A final order granting final compensation in a bankruptcy case is generally seen as barring later claims for misconduct lodged against a professional whose compensation was approved.
Like most general statements, the notion of immunity flowing from a final allowance doesn’t hold water. An important exception to the general rule is evident from an opinion by a district judge in New York in the lawsuit between Jay Alix and McKinsey & Co. Inc.
The RICO 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 the Racketeer Influenced and Corrupt Organizations Act, or RICO. Alix alleged that his firm and three others along with McKinsey were retained as consultants in most of the country’s largest 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 have been retained in some of the cases had McKinsey been disqualified.
The district court granted McKinsey’s motion to dismiss under Rule 12(b)(6). The Second Circuit reversed in January 2022, in large part finding that Alix’s complaint established causation to justify a RICO claim. Alix v. McKinsey & Co. Inc., 23 F.4th 196 (2d Cir. Jan. 19, 2022). For ABI’s report on Alix, click here.
The Rulings Following Remand
Following remand, McKinsey and its executives again moved to dismiss, but this time on grounds not covered by the Second Circuit’s reversal. On August 18, District Judge Jesse M. Furman of New York dismissed some of the claims but held that most asserted plausible claims under RICO.
For RICO mavens, we recommend reading the 60-page opinion’s full text. It shows that inappropriate activities in bankruptcy cases by a company along with its affiliates and executives can give rise to a RICO complaint that will withstand a motion to dismiss.
For bankruptcy professionals, four pages in Judge Furman’s opinion stand out.
One of the McKinsey executives argued for dismissal based on the idea that the bankruptcy court’s allowances of compensation and approval of McKinsey’s retention foreclosed Alix’s claims. Specifically, the McKinsey executive contended that the RICO suit was a collateral attack on orders of the bankruptcy courts and was barred by Federal Rule 60.
“By its own terms,” Judge Furman said, “Rule 60 applies only to parties seeking relief from a judgment.” [Emphasis in original.] Except for two of the bankruptcy cases, he said that Alix was not involved in the bankruptcy cases “at all.”
“And while bankruptcy orders may operate ‘against the world,’” Judge Furman said that “an un-involved third party, as Alix was in most of the bankruptcies, cannot challenge the bankruptcy court’s orders.”
“Moreover, and perhaps more importantly,” Judge Furman said, “Alix is not seeking relief from the judgments of the bankruptcy courts,” nor was he “actually seeking to have those retention orders overturned.”
Judge Furman rejected the Rule 60 argument “[b]cause Alix is not seeking to overturn prior judgments, and because Alix was not a party who can challenge those prior judgments pursuant to Rule 60.”
The McKinsey executive proffered a different argument under 28 U.S.C. § 1334(e)(2). The subsection gives exclusive jurisdiction to the district court where the bankruptcy resides “over all claims or causes of action that involve construction of section 327 of title 11, United States Code, or rules relating to disclosure requirements under section 327.” Section 327 is the pivotal section regarding retention of professionals.
Judge Furman said that Section 1334(e)(2) applies “when courts have reviewed the retention or fee applications of bankruptcy professionals . . . or upon a debtor’s application to challenge a professional’s lack of disinterestedness.” [Citations omitted.]
Judge Furman said there are no cases holding “that the statute would apply to a case such as this, involving claims under RICO.” He read the Alix complaint as being based on misleading disclosures in McKinsey’s retention papers and not primarily “on a construction of” Section 327.
Judge Furman held that Section 1334(e)(2) “does not apply to this case.”
A final order granting final compensation in a bankruptcy case is generally seen as barring later claims for misconduct lodged against a professional whose compensation was approved.
Like most general statements, the notion of immunity flowing from a final allowance doesn’t hold water. An important exception to the general rule is evident from an opinion by a district judge in New York in the lawsuit between Jay Alix and McKinsey & Co. Inc.