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March 31, 2022

Disclose, Disclose, Disclose: Second Circuit Reinforces Necessity of Disclosure in Bankruptcy Cases

The detailed disclosure obligations in a bankruptcy case must be taken very seriously. As an example, consulting firm McKinsey & Co. could stand to lose millions of dollars in requested fees, in whole or in part, and potentially face other consequences if claims by one of its competitors are found to be true.

In January 2022, the United States Court of Appeals for the Second Circuit overturned the finding by the United States District Court for the Southern District of New York in Alix v. McKinsey & Co. (the action) that harm was not shown and the complaint should be dismissed for failure to state a claim. The Second Circuit revived Alix’s complaint, which alleged seven claims for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), breach of contract, promissory estoppel, and tortious interference with business expectancy under Virginia law when securing bankruptcy work. The Second Circuit found that the district court “did not draw all reasonable inferences in Alix’s favor” as is required when considering a motion to dismiss under Federal Rules of Civil Procedure Rule 12(b).  

In the action, Alix accused McKinsey of failing to properly and adequately disclose potential conflicts of interest in 13 large corporate bankruptcies, which could have resulted in McKinsey’s disqualification as a court-appointed professional under Section 327 of the Bankruptcy Code. If Alix’s allegations were true, then it was plausible that McKinsey’s consulting work could result in the high-paying work being awarded to other niche firms, like AlixPartners. Thus, the complaint should proceed to discovery, motion practice, trial, or all three. In reaching this ruling, the Second Circuit noted that Alix will have the opportunity to substantiate his claims that McKinsey and some of its executives violated RICO and used a pay-to-play scheme to get hired for advisory work in bankruptcy cases. 

The Second Circuit’s ruling reaffirms the vitality and necessity for openness, transparency, and full disclosure required in our bankruptcy system.  

Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts on an ongoing basis to keep clients and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Beth Ann Bivona, partner, at bbivona@barclaydamon.com; Jeff Dove or Janice Grubin, co-chairs of the Restructuring, Bankruptcy & Creditors’ Rights Practice Area, at jdove@barclaydamon.com and jgrubin@barclaydamon.com, respectively; Robert Wonneberger, partner, at rwonneberger@barclaydamon.com; or Frank Heller, partner, at fheller@barclaydamon.com.

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