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Credit tightening, the slowing economy and the impact of losses caused by subprime mortgage fallout have been front and center when it comes to the current reporting on the country’s financial state. It was inevitable that these issues and their far-reaching effects would eventually take center stage in bankruptcy cases around the country. Recently, there has been an uptick in bankruptcy filings by the originators and servicers of subprime mortgages, as well as the individual borrowers who entered into them. See Faten Sabry & Thomas Schopflocher, “The Subprime Meltdown: Not Again!,” 26 Am. Bankr. Inst. J. 1 (September 2007) (listing recent bankruptcy cases filed by subprime lenders and related litigation). However, the waves caused by these issues are being seen as something more than just the bankruptcy filings of mortgage lenders. One example of such ancillary impact is the U.S. trustee’s activism in cases involving Countrywide Financial Corp. and its affiliates. This activism has been undertaken in several jurisdictions around the country, most recently in the U.S. Bankruptcy Court for the Southern District of Florida. The actions by the U.S. trustee raise several questions: Is it the proper role of the U.S. trustee to investigate such matters? Does this portend increased scrutiny nationwide for other creditors with ties to the subprime mortgage and credit crisis? Or is this activism limited to Countrywide? In several jurisdictions around the country, the U.S. trustee is seeking to use the powers granted to it under the U.S. Bankruptcy Code to subpoena documents and depose representatives of Countrywide Home Loans Inc. Countrywide is the nation’s largest mortgage lender and loan servicer. Two cases pending in the U.S. Bankruptcy Court for the Southern District of Florida provide a good overview of the disputes between Countrywide and the U.S. trustee. The cases are In re Chadwick, No. 05-37014 (Bankr. S.D. Fla.), and In re Del Castillo, No. 07-13601 (Bankr. S.D. Fla.). The facts of the Florida cases are very similar. In both cases, Countrywide filed proofs of claim that the debtors believed included charges that were not supported by documentation. Thus, the debtors filed objections to Countrywide’s proofs of claim. Countrywide did not file written responses to the objections in either case, nor did Countrywide attend the hearings on the objections. The bankruptcy court sustained the debtors’ objections due to Countrywide’s failure to oppose them. Thereafter, in “an effort to determine whether Countrywide’s conduct in this particular case deviated from the standards established by the bankruptcy code and/or whether its particular actions threatened an abuse of the bankruptcy system or its procedures,” the U.S. trustee opened an inquiry into Countrywide’s activities. See “Response of the United States Trustee to the Objections of Countrywide Home Loans, Inc., to the Notice of Examination Under Fed. R. Bankr. P. 2004 and Subpoena (Duces Tecum)” at � 8, In re Chadwick, No. 05-37014 (Bankr. S.D. Fla. filed Nov. 29, 2007). This included requests for oral examination of a corporate representative of Countrywide, and subpoenas of documents under Federal Rule of Bankruptcy Procedure 2004. An expansive inquiry The requested examinations and subpoenas were expansive. The U.S. trustee sought to subpoena documents from all of Countrywide’s affiliates, subsidiaries and other entities acting on its behalf, not just the Countrywide entity that filed the proofs of claim. Further, the U.S. trustee sought discovery of Countrywide initiatives and policies related to all proofs of claims that Countrywide had filed, and to all debtors of which Countrywide was a creditor, in the Southern District of Florida, not just the two specific debtors in these cases. Countrywide objected to the examinations and subpoenas on the ground that the U.S. trustee had no authority or standing to conduct the examinations it requested. It argued that the U.S. trustee’s inquiry, if it was allowed to go forward, “invests the U.S. Trustee with unauthorized regulatory supervision over Countrywide, or any other creditor filing a proof of claim or other pleading in any bankruptcy court, to examine its internal policies and procedures, not the claim or pleading in issue.” Further, because the debtors’ objections to its proofs of claim had been sustained, and Countrywide’s claims in the cases fully resolved, Countrywide maintained that there was no “issue” in the cases, as required under 11 U.S.C. 307, upon which the U.S. trustee could be heard. The bankruptcy court overruled Countrywide’s objections, holding that the U.S. trustee had standing and authority to issue the Rule 2004 examination requests and the subpoenas; 28 U.S.C. 586 did not circumscribe the broad grant of authority given to the U.S. trustee by 11 U.S.C. 307; and there was an “issue” pending in the cases upon which the U.S. trustee may appear and be heard. Countrywide subsequently appealed the bankruptcy court’s orders, and those appeals are pending. To determine whether the U.S. trustee’s inquiries in the Countrywide cases is proper requires an examination of the powers granted to the U.S. trustee by the Bankruptcy Code, specifically, 11 U.S.C. 307 and 28 U.S.C. 586. Section 307 of the Bankruptcy Code provides that the “United States trustee may raise and may be heard on any issue in any case or proceeding under [title 11].” 11 U.S.C. 307. This is in stark contrast to the specific duties set out in 28 U.S.C. 586, which provides the U.S. trustee with authority to “supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever the United States trustee considers it to be appropriate . . . monitoring the progress of cases under title 11 and taking such actions as the United States trustee deems to be appropriate to prevent undue delay in such progress.” 28 U.S.C. 586(a)(3)(G). How broad is the authority? This clearly is a broad grant of authority. But is it broad enough to give the U.S. trustee an unconditional right to intervene? In bankruptcy cases, the U.S. trustee is presumed to represent the public interest. In re Columbia Gas Sys. Inc., 33 F.3d 294 (3d Cir. 1994). Thus, the U.S. trustee does not need a concrete injury or pecuniary interest under � 307 in order to have standing. United Artist Theater Co. v. Walton, 315 F.3d 217, 225 (3d Cir. 2003). Instead, the U.S. trustee has standing to enforce the bankruptcy laws in the public interest. In re Clark, 927 F.2d 820, 824 (1st Cir. 1990). The U.S. trustee is not limited to the duties set out in 28 U.S.C. 586. In re LWD Inc., 342 B.R. 514 (Bankr. W.D. Ky. 2006). Rather, it “is an official of the United States Department of Justice charged by statute with the duty to oversee and supervise the administration of bankruptcy cases.” In re Glados Inc., 83 F.3d 1360 n.1 (11th Cir. 1996). However, “neither � 307 of the Bankruptcy Code nor 28 U.S.C. � 586(a) give the United States Trustee ‘an unconditional right to intervene.’ ” In re Washington Mfg. Co., 123 B.R. 272, 276 (Bankr. M.D. Tenn. 1991). Furthermore, the U.S. trustee’s right to be heard is limited to issues in cases or proceedings. 11 U.S.C. 307. In the Florida cases, it was hotly contested whether there was an issue because Countrywide’s proof of claim had been disposed of, and the resolution of that question on appeal will be important for future bankruptcy cases. Additionally, the U.S. trustee’s discovery was sought under Bankruptcy Rule 2004. Rule 2004 provides that the examination may relate “only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate” Fed. R. Bankr. P. 2004(b). “The examination of a witness as to matters having no relationship to the debtor’s affairs or no effect on the administration of the estate is improper.” In re Johns-Manville Corp., 42 B.R. 362 (S.D.N.Y. 1984). Furthermore, Rule 2004 cannot be used to investigate a nondebtor’s private business affairs. In re Continental Forge Co., 73 B.R. 1005, 1007 (Bankr. W.D. Pa. 1987). However, the scope of a Rule 2004 examination is “unfettered and broad.” In re GHR Energy Corp., 33 B.R. 451, 453-54 (Bankr. D. Mass. 1983). And most courts allow a Rule 2004 examination to go forward unless the party can show that the examination is oppressive or burdensome. In re Vantage Petroleum Corp., 34 B.R. 650, 652 (Bankr. E.D.N.Y. 1983). Again, because the objections to Countrywide’s claims were resolved in favor of each debtor prior to the U.S. trustee’s requests, it was unclear exactly how the matters the U.S. trustee was inquiring into might affect the administration of the debtors’ estates. As stated, the U.S. trustee’s inquiries directed at Countrywide’s conduct is not limited to the two Florida cases. Similar Rule 2004 examinations and subpoenas for documents have been issued by the U.S. trustee in 10 separate bankruptcy cases pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The same representative of the U.S. trustee responsible for the attempts to compel the production of documents and testimony of Countrywide in the Pennsylvania cases was involved in determining the scope of the notices in the Florida cases. Similar action against Countrywide has been taken by the U.S. trustee in the U.S. Bankruptcy Court for the Southern District of Texas. Is this a harbinger? Is this an isolated incident limited to Countrywide and the specific facts of each of the respective cases, or a harbinger of increased scrutiny of certain creditors in bankruptcy cases nationwide? Either way, the decisions of the bankruptcy courts in Florida will have far-reaching effects for Countrywide, and perhaps for other creditors in future cases. It is possible that this streak of activism could be directed toward other creditor constituencies that are believed to have played a role in the current economic situation. Such players include hedge funds, private equity funds and other financial institutions that were involved in the development, marketing and trading of mortgage-backed securities and other exotic financial instruments. Hedge funds have begun to play an increased role in bankruptcy cases. Harvey R. Miller, “Chapter 11 in Transition � From Boom to Bust and into the Future,” 81 Am. Bankr. L.J. 375 (2007). They have replaced traditional lenders, such as banks and insurance companies, to become the primary providers of financing to troubled companies. Id. According to a recent survey, 35% of turnaround firms named hedge funds and private equity funds as sources of businesses, up from a 13% in 2005. “Hedge Fund Drive to Succeed Fuels Turnaround Industry,” Hedge Fund Daily, May 8, 2007. This trend will create a new dynamic in future bankruptcy restructurings. The interests and motivations of distressed debt investors, which many hedge funds and private equity funds are, are fundamentally different from those of senior lenders. Peter J.M. DeClercq, “Restructuring European Distressed Debt: Netherlands Suspension of Payment Proceeding . . . The Netherlands Chapter 11,” 77 Am. Bankr. L.J. 377 (2003). Hedge funds also have begun to make loans to Chapter 11 debtors in an effort to secure controlling interests through subsequent Chapter 11 plans, so-called “loan-to-own” cases. Slayton Dabney Jr. & Richelle Eisendrath, “When Hedge Funds Compete,” 26 Am. Bankr. Inst. J. 22 (December 2007/January 2008). Funds are getting blamed It is easy to see from current media coverage that hedge funds and private equity funds are getting their share of the blame for the current financial situation, just like those companies involved in the subprime mortgage industry. In discussing the focus of hedge funds and private equity funds on short-term returns, one commentator noted, “I think it is a terrible thing for corporate America . . . .And ultimately it’s a tremendous threat to the vitality of our economy.” Andrew Ross Sorkin, “To Battle, Armed with Shares,” N.Y. Times, Jan. 4, 2006, at C1. Activism in bankruptcy cases against the influence of hedge funds can already be seen. This includes litigation filed by debtors and creditors against hedge funds over their roles in bankruptcy cases. See, generally, The Official Committee of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners LLC (In re Radnor Holdings Corp.), Adversary Proceeding No. 06-50909, Ch. 11 Case No. 06-10894 PJW (Bankr. D. Del. Nov. 16, 2006). There also have been attempts to force financial disclosure requirements on hedge funds as the price for participating on ad hoc creditors’ committees. Mark Berman & Jo Ann J. Brighton, “Will the Sunlight of Disclosure Chill Hedge Funds?,” 26 Am. Bankr. Inst. J. 24 (May 2007). The negative views of hedge funds and their suspected role in the current financial downturn, along with their ever increasing role in bankruptcy cases, could lead to Countrywide-type inquiries becoming another tool to shed light on their businesses. J. Seth Moore is an associate, and Vincent P. Slusher is a partner, in the Dallas office of Beirne Maynard & Parsons. They both specialize in complex commercial bankruptcy matters.

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