The Jay Alix/McKinsey Spat Reaches the Supreme Court

The dogfight between retired turnaround advisor Jay Alix and the McKinsey consulting firm has led to a petition for certiorari asking the Supreme Court to resolve a split of circuits. Alix says the high court should decide whether vindicating the integrity of the judicial system confers standing to appeal when the appellant otherwise would not satisfy the “person aggrieved” standard.

In a one-paragraph per curiam opinion handed down in September, the Fourth Circuit rigorously enforced the requirement that an appellant have a pecuniary interest in the outcome of an appeal to avoid dismissal for lack of standing, even if the appeal purports to uphold the integrity of the bankruptcy system.

The case comes to the Supreme Court in the aftermath of the reorganization of coal producer Alpha Natural Resources Inc. Alix, one of the creditors, persistently challenged the adequacy of the disclosures under Bankruptcy Rule 2014 made by the debtor’s turnaround advisor, McKinsey Recovery & Transformation Services US LLC.

Ultimately, the bankruptcy court only required McKinsey to file an in camera disclosure of the names of some of its clients. The bankruptcy court went on to rule that McKinsey’s disclosures were adequate and that the firm was disinterested. Through the creditor he beneficially owned, Alix appealed by challenging the sufficiency of the disclosure and seeking to have the identity of McKinsey’s clients disclosed publicly.

Concluding that Alix lacked appellate standing, the district court dismissed the appeal in September 2017, prompting him to appeal to the Fourth Circuit.

In one paragraph, the appeals court affirmed “for the reasons stated by the district court.” To read ABI’s discussion of the Fourth Circuit’s ruling, click here.

Adopted by the circuit court, the district judge had reasoned that Alix lacked appellate standing because he was not a “person aggrieved,” since he had no pecuniary interest in the outcome. Even if the appellate court were to reverse and McKinsey was directed to disgorge the fees it had been paid, Alix would not benefit monetarily because additional recoveries by the estate were earmarked for more senior creditors.

Alix filed a petition for certiorari on January 22, represented by Harvard Law School Professor Lawrence H. Tribe and Susan M. Freeman of Phoenix.

To establish standing, courts require the appellant to be a “person aggrieved.” According to the certiorari petition, the Second, Third, Sixth and Eleventh Circuits recognize an exception to the pecuniary interest requirement. They hold that the public interest may also create a sufficient stake in the outcome to confer appellate standing.

On the other hand, according to the certiorari petition, the Fourth, Fifth and Seventh Circuits do not recognize the public interest exception to the pecuniary interest test.

Alix urges the justices to grant certiorari and resolve the deepening circuit split. He contends there is “an exception to the test for appeals brought by parties with Article III standing in order to vindicate the public interest, especially when the integrity of the judicial system is at stake.”

The circuit split is not the only reason for granting certiorari, Alix says. The result is contrary to the policy shown in Stern v. Marshall because dismissal of the appeal meant there was no Article III supervision of the Article I tribunal.

Alix also argues that the result in the Fourth Circuit is contrary to the Supreme Court’s teaching in Lexmark International Inc. v. Static Control Components Inc., 572 U.S. 118 (2014). According to Alix, Lexmark casts “grave doubt on the viability of ‘prudential’ doctrines that abdicate federal courts’ ‘virtually unflagging’ obligation to resolve cases within their Article III jurisdiction.”

Should the high court grant certiorari, an opinion expounding on Lexmark in the bankruptcy context might support or undercut the principle of equitable mootness that often cuts off appeals in bankruptcy cases.

If McKinsey elects to oppose the certiorari petition, the response is due on February 27, barring an extension of time. Even if the petition is granted this spring, argument would not be held until the term to begin in October 2019.