Jay Alix, Mckinsey, and a Lack of Clarity

• Publication year: 2020

Jay Alix, McKinsey, and a Lack of Clarity

Ryan McMullan

JAY ALIX, MCKINSEY, AND A LACK OF CLARITY

Abstract

Jay Alix v. McKinsey & Co. is the product of a gaping hole in the U.S. Bankruptcy Code: its extensive definition section does not adequately define various key words, including "professional persons" and "disinterested persons." McKinsey & Co., one of the world's largest and wealthiest consulting firms, stands accused of violating the disinterested standard set out in 11 U.S.C. § 327(a) and Federal Rules of Bankruptcy Procedure Rule 2014(a). McKinsey, however, maintains that it fully complied with the Bankruptcy Code requirements, and it may well be right; depending on the jurisdiction, and even on the individual judge, the disinterested and disclosure requirements to be employed under the Bankruptcy Code may vary.

Previous bankruptcy courts have not applied a clear, consistent standard regarding which entities are subject to the Bankruptcy Code requirements by virtue of being a professional person under 11 U.S.C. § 327(a), what constitutes a disinterested person under 11 U.S.C. § 327(a), or what exactly an entity must disclose under Bankruptcy Rules of Civil Procedure Rule 2014(a) prior to bankruptcy employment. However, the court has just such an opportunity in Jay Alix v. McKinsey & Co. Neglecting to use this opportunity to clarify the Bankruptcy Code could lead to further lawsuits between bankruptcy practitioners, as well as forum shopping by bankruptcy participants, all in an effort to hide potentially significant connections. This Comment proposes that the court should adopt firm standards for both definitional issues, as well as the disclosure requirement, to ensure a fair, transparent bankruptcy process that is in accordance with the original goals of the Code and the bankruptcy system as a whole.

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INTRODUCTION

On May 9, 2018, bankruptcy turnaround expert Jay Alix filed suit against McKinsey & Co. in the Southern District of New York regarding the actions of McKinsey's restructuring group.¹ In this suit, Jay Alix—the founder and largest individual shareholder of AlixPartners, a major consulting firm and "turnaround veteran"—alleged that McKinsey & Co.—also a worldwide consulting firm that has recently grown its turnaround group—"conducted a criminal enterprise through a pattern of racketeering activity" by "knowingly and intentionally" submitting false and material declarations under oath in bankruptcy proceedings.² Alix claims that McKinsey submitted these false and material declarations in order to conceal "significant connections" to interested parties in bankruptcy proceedings and to avoid revealing conflicts of interest that would preclude it from being hired as a bankruptcy professional in those proceedings.³ Because of these alleged false and misleading declarations, Alix brought suit alleging racketeering activity, including bankruptcy fraud in violation of 18 U.S.C. §§ 152(2), 152(3), and 152(6); mail fraud in violation of 18 U.S.C. § 1341; wire fraud in violation of 18 U.S.C. § 1343; obstruction of justice in violation of 18 U.S.C. § 1503(a); witness tampering in violation of 18 U.S.C. §§ 1512(b) and 1512(c); unlawful monetary transactions in violation of 18 U.S.C. §§ 1956 and 1957; and inducement to interstate or foreign travel in violation of 18 U.S.C. § 2314.⁴ While this initial suit has since been dismissed, Alix appears to be continuing his charge, noting after the dismissal that the judge did not rule on the merits and that he would continue to litigate these allegations in other cases.⁵

This is not the first such case brought against McKinsey for similar activities. This kind of litigation has been an ongoing problem for McKinsey that gained broader nationwide attention following the publication of a recent Wall Street Journal article highlighting the firm's secretive nature and unwillingness to disclose information about clients.⁶ The article highlights just how differently

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McKinsey views the disclosure requirements as compared to traditional law firms and other groups involved in the bankruptcy process. For example, during the GenOn Energy bankruptcy, Kirkland & Ellis billed 105 hours for connections and conflict disclosures.⁷ McKinsey, in contrast, billed five—although it claims this is because the firm does not bill for administrative staffers who check for connections.⁸ Similarly, in the Edison Mission Energy bankruptcy, Akin Gump Strauss Hauer & Feld disclosed 368 connections, while McKinsey disclosed none.⁹ McKinsey has responded to criticism of this lack of disclosure by stating that it cannot "disclose services performed for some interested parties because of its responsibility to maintain strict client confidentiality."¹⁰ In response to this behavior—which continued in a similar vein in the Alpha Natural Resources' bankruptcy—and urging by Jay Alix, the U.S. Trustee in Virginia criticized McKinsey's disclosure statements as "vague and amorphous."¹¹ Further, according to the U.S. Trustee, McKinsey "gives the appearance of compliance without actually complying."¹² The findings from the Wall Street Journal's expose are featured in multiple places in Alix's suit against McKinsey.¹³

This article, and the resulting suit against McKinsey, have brought attention to two definitional issues that not only resulted in the issue underlying this suit, but also plague law firms and other entities involved in the bankruptcy process. First, what does mean for an entity to be "disinterested," and second, who must go through the disinterested tests and procedures as set out in 11 U.S.C. § 327(a) and Federal Rules of Bankruptcy Procedure Rule 2014(a) ("Rule 2014"). This Comment explores who is considered to be a professional under the U.S. Bankruptcy Code, what is required to be disinterested according to the Code, and finally, the level of disclosures required under Rule 2014. First, this Comment delves into what it means for a party to be a professional person under the Code. Second, this Comment addresses how the Code defines disinterested and how this definition, which lacks specificity, has given rise to numerous lawsuits and a split among courts. Third, this Comment considers the various

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formulations for the amount of disclosures required under Rule 2014. Finally, this Comment suggests that the various courts involved in the ongoing bankruptcy and civil suits between Alix and McKinsey, particularly in Alix v. McKinsey & Co., should adopt clear, easy-to-follow tests that provide a consistent standard to these questions across circuits. In establishing a consistent standard, the court should: 1) adopt the six-part test for a professional set out by the Bankruptcy Court for the District of Delaware in In re American Tissue, Inc.;¹⁴ 2) adopt the strict definition of disinterested as set out by the Fourth Circuit in In re Martin;¹⁵ 3) require an extensive level of disclosure similar to the amount set forth by the standard established by the Eleventh Circuit in In re Jennings;¹⁶ and 4) rule for Jay Alix in his case against McKinsey & Co.

A. Background

The Bankruptcy Code sets out requirements for the employment of attorneys and professional persons during the bankruptcy process. First, under 11 U.S.C. § 1107(a), the power of a debtor in possession to employ attorneys and professionals is the same as that of a trustee.¹⁷ Accordingly, the debtor-in-possession "may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons."¹⁸ Additionally, if the trustee or debtor in possession, by virtue of § 1107(a), is authorized to run the business under 11 U.S.C. § 1108 and the debtor has "regularly employed attorneys, accountants, or other professional persons on salary, the trustee may retain or replace such professional persons if necessary in the operation of such business."¹⁹

Professionals must satisfy two requirements: 1) they must not hold interests adverse to the estate; and 2) they must be disinterested.²⁰ Additionally, the Federal Rules of Bankruptcy Procedure state that, to be employed as a professional, an application must be filed that details all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.²¹ This application must be accompanied

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by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.²² The Bankruptcy Code defines a "disinterested person" as one that: 1) "is not a creditor, an equity security holder, or an insider;" and 2) "does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason."²³ Despite this definition, questions remain over who exactly qualifies as a disinterested person, as well as to whom this standard applies, considering the lack of clarity in who is under the classification of "professional person." Additionally, there is disagreement between courts as to the proper amount of disclosures that are required under Rule 2014; must the professional seeking employment detail every possible connection, or only those that present the threat of an actual conflict of interest?

1. Who is a Professional Person?

The first issue that must be considered in the case of Alix v. McKinsey & Co. is what exactly the Bankruptcy Code means when it refers to a "professional person." 11 U.S.C. § 327(a) states that the trustee may employ "attorneys, accountants, appraisers, auctioneers, or other professional persons, that do...