Although written in the context of a RICO suit, language in a Second Circuit opinion seems to mean that a creditor who otherwise might not have standing would have standing to pursue litigation “to ensure the integrity of the Bankruptcy Court.”
The Second Circuit handed down its opinion on January 19 reversing the district court, which had dismissed a lawsuit brought by Jay Alix against consulting firm McKinsey & Co. Inc. under the Racketeer Influenced and Corrupt Organizations Act, or RICO.
The Allegations
Jay Alix was the founder of AlixPartners LLP, a bankruptcy consulting firm. As the assignee of the firm, Alix sued McKinsey and some of its officers in federal district court in New York under RICO. Alix alleged that his firm and three others along with McKinsey were retained as consultants in most of the country’s so-called mega chapter 11 cases.
Alix alleged that his firm and three others had been retained in 75% of the cases in which McKinsey was not the court-retained bankruptcy consultant. Among the assignments that did not go to McKinsey, Alix alleged that his firm captured 24%.
The complaint alleged that McKinsey failed to disclose connections under Sections 327(a) and 101(14) that would have made the firm not disinterested and would have disqualified the firm from being retained in 13 cases. Alix alleged that his firm would been retained in some of those 13 cases had McKinsey been disqualified.
Alix also alleged that McKinsey had been engaged in a so-called pay-to-play scheme.
The district court granted McKinsey’s motion to dismiss under Rule 12(b)(6). The district court reasoned that the allegations in the complaint were insufficient to satisfy RICO’s proximate cause requirement.
The Second Circuit reversed the dismissal in a 31-page opinion by Circuit Judge Barrington D. Parker.
Special Standing Rules for Bankruptcy Integrity
To prove a RICO claim, the complaint must show a violation of RICO, an injury to the plaintiff’s business and that the injury was caused by the RICO violation. “This appeal implicates the causation requirement,” Judge Parker said.
The district judge believed that the injury to Alix had been caused by the debtors’ decisions not to hire AlixPartners and not by McKinsey’s alleged misconduct. The district judge also believed that the U.S. Trustee would have been the better plaintiff to remedy the alleged misconduct.
Disagreeing, Judge Parker said that the district court had “conflated proof of causation and proof of damages and that it did not draw all reasonable inferences in Alix’s favor.”
Here’s the important bankruptcy angle:
“More importantly,” Judge Parker said, “the district court gave insufficient consideration to the fact that McKinsey’s alleged misconduct targeted the federal judiciary.”
Judge Parker expanded on the idea, suggesting that litigants who can’t show direct harm to afford standing may nonetheless pursue litigation when the integrity of the process is at stake. He said:
[T]his case requires us to focus on the responsibilities that Article III courts must shoulder to ensure the integrity of the Bankruptcy Court and its processes. Litigants in all of our courts are entitled to expect that the rules will be followed, the required disclosures will be made, and that the court’s decisions will be based on a record that contains all the information applicable law and regulations require. If McKinsey’s conduct has corrupted the process of engaging bankruptcy advisors, as Alix plausibly alleges, then the unsuccessful participants in that process are directly harmed.
Later, Judge Parker said that “fraud on the Bankruptcy Court committed in the manner alleged by Alix causes direct harm to litigants who are entitled to a level playing field and calls into play our unique supervisory responsibilities.”
Judge Parker went on to explain why Alix had “plausibly alleged proximate cause with respect to all thirteen engagements.” He said there was “also a reasonable inference that, in making another selection [of a consultant had McKinsey been disqualified, the chapter 11 debtors] would likely have awarded assignments to eligible firms in approximately the same ratio they had been using in the past.”
To the idea that the U.S. Trustee would have been a better plaintiff, Judge Parker said he was “not persuaded that the Bankruptcy Court or the U.S. Trustee, which McKinsey argues would be a more appropriate alternative plaintiff, would be in a position to gather information about McKinsey’s conduct were Alix not in the picture.”
Likewise, he was “not persuaded that, under the circumstances presented here, either the Bankruptcy Court or the U.S. Trustee would be in a superior position to find out what McKinsey did (or did not do).”
Judge Parker also reversed dismissal of Alix’s pay-to-play claim under 18 U.S.C 152(6), which proscribes fraudulently offering money to act or forbear from acting in a bankruptcy case. He said it was “implausible — indeed inconceivable — that any Bankruptcy Court would have approved McKinsey’s retention if Alix’s allegations were substantiated.”
Because Judge Parker was reversing a motion to dismiss, he said that “McKinsey might well prevail on summary judgment or at trial, and to be sure, uncertainties at those stages might exist.”
In the same vein, D.J. Carella, a spokesperson for McKinsey, said in a statement that the “decision solely addresses technical pleading standards and not whether Mr. Alix’s claims are true. To date, Mr. Alix has lost all six of his lawsuits against McKinsey, and we are confident the evidence will ultimately show that this lawsuit is similarly meritless.”
Although not in lawsuits with Alix, the U.S. Trustee Program issued a press release in February 2019 about a settlement where McKinsey agreed to pay $15 million for inadequate disclosure in three chapter 11 cases. In December 2020, the U.S. Trustee Program issued a press release about a separate settlement made in connection with a case in Texas where McKinsey agreed to withdraw its application for retention and waive the recovery of fees for work it had performed. The press release said that the fees and expenses “likely” would have been “millions of dollars.”
The Circuit Split
To establish appellate standing, courts require the appellant to be a “person aggrieved.” The Second Circuit’s opinion reignites a circuit split.
Alix previously argued in a petition for certiorari that the Second, Third, Sixth and Eleventh Circuits recognize an exception to the pecuniary interest requirement. They hold, he argued, that the public interest may also create a sufficient stake in the outcome to confer appellate standing.
On the other hand, Alix argued to the Supreme Court that the Fourth, Fifth and Seventh Circuits do not recognize the public interest exception to the pecuniary interest test. The Supreme Court denied certiorari in Mar-Bow Value Partners LLC v. McKinsey Recovery & Transformation Services US LLC, 139 S. Ct. 1601, 203 L. Ed. 2d 755 (Sup. Ct.) (cert. den. April 22, 2019).
Alix was in the Supreme Court because the Fourth Circuit had upheld dismissal of another lawsuit against McKinsey where the district court concluded that Alix would not have benefitted monetarily. To read ABI’s stories on the petition for certiorari, click here and here.
Although written in the context of a RICO suit, language in a Second Circuit opinion seems to mean that a creditor who otherwise might not have standing would have standing to pursue litigation “to ensure the integrity of the Bankruptcy Court.”
The Second Circuit handed down its opinion on January 19 reversing the district court, which had dismissed a lawsuit brought by Jay Alix against consulting firm McKinsey & Co. Inc. under the Racketeer Influenced and Corrupt Organizations Act, or RICO.