Alix v. McKinsey & Co.

• Decision Date: 19 August 2019
• Docket Number: 18-CV-4141 (JMF)
• Citation: 404 F.Supp.3d 827
• Parties: Jay ALIX, Plaintiff, v. MCKINSEY & CO., INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

404 F.Supp.3d 827

Jay ALIX, Plaintiff,

v.MCKINSEY & CO., INC., et al., Defendants.

18-CV-4141 (JMF)

United States District Court, S.D. New York.

Signed August 19, 2019

Michael Edward Petrella, Sean F. O'Shea, Amanda Lynn Devereux, Cadwalader, Wickersham & Taft LLP, New York, NY, for Plaintiff.

Christine H. Chung, David Scott Flugman, Faith E. Gay, Jennifer M. Selendy, Joshua Scott Margolin, Maria Ginzburg, Selendy & Gay PLLC, Jordan Blake Leader, Mark David Harris, Matthew Jerome Morris, Robert J. Cleary, Steven Michael Kayman, Proskauer Rose LLP, Martin J. Bienenstock, Dewey & LeBoeuf, L.L.P., New York, NY, for Defendants.

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

Plaintiff Jay Alix is the founder, thirty-five-percent owner, and a director of a company now known as AlixPartners LLP ("AlixPartners"). Docket No. 73 ("Am. Compl."), ¶ 45. AlixPartners specializes in bankruptcy consulting, and particularly in "providing professional crisis management and consulting services in major corporate Chapter 11 bankruptcy cases involving companies with assets valued at over $1 billion." Id. ¶¶ 1, 47. AlixPartners is one of only a few companies operating in that market. Among its competitors are two subsidiaries of McKinsey & Co., Inc.: McKinsey & Company Inc., U.S. ("McKinsey US") and McKinsey Recovery & Transformation Services U.S., LLC ("McKinsey RTS"), of which McKinsey US is the sole member. Id. ¶¶ 32-33, 48-49. Those McKinsey entities are Defendants here, as is a third subsidiary, McKinsey Holdings, Inc. (collectively, "McKinsey" or the "McKinsey Defendants"), and various McKinsey employees (the "Individual Defendants"). Id. ¶¶ 30-40.

The Bankruptcy Code permits the trustee of a bankruptcy estate to hire bankruptcy "professional[s]" such as AlixPartners and McKinsey, but only "with the court's approval." 11 U.S.C. § 327(a). Bankruptcy professionals must "not hold or represent an interest adverse to the estate," and must also be "disinterested persons" within the meaning of the Code. Id. ; see id. § 101(14). To help bankruptcy courts ensure compliance with those requirements, Rule 2014 of the Federal Rules of Bankruptcy Procedure ("Rule 2014") provides that when a bankruptcy trustee or committee applies for an order approving the employment of a bankruptcy professional, the trustee's application must disclose "to the best of the applicant's knowledge, 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." Fed. R. Bankr. P. 2014(a). Rule 2014 requires that any such application "be accompanied by a verified statement of the person to be employed" — that is, the bankruptcy professional — "setting forth" those same connections. Id. Such declarations are submitted under penalty of perjury pursuant to 28 U.S.C. § 1746, and are also subject to the criminal bankruptcy fraud statute, 18 U.S.C. §§ 152(2) - (3). See Am. Compl. ¶¶ 57, 468-77.

Alix brings this lawsuit because he believes that McKinsey has won bankruptcy-consulting business at the expense of AlixPartners by filing incomplete or misleading Rule 2014 disclosure statements. According to Alix — to whom AlixPartners has assigned each of the claims asserted here — every time McKinsey filed an incomplete or misleading statement with the bankruptcy courts, it committed an act of criminal fraud. Am. Compl. ¶ 3. More important for present purposes, Alix alleges that Defendants' Rule 2014 filings constituted predicate acts of racketeering activity under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 - 1968, which provides a private right of action to "[a]ny person injured in his business or property by reason of a violation" of RICO, id. § 1964(c). Simplifying matters somewhat, Alix's theory is that AlixPartners was "injured it [its] business or property by reason of" a RICO violation because Defendants won business from bankruptcy estates, then filed fraudulent Rule 2014 statements, on the basis of which they obtained court approval to do work that otherwise would have been secured by AlixPartners. The question presented here, on Defendants' motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, is not whether, as Alix puts it, the facts alleged are "deeply concerning." ECF No. 93 ("Alix Opp'n"), at 2. If true — and for purposes of Defendants' motion, the Court is required to assume they are true — the facts are indeed concerning. Instead, the principal question presented is whether the facts alleged are sufficient for Alix to satisfy RICO's proximate-cause standard. In light of binding Supreme Court and Second Circuit precedent, the Court concludes that they are not and thus dismisses Alix's federal claims. The Court defers judgment on Alix's state-law claims pending supplemental briefing on the question of subject-matter jurisdiction.

BACKGROUND

The following brief factual summary is drawn from the facts alleged in the Amended Complaint — which are taken as true and construed in the light most favorable to Alix for purposes of this motion to dismiss — and from documents attached to the complaint, statements or documents incorporated into the complaint by reference or relied upon so heavily for their terms and effect as to be "integral" to the complaint, and matters of which judicial notice may be taken. See, e.g., Empire Merchants, LLC v. Reliable Churchill LLLP , 902 F.3d 132, 139 (2d Cir. 2018) ; Goel v. Bunge, Ltd. , 820 F.3d 554, 559 (2d Cir. 2016).

McKinsey first entered the bankruptcy-consulting market "in or around 2001," and now competes with a small group of companies for lucrative business at the top of that market. Am. Compl. ¶ 48. McKinsey has three primary competitors at that level: FTI Consulting, Alvarez & Marsal, and AlixPartners. Id. ¶ 49. More specifically, "in approximately 75% of the bankruptcy cases since 2010 involving assets over $1 billion in which" McKinsey did not serve as a bankruptcy professional, one of these companies did. Id. Of those cases, AlixPartners obtained approximately twenty-five percent of "the contracts." Id.

Alix's allegations concern thirteen of the bankruptcy proceedings in which McKinsey has been employed as a bankruptcy professional since it first entered the market. See Am. Compl. ¶¶ 16, 48, 67, 136, 143.¹ Alix alleges that, in each of those cases, "McKinsey's disclosure affidavits and declarations violated Rule 2014" and "were also false and misleading in numerous respects." Id. ¶¶ 68, 113. "All or any one of McKinsey's undisclosed connections," Alix repeatedly asserts, "would have disqualified [McKinsey] from employment as a bankruptcy professional.... However, because of Defendants' fraudulent concealment of those connections, neither the bankruptcy court, the U.S. Trustee, nor any of the Interested Parties could meaningfully assess the nature and extent of McKinsey's conflicts." Id. ¶ 75; accord id. ¶¶ 79, 85, 92, 103, 111, 118. The net result, Alix alleges, is that AlixPartners was deprived of work it otherwise would have secured. More specifically, McKinsey's fraudulent Rule 2014 statements "caused [AlixPartners] to lose considerable revenue that it otherwise would have earned had Defendants complied with the law and truthfully disclosed McKinsey's disqualifying conflicts of interest." Id. ¶ 5.

Additionally, in highly general terms, Alix alleges an "unlawful ‘pay-to-play’ scheme whereby McKinsey made offers to bankruptcy attorneys to arrange exclusive meetings between bankruptcy counsel and high-level executives from McKinsey's most valued clients in exchange for exclusive referrals of bankruptcy assignments from those attorneys." Id. ¶ 120. Alix alleges that he confronted Individual Defendants Dominic Barton and Robert Sternfels on several occasions in late 2014, informed them of the "pay-to-play" scheme, advised them that the scheme was illegal, and warned them of the "grave potential consequences of McKinsey's serious past misconduct." Id. ¶¶ 119-21. At one of those meetings, Alix "explained McKinsey's disclosure obligations under bankruptcy law at length to Barton and Sternfels," "provided a lengthy and detailed exposition of the relevant legal principles and demonstrated how all of McKinsey's past disclosure declarations were non-compliant and illegal because they failed to identify connections by name and failed to describe connections in sufficient detail," "raised McKinsey's pay-to-play scheme," and "explained ... why it, too, was illegal." Id. ¶ 123. According to Alix, Barton responded by "frankly express[ing] doubt about McKinsey RTS as a business," called him the next day to thank him, and later admitted the wrongdoing. Id. ¶¶ 126-28. Thereafter, Barton promised that, once he was reelected as McKinsey's Global Managing Partner, he would remove the individual wrongdoers from their posts and that "by March 2015, McKinsey would exit the bankruptcy consulting business" altogether, including from active consulting engagements. Id. ¶¶ 130-31. In consideration for that promise, Alix allegedly agreed on behalf of AlixPartners "to remain patient and refrain from acting at that time on the issues he had raised, including forbearance from legal action." Id. ¶ 131. When Barton did not hold up his end of the alleged deal, Alix and Barton met one final time; at that meeting, Alix alleges, Barton "offered Alix bribes" — in the form of introductions to potential clients — "to keep quiet." Id. ¶ 134. Alix refused the overture, and negotiations apparently broke down. Id.

Since then, McKinsey has continued to handle bankruptcy consulting work. See Am. Compl. ¶¶ 159-77; see also, e.g., In re Westmoreland Coal Co. , No. 18-35672, 2018 WL 6920227 (Bankr. S.D. Tex. Oct. 9, 2018), ECF No. 452. Eventually, Alix brought this action as AlixPartners' assignee, seeking treble damages...