Mar-Bow Value Partners, LLC v. McKinsey Recovery & Transformation Servs. US, LLC

• Decision Date: 30 September 2017
• Docket Number: Civil Action No. 3:16cv612
• Citation: 578 B.R. 325
• Court: U.S. District Court — Eastern District of Virginia
• Parties: MAR–BOW VALUE PARTNERS, LLC, Appellant, v. MCKINSEY RECOVERY & TRANSFORMATION SERVICES US, LLC and Alpha Natural Resources, Inc., Appellees.

578 B.R. 325

MAR–BOW VALUE PARTNERS, LLC, Appellant,

v.MCKINSEY RECOVERY & TRANSFORMATION SERVICES US, LLC and Alpha Natural Resources, Inc., Appellees.

Civil Action No. 3:16cv612

United States District Court, E.D. Virginia, Richmond Division.

Signed September 30, 2017

David Richard Ruby, William Daniel Prince, IV, Thompson McMullan PC, Richmond, VA, Daniel Abraham Arellano, Lewis Roca Rothgerber Christie LLP, Susan Maud Freeman, Lewis Roca Rothgerber Christie LLP, Phoenix, AZ, pro hac vice, Judith Klaswick Fitzgerald, Tucker Arensberg PC, Pittsburgh, PA, pro hac vice, Sheldon Samuel Toll, Law Office of Sheldon S Toll PLLC, Southfield, MI, pro hac vice, Steven M. Biskupic, Biskupic & Jacobs SC, Mequon, WI, pro hac vice, Steven Rhodes, Steven Rhodes Consulting LLC, Ann Arbor, MI, pro hac vice, for Appellant.

Christopher Lawrence Perkins, Bruce Howard Matson, LeClair Ryan PC, Tyler Perry Brown, Henry Pollard Long, III, Justin Fielder Paget, Shannon Eileen Daily, Hunton & Williams LLP, Richmond, VA, Ehud Barak, Martin Jay Bienenstock, Proskauer Rose LLP (NY–NA), New York, NY, pro hac vice, for Appellees.

MEMORANDUM OPINION

M. Hannah Lauck, United States District Judge

This matter comes before the Court on Appellant Mar–Bow Value Partners, LLC's ("Mar–Bow") appeal from several orders¹ of the United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court"), Appellee McKinsey Recovery & Transformation Services US, LLC's ("McKinsey") Motion to Dismiss Appeal of Mar–Bow Value Partners, LLC as Equitably Moot (the "Motion to Dismiss as Equitably Moot"), (ECF No. 32), and McKinsey's Motion to Dismiss Appeal of Mar–Bow Value Partners, LLC for Lack of Standing (the "Motion to Dismiss for Lack of Standing"), (ECF No. 37). Mar–Bow, McKinsey, and Alpha Natural Resources ("ANR") have all filed their respective briefs, (ECF Nos. 24, 35, 38, 47), Mar–Bow has responded to the Motion to Dismiss as Equitably Moot and the Motion to Dismiss for Lack of Standing (ECF Nos. 33, 43), and McKinsey has replied, (ECF Nos. 34, 46). The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. Accordingly, the matters are ripe for disposition. The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).² For the reasons that follow, the Court will grant both motions to dismiss and dismiss Mar–Bow's appeal.

I. Standard of Review

"When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal." Paramount Home Entm't Inc. v. Circuit City Stores, Inc. , 445 B.R. 521, 526–27 (E.D. Va. 2010) (citing In re Webb , 954 F.2d 1102, 1103–04 (5th Cir. 1992) ). The district court reviews the bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Harford Sands Inc. , 372 F.3d 637, 639 (4th Cir. 2004). A finding of fact is clearly erroneous if a court reviewing it, considering all of the evidence, "is left with the definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ; accord In re Mosko , 515 F.3d 319, 324 (4th Cir. 2008). In cases where the issues present mixed questions of law and fact, the Court will apply the clearly erroneous standard to the factual portion of the inquiry and de novo review to the legal conclusions derived from those facts. Gilbane Bldg. Co. v. Fed. Reserve Bank of Richmond , 80 F.3d 895, 905 (4th Cir. 1996).

II. Factual Background ³

Although this appeal arises in the context of a chapter 11 bankruptcy,⁴ the dispute before the Court has little to do with the bankruptcy itself. The conflict before the Court is between McKinsey, a professional firm employed by ANR and many of its subsidiaries, the debtors in the underlying bankruptcy action (collectively, the "Debtors"), and Mar–Bow, an unsecured creditor of the Debtors. From the time Mar–Bow first appeared in the bankruptcy action, it objected strenuously and continually to the sufficiency of disclosures that the Bankruptcy Rules require McKinsey, employed to assist with the Debtors' reorganization in this bankruptcy action, to make.⁵ Each appeal before the Court attempts to revisit that same issue: whether McKinsey fully complied with Federal Rule of Bankruptcy Procedure 2014.⁶

A. The Parties Relevant to the Instant Appeal

The Debtors—Alpha Natural Resources and many of its subsidiaries—are "one of the largest coal suppliers in the United States." (McKinsey Br. 15, ECF No. 38.) The Debtors filed for chapter 11 protection in August 2015 in part because of an "historic downturn in their industry." (July 7, 2016 Hr'g Tr. 23.)

McKinsey Recovery and Transformation Services ("McKinsey") "is a global, full service restructuring advisory and crisis management firm that ... support[s] companies through all aspects of recovery and transformation." (First Carmody Decl. 3, App. 31.) Essentially, McKinsey advises struggling businesses on how to improve their profitability, and helps businesses implement the changes it suggests. McKinsey has experience providing chapter 11 advisory services, and in helping struggling businesses increase their profitability.

Mar–Bow, as relevant to the bankruptcy action, is an unsecured creditor of the Debtors. On March 23, 2016, almost nine months after the Debtors began their chapter 11 reorganization, Mar–Bow filed a proof of claim⁷ in the amount of $1,250,000.00.⁸ The record lacks clarity about the precise nature of Mar–Bow's business, but Mar–Bow is "beneficially owned and funded by" Jay Alix, the founder of the firm "AlixPartners." (Alix Decl. 1, Mar–Bow Mot. Compel Ex. A, App. 431.) AlixPartners is a consulting firm that competes with McKinsey in the turnaround consulting business.

B. Background of the Underlying Bankruptcy Case

On August 3, 2015, the Debtors began the bankruptcy proceedings by filing voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code, which allows for reorganization—rather than liquidation—of a bankruptcy estate. The Bankruptcy Court consolidated all the petitions for procedural purposes only, meaning that one chapter 11 bankruptcy action was pending.

Three weeks later, on August 24, 2015, the Debtors filed an application in the Bankruptcy Court requesting permission to employ McKinsey as a turnaround advisor for the pendency of the bankruptcy case (the "Retention Application").⁹ The Debtors sought to retain McKinsey "as their turnaround advisor ... to assist the Debtors with the development and refinement of their strategic business plan." (Retention Appl. 2–3, App. 2–3.) On September 17, 2015, the Bankruptcy Court granted the Retention Application and authorized the Debtors to retain McKinsey as turnaround advisor.

On March 23, 2016, more than six months after McKinsey's employment had been approved, Mar–Bow filed its proof of claim against ANR, entering the bankruptcy proceeding. On May 1, 2016, Mar–Bow filed its first notice of appearance in the bankruptcy proceeding. Since entering the bankruptcy proceeding, Mar–Bow has raised the issue of McKinsey's Rule 2014 disclosures to the Bankruptcy Court formally at least five times.¹⁰ The Court does not see—and neither party identifies—any other action by Mar–Bow in the Bankruptcy Court.

On July 12, 2016, five days after a lengthy evidentiary hearing on the matter, the Bankruptcy Court entered a written order confirming the Debtors' Reorganization Plan.¹¹ The Reorganization Plan became effective on July 26, 2016. Additional proceedings have taken place in the Bankruptcy Court since then, and Mar–Bow has continued to object to McKinsey's Rule 2014 disclosures.

C. McKinsey's Employment as Turnaround Advisor for the Debtors

On August 24, 2015, three weeks after filing for bankruptcy, the Debtors filed the Retention Application in the Bankruptcy Court requesting permission to employ McKinsey as a turnaround advisor for the pendency of the bankruptcy case. The Debtors sought to retain McKinsey "as their turnaround advisor ... to assist the Debtors with the development and refinement of their strategic business plan." (Retention Appl. 2–3, App. 2–3.)

In accordance with Federal Rule of Bankruptcy Procedure 2014(a),¹² the Debtors attached to the Retention Application a copy of the "Amended and Restated Agreement" Letter, (the "Engagement Letter") which detailed the proposed terms of McKinsey's employment as turnaround advisor for the Debtors, and the proposed fee arrangement. As turnaround advisor, McKinsey's role was to help the Debtors save money and become more profitable, which would in turn increase the bankruptcy estate and result in maximum recovery for the Debtors' creditors.¹³ The Debtors requested that McKinsey's employment be approved as of August 3, 2015, the date the Debtors filed for bankruptcy, because McKinsey had been working with the Debtors since June 29, 2015, before the Debtors filed for bankruptcy.

As a term of McKinsey's employment, the Debtors agreed to indemnify McKinsey for a broad array of potential liabilities arising out of McKinsey's employment as turnaround advisor. McKinsey would not be indemnified, however, from liabilities resulting from its own "willful misconduct or gross negligence."¹⁴ (Engagement Letter 6, App. 24.)

The Retention Application was unopposed, and on September 17, 2015, the Bankruptcy Court granted the Retention Application, approved the terms of the Engagement Letter, and authorized the Debtors "to employ and retain [McKinsey] as turnaround advisor." (Retention O. 1–6, Supp. 291–97.) These events all occurred six months before Mar–Bow first appeared in the bankruptcy case.

D. McKinsey's Rule 2014 Disclosures

Federal Rule of Bankruptcy Procedure 2014(a) requires that any application for the employment of professionals

be accompanied by a

...