; and I’m 29 years old.

The whole issue was that Texaco had gotten an $11 billion judgment against it by Pennzoil, which is what forced it into bankruptcy. Pennzoil’s lawyer was a guy from Houston named Joe Jamail, who is about to make a billion dollars on this case—he’s got a contingency fee on this massive judgment. Icahn wants to settle the case, make a lot of money, and he takes me along and says, “Go tell Jamail what you’re going to do to him in bankruptcy court.” So I’m 29 years old, talking to this guy, probably the richest lawyer in history, one of these Texas guys who doesn’t suffer idiots much. And he shuts me up in 10 seconds. He says [adopts Texas drawl], “Uh, son, how many jury trial verdicts you got in your life? And how many of them were for $100 million or more?” He says, “How many times you been named trial lawyer of the year?” Then he says, “Give me one good reason why I should give a flying fuck what you have to say?” [Laughs]

And I just sit there. And Icahn says, “You go back to the office. I’ll have a drink with Jamail and see what I can do.”

I don’t think I was laughing then but it’s pretty funny, looking back on it.