Monday, January 27, 2014

NYT: A Lawyer and Partner, and Also Bankrupt

By James B. Stewart

Anyone who wonders why law school applications are plunging and there’s
widespread malaise in many big law firms might consider the case of Gregory M.
Owens.

The silver-haired, distinguished-looking Mr. Owens would seem the
embodiment of a successful Wall Street lawyer. A graduate of Denison University
and Vanderbilt Law School, Mr. Owens moved to New York City and was named a
partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer &
Wood, and after a merger, at Dewey & LeBoeuf.

Today, Mr. Owens, 55, is a partner at an even more eminent global law firm,
White & Case. A partnership there or any of the major firms collectively known as
“Big Law” was long regarded as the brass ring of the profession, a virtual
guarantee of lifelong prosperity and job security.

But on New Year’s Eve, Mr. Owens filed for personal bankruptcy.

According to his petition, he had $400 in his checking account and $400 in
savings. He lives in a rental apartment at 151st Street and Broadway. He owns
clothing he estimated was worth $900 and his only jewelry is a Concord watch,
which he described as “broken.”

Mr. Owens is an extreme but vivid illustration of the economic factors roiling
the legal profession, although his straits are in some ways unique to his personal
situation.

The bulk of his potential liabilities stem from claims related to the collapse of
Dewey & LeBoeuf, which filed for bankruptcy protection in 2012. Even stripping
those away, his financial circumstances seem dire. Legal fees from a divorce
depleted his savings and resulted in a settlement under which he pays his former
wife a steep $10,517 a month in alimony and support for their 11-year-old son.

But in other ways, Mr. Owens’s situation is all too emblematic of pressures
facing many partners at big law firms. After Dewey & LeBoeuf collapsed, Mr.
Owens seemingly landed on his feet as a partner at White & Case. But he was a full
equity partner at Dewey, Ballantine and Dewey & LeBoeuf. At White & Case, he
was demoted to nonequity or “service” partner — a practice now so widespread it
has a name, “de-equitization.”

Nonequity partners like Mr. Owens are not really partners, but employees,
since they do not share the risks and rewards of the firm’s practice. Service
partners typically have no clients they can claim as their own and depend on
rainmakers to feed them. In Mr. Owens’s case, his mentor and protector has long
been Morton A. Pierce, a noted mergers and acquisitions specialist and prodigious
rainmaker whom Mr. Owens followed from the former Reid & Priest to Dewey,
Ballantine to Dewey & LeBoeuf and then to White & Case.

“It’s sad to hear about this fellow, but he’s not alone in being in jeopardy,”
said Thomas S. Clay, an expert on law firm management and a principal at the
consulting firm Altman Weil, which advises many large law firms. “For the past 40
years, you could just be a partner in a firm, do good work, coast, keep your nose
clean, and you’d have a very nice career. That’s gone.”

Mr. Clay noted that there was a looming glut of service partners at major
firms. At the end of 2012, he said, 84 percent of the largest 200 law firms, as
ranked by the trade publication American Lawyer, had a class of nonequity or
service partners, 20 percent more than in 2000. And the number of nonequity
partners has swelled because firms have been reluctant to confront the reality that,
in many cases, “they’re not economically viable,” Mr. Clay said.

Scott A. Westfahl, professor of practice and director of executive education at
Harvard Law School, agreed that service partners faced mounting pressures.
“Service partners need a deep expertise that’s hard to find anywhere else,” he said.
“Even then, when demand changes, and your specialty is no longer hot, you’re in
trouble. There’s no job security.” He added that even full equity partners were
feeling similar pressures as clients demanded more accountability. “Partners are
being de-equitized,” he said, as Mr. Owens was. “That’s a trend.”

Mr. Owens specializes in financing and debt structuring in mergers and
acquisitions, a relatively narrow expertise where demand rises and falls with the
volume of merger and acquisition deals that his mentors generate. Former
colleagues (none of whom would speak for attribution) uniformly described him as
a highly competent lawyer in his specialty and, as several put it, “a lovely person”
who relishes spending time with his son. But he does not seem to be the kind of
alpha male — or female — who can generate revenue, bring in clients and are
generally prized by large law firms.

At Dewey & LeBoeuf, Mr. Owens’s name was perennially among a group of
partners who were not making enough revenue to cover their salaries and
overhead, according to two former partners at the firm. But each time, the
powerful Mr. Pierce, then the firm’s vice chairman, protected Mr. Owens, they
said.

“He was very good at what he knew,” a former Dewey & LeBoeuf partner said.
“But he wasn’t built to adapt. To make it as a law firm partner today, you have to
periodically reinvent yourself.”

As partners were leaving Dewey & LeBoeuf in droves as it neared bankruptcy
in 2012, Mr. Pierce went to White & Case. Mr. Owens followed, but this time as a
salaried lawyer, not an equity partner, even though he has the title of partner.

A spokesman for White & Case said Mr. Owens and Mr. Pierce had no
comment. Neither did the firm.

Mr. Owens has been well paid by most standards, but not compared with top
partners at major firms, who make in the millions. (Mr. Pierce was guaranteed $8
million a year at Dewey & LeBoeuf.) When Mr. Owens first became a partner at
Dewey, Ballantine, he made about $250,000, in line with other new partners. At
Dewey & LeBoeuf, his income peaked at over $500,000 during the flush years
before the financial crisis. In 2012, he made $351,000, and last year, while at
White & Case, he made $356,500. He listed his current monthly income as
$31,500, or $375,000 a year. And he has just over $1 million in retirement
accounts that are protected from creditors in bankruptcy.

How far does $375,000 a year go in New York City? Strip out estimated
income taxes ($7,500 a month), domestic support ($10,517), insurance ($2,311), a
mandatory contribution to his retirement plan ($5,900), and routine expenses for
rent ($2,460 a month) transportation ($550) and food ($650) and Mr. Owens
estimated that he was running a small monthly deficit of $52, according to his
bankruptcy petition. He has gone back to court to get some relief from his divorce
settlement, so far without any success.

In his petition, Mr. Owens said he didn’t expect things to get any better in
2014.

And they could get worse. The most recent deal on White & Case’s website in
which Mr. Owens played a role was the relatively modest $392 million acquisition
of the women’s clothing retailer Talbots by Sycamore Partners, in which Mr.
Owens (working with Mr. Pierce) represented Talbots. That deal was announced in
May 2012. The White & Case spokesman did not provide any examples of more
recent deals.

“In almost any other context, $375,000 would be a lot of money,” said
William Henderson, a professor at the Indiana University School of Law and a
director of the Center on the Global Legal Profession. “But anyone who doesn’t
have clients is in a precarious position. For the last 40 years, all firms had to do
was answer the phone from clients and lease more office space. That run is over.
The forest has been depleted, as we say, and firms are competing for market share.
Law firms are in a period of consolidation and, initially, it’s going to take place at
the service partner level. There’s too much capacity.” He added that law firm
associates and summer associates had also suffered significant cuts, which has
culled the ranks of future partners.

All this “has had a huge effect on law school enrollment,” Professor
Henderson said.

Mr. Clay, the consultant, said many firms had been slow to confront the
reality that successful service partners were probably going to need to work more
hours than rainmakers, not fewer, to justify their mid- to high-six-figure salaries.
Many of them “seem to have felt they had a sinecure,” Mr. Clay said. “They’re well
paid, didn’t have to work too hard, they had a nice office, prestige. It’s a nice life.
That’s O.K., except it’s not the kind of professional life that will do much for a firm.
These nonequity positions were never meant to be a safe place to rest and not
work as hard as everyone else.”

And these lawyers may have to give up the pretense that they’re law firm
partners. In his bankruptcy petition, Mr. Owens describes himself as a “contract
attorney,” which has the virtue of candor.

“From a prestige standpoint, being called a partner is something that’s very
important to people,” Mr. Westfahl observed. “Lawyers tend to be very
competitive, and like all people, titles and status matter. But to the outside world,
where people think all partners are equal, it’s deceptive. And inside the firm,
everyone knows the real pecking order. When people see that partners are treated
disparately, it causes unnecessary dissonance and personal frustration.”

Copyright 2014 The New York Times Company.  All rights reserved.

Thursday, January 02, 2014

NYT: Loan Monitor Is Accused of Ruthless Tactics on Student Debt

Stacy Jorgensen fought her way through pancreatic cancer. But her struggle was just beginning.

Before she became ill, Ms. Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”

The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Ms. Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.

“The mere possibility of recurrence is not enough,” a lawyer representing the agency said. “Survival rates for younger patients tend to be higher,” another wrote, citing a study presented in court.

There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery. Congress, faced with troubling default rates in the past, has made it especially hard for borrowers to get bankruptcy relief for student loans, and so only some hundreds try every year. And while there has been attention to aggressive student debt collectors hired by the federal government, the organization pursuing Ms. Jorgensen does something else: it brings legal challenges to those few who are desperate enough to seek bankruptcy relief.

That organization is the Educational Credit Management Corporation, which, since its founding in Minnesota nearly two decades ago, has been the main private entity hired by the Department of Education to fight student debtors who file for bankruptcy on federal loans.

Founded in 1994, just after the largest agency backstopping federal student loans collapsed, Educational Credit is now facing concerns that its tactics have grown ruthless. A review of hundreds of pages of court documents as well as interviews with consumer advocates, experts and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has veered more than occasionally into dubious terrain. A law professor and critic of Educational Credit, Rafael Pardo of Emory University, estimates that the agency oversteps in dozens of cases per year.
Others have also been highly critical.

A panel of bankruptcy appeal judges in 2012 denounced what it called Educational Credit’s “waste of judicial resources,” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

Representative Steve Cohen, a Tennessee Democrat who has introduced a bill to limit predatory tactics, said, “The government should hold its agents to the highest standards, and I don’t know that we’ve been doing that.”

He added that the government has a special responsibility to use “a standard that’s reasonable.”

The case that caused the bankruptcy judges to accuse the agency of abuse concerned Barbara Hann, who took a particularly drawn-out beating from Educational Credit. In 2004, when Ms. Hann filed for bankruptcy, Educational Credit claimed that she owed over $50,000 in outstanding debt. In a hearing that Educational Credit did not attend, Ms. Hann provided ample evidence that she had, in fact, already repaid her student loans in full.

But when her bankruptcy case ended in 2010, Educational Credit began hounding Ms. Hann anew, and, on behalf of the government, garnished her Social Security — all to repay a loan that she had long since paid off.

When Ms. Hann took the issue to a New Hampshire court, the judge sanctioned Educational Credit, citing the lawyers’ “violation of the Bankruptcy Code’s discharge injunction.”

Educational Credit went on to appeal the sanctions twice, earning a reprimand from Judge Norman H. Stahl of the United States Court of Appeals for the First Circuit, who agreed with the bankruptcy judges that the agency “had abused the bankruptcy process.”

Asked for comment, Educational Credit responded that the case was not related to undue hardship and that it was based on “complicated issues of legal procedure.”

Another case dating from 2012 involved Karen Lynn Schaffer, 54, who took out a loan for her son to attend college. Her husband, Ronney, had a steady job at the time.

But Mr. Schaffer’s hepatitis C began to flare up, and he was found to have diabetes and liver cancer. He became bedridden and could no longer work.

Ms. Schaffer said she did her best to cut expenses. She began charging her adult son rent, got loan modifications for her mortgages and cut back on watering the yard and washing clothes to save on utilities. She woke up at 4 every morning to take care of her husband before leaving for a full day at a security job.

But Educational Credit said Ms. Schaffer was spending too much on food by dining out. According to Ms. Schaffer, that was a reference to the $12 she spent at McDonald’s. She and Mr. Schaffer normally split a “value meal,” a small sandwich and fries.

“I was taking care of Ron and working a full-time job, so lots of times I didn’t have time to fix dinner, or I was just too darn tired,” Ms. Schaffer said in an interview. The lawyers also suggested she should charge her son for using their car, require him to pay more in rent and rent out the other room in their house.

Asked for comment, Educational Credit said that Ms. Schaffer “did not meet the legal standard for undue hardship,” and that she declined an income-based payment plan. Her lawyer argued that the plan would treat any forgiven loans as taxable income at the end of the repayment period so it was not a viable option.

Supporters of the agency’s tactics say they are necessary to hold borrowers accountable. “For every dollar that the aggressive debt-collection firm fails to recoup, that’s a dollar that someone else is going to have to pay,” said G. Marcus Cole, a law professor at Stanford University.

Professor Cole added that if it were easy to discharge student loans in bankruptcy, lenders would simply not lend money to students without clear assets or prospects. “We need a standard like that to be able to allow students who can’t afford an education to be able to borrow,” he said.

The Educational Credit Management Corporation is the product of a scandal that almost brought down the government’s student loan program two decades ago. In 1990, the Higher Education Assistance Foundation, the nation’s largest student loan guarantee agency for federal loans, announced that it had become insolvent, evidence that no one was paying very close attention to where student loans went, and whether they were ever paid off.

“The high default rates had a particularly high impact with the press,” said Frank Holleman, deputy secretary of education at the time.

Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.
The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.

But critics of Educational Credit said it had stepped over a line between legitimate efforts to collect on defaulted loans and legal harassment.

“We should be outraged when a student-loan creditor like E.C.M.C. can use bulldog tactics to scare away someone who has a legitimate claim for relief,” said Professor Pardo, who has analyzed hundreds of adversary proceedings involving the nonprofit. “Part of the outrage is that ultimately E.C.M.C. is defending the federal government’s interest.”

Professor Pardo called the agency’s tactics a “war of attrition, death by a thousand cuts.”

Asked to respond, Educational Credit issued a statement saying that its practices strictly follow federal law and that it strives to avoid lengthy court proceedings by working with borrowers to help them apply for income-based repayment plans. When appropriate, it said it “consents to a discharge as an undue hardship.” It acknowledged that some cases are “close calls.”

Chris Greene, a spokesman for the Department of Education, said that the department offers flexible repayment options and believes that Educational Credit complies with the law and government policies. He said that if there was evidence of wrongdoing, the department would investigate.

One of the places where Educational Credit has had the biggest impact has been to shape the meaning of the phrase “undue hardship,” the standard required since the 1970s for relief from student debt. In 2009, for example, the agency persuaded the United States Court of Appeals for the Eighth Circuit to adopt stricter standards. One argument it made was that if student borrowers seeking bankruptcy could qualify for a repayment plan tied to their incomes they were, by definition, ineligible for relief.

The dissenting judge, Kermit E. Bye, said the decision “improperly limits the inherent discretion afforded to bankruptcy judges when evaluating requests” for relief. He also said the new standards subjected debtors to a higher burden of proof than was actually required by law.

These and other changes have been regretted by others as well.

“We thought we were doing God’s work,” said David A. Longanecker, a former Department of Education official, referring to efforts to strengthen collection. “We didn’t realize the full extent to which our actions would lead to some activities that would be unfair to borrowers.”
 
Copyright 2014 The New York Times Company.  All rights reserved.