Alix v. McKinsey & Co., Inc., No. 20-2548 (2d Cir. 2022)
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The Second Circuit vacated the district court's dismissal of plaintiff's amended complaint against McKinsey and others under the Racketeer Influenced and Corrupt Organizations Act (RICO). The complaint alleged that McKinsey filed false and misleading disclosure statements in the bankruptcy court to obtain lucrative consulting appointments and that, as a result, AlixPartners LLP lost business and profits it otherwise would have secured. The court concluded that the amended complaint plausibly alleges proximate cause with respect to all 13 bankruptcies in which McKinsey filed false statements as well as the pay-to-play scheme. Accordingly, the court remanded for further proceedings.
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20-2548-cv Alix v. McKinsey & Co., Inc., et al 1 In the 2 United States Court of Appeals 3 For the Second Circuit 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 August Term 2020 No. 20-2548-cv Jay Alix, Plaintiff-Appellant, v. McKinsey & Co., Inc., McKinsey Holdings, Inc., McKinsey & Company Inc. United States, McKinsey Recovery & Transformation Services U.S., LLC, Dominic Barton, Kevin Carmody, Jon Garcia, Seth Goldstrom, Alison Proshan, Jared D. Yerian, Robert Sternfels, Defendants-Appellees. Appeal from the United States District Court for the Southern District of New York No. 18-cv-4141, Jesse M. Furman, District Judge, Presiding. (Argued June 22, 2021; Decided January 19, 2022) B e f o r e: NEWMAN, CABRANES, PARKER, Circuit Judges. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Plaintiff Jay Alix appeals from a judgment of the United States District Court for the Southern District of New York (Furman, J.), dismissing the amended complaint against McKinsey & Co., Inc., three of its subsidiaries, and several of its current or former employees. Alix sued under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq, alleging that McKinsey filed false and misleading disclosure statements in the bankruptcy court to obtain lucrative consulting appointments and that, as a result, AlixPartners LLP lost business and profits it otherwise would have secured. The district court held that Alix failed to meet RICO’s proximate cause requirement. We disagree. We hold that the amended complaint plausibly alleges proximate cause with respect to all 13 bankruptcies in which McKinsey filed false statements as well as the pay-to-play scheme. Accordingly, we VACATE and REMAND for further proceedings. SEAN F. O’SHEA (Michael E. Petrella, Amanda L. Devereux, on the brief), Cadwalader, Wickersham & Taft LLP, New York, NY,for Plaintiff-Appellant. FAITH E. GAY (Jennifer M. Selendy, Maria Ginzburg, Caitlin J. Halligan, David S. Flugman, on the brief), Selendy & Gay, PLLC, New York, NY and JOHN GLEESON (Andrew J. Ceresney, Erica S. Weisgerber, Nathan S. Richards, on the brief), Debevoise & Plimpton LLP, New York, NY, for DefendantsAppellees McKinsey & Co., Inc., McKinsey Holdings, Inc., McKinsey & Company Inc. United States, and McKinsey Recovery & Transformation Services U.S., LLC. ROY T. ENGLERT, JR. (Ariel N. Lavinbuk, Richard A. Sauber, on the brief), Robbins, Russell, Englert, Orseck, Untereiner & Sauber, LLP, Washington, DC, for 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Defendants-Appellees Kevin Carmody, Jon Garcia, Alison Proshan, and Robert Sternfels. REID M. FIGEL (Bradley E. Oppenheimer, on the brief), Kellogg, Hansen, Todd, Figel & Frederick, PLLC, Washington, DC, for Defendant-Appellee Seth Goldstrom. CATHERINE L. REDLICH, Driscoll & Redlich, New York, NY, for Defendant-Appellee Dominic Barton. MICAH E. MARCUS (Christopher Dean, on the brief), McDonald Hopkins LLC, Chicago, IL, for DefendantAppellee Jared D. Yerian. BARRINGTON D. PARKER, Circuit Judge: AlixPartners LLP and McKinsey & Co., Inc. are major competitors in a 19 niche bankruptcy advising market involving estates with assets in excess of one 20 billion dollars. Jay Alix, as assignee of AlixPartners, sued McKinsey & Co., Inc., 21 three of its subsidiaries (together, “McKinsey”), and several current or former 22 McKinsey employees under the Racketeer Influenced and Corrupt Organizations 23 Act (“RICO”), 18 U.S.C. § 1961 et seq., and state law. The amended complaint 24 alleges that McKinsey secured lucrative consulting assignments in this market by 25 knowingly and repeatedly filing disclosure statements in the Bankruptcy Court 26 containing incomplete, misleading, or false representations concerning conflicts 3 1 of interest. Alix alleges that this pattern of misrepresentations to the Bankruptcy 2 Court resulted in injury to AlixPartners through the loss of engagements it 3 otherwise would have secured and of substantial revenues those assignments 4 would have generated, as well as through the loss of the opportunity to compete 5 for them in an unrigged market. 6 RICO affords a private right of action to “[a]ny person injured in his 7 business or property by reason of a [RICO] violation.” 18 U.S.C. § 1964(c). Alix 8 alleges that AlixPartners was directly harmed by McKinsey’s conduct because, 9 had McKinsey truthfully and timely disclosed its conflicts to the Bankruptcy 10 Court, McKinsey would have been disqualified from obtaining at least some of 11 the assignments it secured. In turn, Alix alleges that AlixPartners, because of its 12 major presence in this niche market, would have been retained in at least some of 13 the cases. 14 Alix also alleges a “pay-to-play” scheme under which McKinsey arranged 15 meetings between its clients and bankruptcy attorneys in exchange for exclusive 16 bankruptcy assignment referrals from those attorneys. Consistent with this 17 scheme, Alix alleges that McKinsey offered to introduce AlixPartners to its 4 1 clients if Alix would “drop[] the issues he had raised concerning McKinsey’s 2 acknowledged pay-to-play scheme and its illegal disclosure declarations.” 3 The District Court for the Southern District of New York (Jesse M. Furman, 4 District Judge) dismissed Alix’s RICO claims under Federal Rule of Civil 5 Procedure 12(b)(6). The court concluded that Alix’s allegations were insufficient 6 to establish the required causal connection between McKinsey’s purported RICO 7 violations and AlixPartners’s injury. This appeal followed. The dispositive issue 8 is whether the amended complaint adequately alleges proximate causation under 9 RICO. We hold that it does and, consequently, we vacate and remand for further 10 11 12 proceedings. BACKGROUND Alix is the founder and a minority equity holder of AlixPartners, one of a 13 handful of consulting firms operating in a high-end corporate bankruptcy 14 advising market. McKinsey Recovery & Transformation Services U.S., LLC 15 (“McKinsey RTS”), a subsidiary of McKinsey & Co., Inc., along with FIT 16 Consulting, and Alvarez & Marsal are among the other major competitors in this 17 market. The amended complaint alleges that AlixPartners, FIT Consulting, and 18 Alvarez & Marsal were retained in 75% of the bankruptcy cases since 2010 5 1 involving assets over $1 billion in which McKinsey did not serve as the advisor. 2 Of those cases, AlixPartners obtained about 24% of the contracts. In order to secure engagements, bankruptcy advisors must demonstrate 3 4 that they “do not hold or represent an interest adverse to the estate” and are 5 “disinterested persons” within the meaning of the Bankruptcy Code. 11 U.S.C. § 6 327(a); see also id. § 101(14). 1 When these requirements are satisfied, a bankruptcy 7 professional may be retained “with the court’s approval.” Id. § 327(a). In 8 addition, bankruptcy courts require that an application for retention be 9 “accompanied by a verified statement of the person to be employed setting forth 10 the person’s connections with the debtor, creditor, any other party in interest, 11 their respective attorneys and accountants, the United States trustee, or any 12 person employed in the office of the United States trustee.” Fed. R. Bankr. P. 13 2014(a). The statements requiring these detailed disclosures are submitted under 14 penalties of perjury and are subject to the bankruptcy fraud statute. See 28 U.S.C. 15 § 1746; 18 U.S.C. §§ 152(2)-(3). “The term ‘disinterested person’ means a person that (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to 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.” 11 U.S.C. § 101(14). 1 6 1 Alix alleges that McKinsey violated these disclosure requirements by 2 submitting to the Bankruptcy Court false statements in thirteen bankruptcy 3 proceedings in which it was appointed advisor. 2 Specifically, Alix alleges that, 4 despite “the size and complexity of McKinsey’s business and business 5 relationships” as one of the world’s largest consulting firms, it “disclosed no 6 connections by name in its initial declarations for these eight cases” and 7 disclosed only a few in supplemental declarations filed in only two of the cases. 8 Given AlixPartners’s significant market share, Alix argues, if McKinsey had filed 9 compliant disclosure statements, it would have been disqualified from certain 10 assignments and AlixPartners would have secured at least some of the 11 assignments from which McKinsey would have been disqualified. In other 12 words, Alix contends that AlixPartners’s injury was a foreseeable and direct The thirteen assignments are: In re Hayes Lemmerz International, Inc., No. 01-BK-11490 (Bankr. D. Del. Dec. 5, 2001); In re UAL Corp. (United Airlines), No. 02-BK-48191 (Bankr. N.D. Ill. Dec. 9, 2002); In re Mirant Corp., No. 03-BK-46590 (Bankr. N.D. Tex. Jul. 14, 2003); In re Lyondell Chemical Co., No. 09-BK-10023 (Bankr. S.D.N.Y. Jan. 6, 2009); In re Harry & David Holdings, Inc., No. 11-BK-10884 (Bankr. D. Del. Mar. 28, 2011); In re AMR Corp., No. 11-BK-15463 (Bankr. S.D.N.Y. Nov. 29, 2011); In re AMF Bowling Worldwide, Inc., No. 12-BK-36495 (Bankr. E.D. Va. Nov. 13, 2012); In re Edison Mission Energy, No. 12-BK-49219 (Bankr. N.D. Ill. Dec. 17, 2012); In re NII Holdings, Inc., No. 14-BK-12611 (Bankr. S.D.N.Y. Aug. 15, 2019); In re SunEdison, Inc., No. 16-BK-10992 (Bankr. S.D.N.Y. Apr. 21, 2016); In re Alpha Natural Resources, No. 15-BK-33896 (Bankr. E.D. Va. Jul. 15, 2016); In re GenOn Energy, Inc., No. 17-BK-33695 (Bankr. S.D. Tex. Jun. 14, 2017); and In re SRC Liquidation LLC, No. 15-BK-10541 (Bankr. D. Del. Sep. 12, 2019). 2 7 1 consequence of McKinsey’s failure to follow the law and a fraud on the 2 Bankruptcy Court. 3 The amended complaint includes additional allegations concerning a pay- 4 to-play scheme orchestrated by McKinsey. On September 3, 2014, Alix alleges 5 that he met with two former or current McKinsey partners, defendants Dominic 6 Barton and Robert Sternfels. During that meeting, Alix allegedly told Barton and 7 Sternfels that he had become aware of McKinsey’s practice of agreeing to host 8 meetings between its clients and bankruptcy attorneys in exchange for exclusive 9 referrals of bankruptcy assignments from those attorneys, which, Alix warned 10 11 them, was illegal. The following month, Barton allegedly admitted the existence of, and 12 McKinsey RTS’s participation in, the scheme and also admitted that his outside 13 counsel confirmed its illegality. Barton, acting on behalf of McKinsey, then 14 agreed to remove the senior leadership of McKinsey RTS for this illegal conduct 15 within 30 days of Barton’s re-election as Global Managing Partner of McKinsey & 16 Co. in January 2015, and to remove McKinsey from the bankruptcy consulting 17 business by March 2015. In exchange, McKinsey allegedly asked Alix to “refrain 18 from acting at that time.” In other words, Alix alleged that McKinsey asked him 8 1 not to pursue legal action targeting the pay-to-play scheme or McKinsey’s 2 allegedly fraudulent disclosure statements. But Barton, according to Alix, did not 3 keep his end of the bargain. When Alix confronted him in October 2015 4 regarding McKinsey’s continued misconduct, Barton allegedly offered to 5 introduce AlixPartners to Fortescue—a large Australian iron ore mining 6 company—and Volvo Europe for possible consulting assignments. Alix alleges 7 that he declined these offers because he construed them as “blatant attempted 8 pay-offs and bribes” intended to silence him. 9 Alix argues that McKinsey’s pay-to-play scheme was aimed at eliminating 10 the competitive process by which debtors and their trustees select a bankruptcy 11 advisor. Additionally, Alix alleges that AlixPartners “was never even asked to 12 pitch” in three cases where it typically would have competed for a contract and 13 attributes this to McKinsey’s alleged scheme. 14 McKinsey moved to dismiss the complaint under Rule 12(b)(6) and the 15 district court granted the motion, while nevertheless noting that Alix’s 16 allegations were “indeed concerning.” Still, the district court, in a careful opinion 17 navigating a body of case law that, charitably speaking, is less than pellucid, 18 found the allegations insufficient to satisfy RICO’s proximate cause requirement. 9 1 The court concluded that “independent intervening decisions” of the trustees 2 and the bankruptcy court rendered the causal connection between the alleged 3 misconduct and injury “too remote, contingent, and indirect to sustain a RICO 4 claim.” As to the pay-to-play allegations, the court concluded that they too failed 5 to meet the pleading standards and suffered from the same defects as the 6 allegations concerning fraudulent disclosures because they did not sufficiently 7 narrow the gap between the alleged fraud and the alleged resulting injury. This 8 appeal followed. We review de novo a district court’s dismissal of a complaint pursuant to 9 10 Rule 12(b)(6), construing the complaint liberally, accepting all factual allegations 11 in the complaint as true, and drawing all reasonable inferences in the plaintiff’s 12 favor. Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). 3 However, 13 those allegations must meet the plausibility standard set out in Aschroft v. Iqbal, 14 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). 15 DISCUSSION 16 I. Unless otherwise indicated, when quoting cases, all internal quotation marks, alterations, emphases, footnotes, and citations are omitted. 3 10 1 This case comes to us on an unusual procedural path; thus, we first 2 consider whether we have jurisdiction to review it. See New York State Dep't of 3 Env't Conservation v. Fed. Energy Regul. Comm'n, 991 F.3d 439, 445 (2d Cir. 2021). 4 The amended complaint initially contained several state-law claims in 5 addition to the federal RICO claims at issue on this appeal. After the district 6 court dismissed the federal claims under Rule 12(b)(6), it directed the parties to 7 brief whether an independent basis for federal jurisdiction over the remaining 8 state law claims existed. Alix responded by filing a notice to dismiss without 9 prejudice, under Federal Rule of Civil Procedure 41, his state law claims, which 10 he later attempted to retract. In response, the district court ruled that Alix’s 11 voluntary Rule 41 dismissal of state law claims was effective and could not be 12 withdrawn. The court also denied Alix’s motion for entry of judgment on his 13 federal RICO claims and his alternative request to revive the state law claims. 14 Ordinarily, immediate appeal is unavailable to a plaintiff, such as Alix, 15 who seeks review of an adverse decision on some of his claims by voluntarily 16 dismissing the others without prejudice. Rabbi Jacob Joseph Sch. v. Province of 17 Mendoza, 425 F.3d 207, 210 (2d Cir. 2005). That is because our jurisdiction is 18 limited to appeals from final decisions of the district court, which are orders that 11 1 end the litigation on the merits and leave nothing for the court to do but execute 2 the judgment. Hallock v. Bonner, 387 F.3d 147, 152 (2d Cir. 2004); Coopers & 3 Lybrand v. Livesay, 437 U.S. 463, 467 (1978); 28 U.S.C. § 1291. Because dismissal 4 without prejudice does not preclude reinstatement of the same claims, we do not 5 generally permit an appeal upon dismissal without prejudice. Rabbi Jacob Joseph 6 Sch., 425 F.3d at 210 (“Tolerance of that practice would violate the long- 7 recognized federal policy against piecemeal appeals.”). 8 However, we have previously held that “a plaintiff may cure such defect 9 in appellate jurisdiction by disclaiming an intent to revive the dismissed claim 10 (effectively, converting it to a dismissal with prejudice, for reasons of estoppel).” 11 Jewish People for the Betterment of Westhampton Beach v. Vill. of Westhampton Beach, 12 778 F.3d 390, 394 (2d Cir. 2015) (upholding jurisdiction where the appellants 13 “disclaim[ed] any intent to revive their dismissed claim” in a reply brief); 16 Casa 14 Duse, LLC v. Merkin, 791 F.3d 247, 255 (2d Cir. 2015) (upholding jurisdiction 15 where the appellant “agreed to a dismissal of his remaining claim . . . with 16 prejudice” at oral argument); see also Atlanta Shipping Corp. v. Chemical Bank, 818 17 F.2d 240, 246 (2d Cir. 1987) (“A party who loses on a dispositive issue that affects 12 1 only a portion of his claims may elect to abandon the unaffected claims, invite a 2 final judgment, and thereby secure review of the adverse ruling.”). 3 Alix made a similar effort to cure the jurisdictional defect in this case. 4 When filing this appeal, he disclaimed his state law claims by filing an 5 addendum to Form C, which states that he would “not pursue his appeal of the 6 district court’s July 6, 2020 ruling” and that he “hereby discontinues with 7 prejudice the State Law Claims.” Doc. 10-4. This statement was sufficient to cure 8 any defect in appellate jurisdiction and to permit us to review the district court’s 9 order dismissing Alix’s RICO claims. See Jewish People for the Betterment of 10 Westhampton Beach, 778 F.3d at 394. 11 II. 12 To establish a RICO claim, a plaintiff must prove: (1) a violation of the 13 RICO statute, (2) an injury to business or property, and (3) that the injury was 14 caused by the RICO violation. Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 (2d 15 Cir. 2013); 18 U.S.C. § 1962. This appeal implicates the causation element, 16 pursuant to which a plaintiff must plausibly allege that the RICO violations were 17 (1) “the proximate cause of his injury, meaning there was a direct relationship 18 between the plaintiff’s injury and the defendant’s injurious conduct”; and that 13 1 they were (2) “the but-for (or transactional) cause of his injury, meaning that but 2 for the RICO violation, he would not have been injured.” UFCW Loc. 1776 v. Eli 3 Lilly & Co., 620 F.3d 121, 132 (2d Cir. 2010). The dispositive issue here is whether 4 Alix plausibly alleges proximate cause. 5 The district court concluded that Alix failed to allege proximate cause for 6 three reasons. First, the alleged harm to AlixPartners, it concluded, was directly 7 caused by the decisions of the various debtors’ trustees not to hire AlixPartners 8 rather than by McKinsey’s misconduct. Second and relatedly, the court 9 concluded that the existence of several intervening factors rendered the 10 relationship between the alleged fraud and injury too indirect and remote. 11 Lastly, the court believed that there was “at least one ‘better situated’ party,” 12 such as the U.S. Trustee, “who can seek appropriate remedies for the most direct 13 consequences of McKinsey’s alleged misconduct.” 14 We disagree with the district court’s analysis and conclusions as to the 15 thirteen engagements. In general, we conclude that its analysis conflated proof of 16 causation and proof of damages and that it did not draw all reasonable 17 inferences in Alix’s favor. More specifically (and more importantly) we believe 18 the district court gave insufficient consideration to the fact that McKinsey’s 14 1 alleged misconduct targeted the federal judiciary. As a consequence, this case 2 requires us to focus on the responsibilities that Article III courts must shoulder to 3 ensure the integrity of the Bankruptcy Court and its processes. Litigants in all of 4 our courts are entitled to expect that the rules will be followed, the required 5 disclosures will be made, and that the court’s decisions will be based on a record 6 that contains all the information applicable law and regulations require. If 7 McKinsey’s conduct has corrupted the process of engaging bankruptcy advisors, 8 as Alix plausibly alleges, then the unsuccessful participants in that process are 9 directly harmed. The fact that this case invokes our supervisory responsibilities 10 makes our resolution of it sui generis and of little, if any, application to 11 “ordinary” RICO cases where these responsibilities are not front and center. But 12 in light of these special considerations, we hold that Alix has plausibly alleged 13 proximate cause with respect to all thirteen engagements. 14 The fact that this case is not within the mine-run of civil RICO cases means 15 that its proximate cause analysis differs somewhat from the analysis in cases 16 such as Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008), Anza v. Ideal Steel 17 Supply Co., 547 U.S. 451 (2006), or Empire Merchants, LLC v. Reliable Churchill 18 LLLP, 902 F.3d 132 (2d Cir. 2018). 15 1 Bridge, for example, involved a scheme to undermine a county law 2 restricting bidders at tax lien auctions to one representative. When two or more 3 bids were equal, which happened frequently, 4 the county allocated the liens “on 4 a rotational basis” among the tying bidders. Id. at 643. The defendants in Bridge 5 used straw bidders to give themselves a larger presence and increase their odds 6 of obtaining successful bids. Id. at 643–44. The Court held that the plaintiffs’ 7 “alleged injury—the loss of valuable liens—[wa]s the direct result of [the 8 defendants’] fraud.” Id. at 658. Alix argues that the causal chain in this case is likewise sufficiently direct 9 10 for Rule 12(b)(6) purposes. Alix reasons that, because causation “need only be 11 probable,” BCS Servs., Inc. v. Heartwood 88, LLC, 637 F.3d 750, 758 (7th Cir. 2011), 12 he sufficiently alleged proximate causation by showing that AlixPartners would 13 have received at least one of the engagements from which McKinsey likely At these public auctions, prospective buyers bid on the percentage of penalties the delinquent property owner must pay in order to clear the tax lien on the property. If the owner failed to redeem the property within the statutory period by paying the lienholder (successful bidder) the delinquent taxes and penalty established at the auction, then the lienholder could obtain the deed for the property, effectively purchasing the property by paying only the delinquent taxes. For these reasons, the liens were profitable even at the lowest possible bid, resulting in multiple zero percent bids for many parcels. See Bridge, 553 U.S. at 643. 4 16 1 would have been disqualified based on AlixPartners’s record of success in 2 securing engagements. 3 The district court held that Alix failed to plead proximate cause because 4 intervening events might have broken the chain of causation, such as the 5 Bankruptcy Judge determining whether an advisor was necessary at all and the 6 Trustee selecting a particular advisor, which might not have been AlixPartners. 7 We agree that these might have been intervening events if Alix had somehow 8 learned, before any assignments had been made, that McKinsey had been filing 9 false statements and then sued for the fees it anticipated it would have received if 10 11 McKinsey had told the truth. However, this is not such a case. Alix sued after the assignments had 12 already been awarded. Consequently, we need not speculate whether the 13 Bankruptcy Judge and the Trustee would have thought an advisor was 14 necessary. We know that they did think so in the thirteen bankruptcies at issue 15 because they awarded assignments to McKinsey. It is certainly reasonable to 16 infer that the Bankruptcy Court, the U.S. Trustee, and the parties involved who 17 thought an advisor was needed in thirteen cases would continue to think so after 18 learning that their selected advisor was ineligible because of fraud and that they 17 1 would, at that point, make an alternative selection. And it is also a reasonable 2 inference that, in making another selection, they would likely have awarded 3 assignments to eligible firms in approximately the same ratio they had been 4 using in the past. Of course, McKinsey might ultimately prove the existence of 5 intervening factors, but that showing must await summary judgment or trial. 6 Similarly, this case differs in significant respects from Anza v. Ideal Steel 7 Supply Co., 547 U.S. 451 (2006), where the plaintiff claimed it lost sales because 8 the competitor did not pay sales tax and therefore sold product at lower prices. 9 The Supreme Court noted that the plaintiff’s competitor could have lowered its 10 prices for many reasons, not necessarily because it did not pay sales taxes. These 11 other possible reasons for lowering prices were thought to be the potential 12 intervening events that broke the chain of causation between the tax crime and 13 the plaintiff’s alleged injury. Anza would have been more like this case if an 14 internal document in Anza’s files had stated, “If we do not pay sales taxes, we 15 can and will lower our prices, but we will not lower our prices for any other 16 reason.” Anza would also be more like this case if the defendants had allegedly 17 defrauded one of the courts we oversee. Finally, Empire Merchants, LLC v. Reliable 18 Churchill LLLP, 902 F.3d 132 (2d Cir. 2018), does not preclude a finding of 18 1 proximate cause. In Empire, the defendant smuggled liquor into New York to 2 avoid excise taxes, and the plaintiff, a liquor distributor with exclusive 3 distribution rights in New York, alleged that the smuggling caused it to lose 4 sales. Our Court observed that “Empire’s ‘lost sales could [thus] have resulted 5 from factors other than [the defendants’] alleged acts of fraud.’” Id. at 143 6 (quoting Anza, 547 U.S. at 459). As examples of other possible causes, Empire 7 mentioned bootlegging from states with even lower taxes or retailers responding 8 to changing customers’ tastes by offering product not subject to Empire’s 9 exclusive distributorship. Id. 10 Here, by contrast, the loss to AlixPartners and the other large advising 11 firms is plausibly alleged to flow directly from McKinsey’s fraud on the 12 Bankruptcy Court. If the thirteen assignments had not been awarded to 13 McKinsey, it is entirely plausible that they would have been awarded to other 14 advising firms, and the large advising firms would, following past practice, have 15 received 75% of these assignments and resulting revenue (and that AlixPartners 16 would have received a 24% share of these assignments and resulting revenue). 17 And, of course, none of these prior cases involved allegations of fraud on a court 18 whose operations we superintend. 19 1 Although we hold that Alix sufficiently alleges proximate cause with 2 respect to the thirteen bankruptcies, proximate cause is especially conspicuous in 3 the case of GenOn. Specifically, Alix plausibly alleges that had McKinsey filed 4 proper disclosure statements, GenOn would not have hired McKinsey and, even 5 if it had, the bankruptcy court would not have approved McKinsey’s retention. 6 Moreover, Alix plausibly alleges that had McKinsey been disqualified, 7 AlixPartners would have been hired. 8 9 According to the amended complaint, McKinsey, prior to and at the time of the filing of the GenOn bankruptcy, had extensive connections to NRG Energy, 10 GenOn‘s parent company and a current or former McKinsey client. Prior to its 11 bankruptcy, GenOn had a multi-million-dollar fraudulent transfer claim against 12 NRG Energy. Had McKinsey made truthful disclosures, Alix alleges, GenOn 13 would not have hired McKinsey RTS to investigate GenOn’s fraudulent transfer 14 claim against NRG Energy, McKinsey’s own client. Nor would it have hired 15 McKinsey to negotiate GenOn’s separation from NRG Energy during bankruptcy 16 proceedings. Alix further alleges that, in addition to failing to disclose its 17 connection to NRG Energy, McKinsey also concealed at least 53 other known 18 conflicts and connections, some of which would have revealed that multiple 20 1 McKinsey clients were GenOn’s creditors. Alix further alleges that in order to 2 avoid being listed as a creditor of the estate, McKinsey received avoidable 3 preference payments from GenOn and intentionally concealed an interest 4 adverse to the estate. 5 Based on these alleged facts, it is implausible to conclude that GenOn 6 would have retained McKinsey with knowledge of these serious conflicts of 7 interests. We are even more hard-pressed to conclude that the Bankruptcy Court, 8 given these facts, could or would have found that McKinsey was “disinterested” 9 and did not “hold or represent an interest adverse to the estate.” 11 U.S.C. § 10 11 327(a). McKinsey contends that the causal chains in these thirteen bankruptcies 12 are too tenuous to meet the proximate cause standard because debtors do not 13 have to hire a bankruptcy consultant at all or may hire more than one. In its 14 view, this discretion makes any causal relationship too speculative. We disagree. 15 As the Supreme Court has explained, proximate cause is a “flexible concept” that 16 is “generally not amenable to bright-line rules.” Bridge, 553 U.S. at 654, 659. 17 Although the existence of an intervening decision-maker “may in some cases 18 tend to show that an injury was not sufficiently direct to satisfy [the] proximate- 21 1 cause requirement, . . . it is not in and of itself dispositive.” Bridge, 553 U.S. at 659. 2 On our review of a Rule 12(b)(6) dismissal, which requires us to draw all 3 reasonable inferences in Alix’s favor, we see nothing implausible or speculative 4 about the conclusion that AlixPartners and the other competitors would have 5 secured additional engagements absent McKinsey’s alleged misconduct. 6 Although proximate cause is most clearly alleged with respect to GenOn, 7 the remaining twelve engagements also meet the proximate cause requirement. 8 This is because, as we have noted (see pp. 13- 18), Alix plausibly alleges that Alix 9 Partners and the other two firms that compete for assignments in large 10 bankruptcies would have been in direct competition for the other twelve 11 bankruptcies if McKinsey had not submitted allegedly fraudulent statements to 12 the Bankruptcy Court. Then, plausibly, the firms would have received 13 assignments roughly in accordance with their historical market shares. 14 Moreover, fraud on the Bankruptcy Court committed in the manner alleged by 15 Alix causes direct harm to litigants who are entitled to a level playing field and 16 calls into play our unique supervisory responsibilities. 17 The congruence of these concerns has not been at play in any of the 18 authorities cited by the parties—Bridge, Anza, or Empire Merchants—or, for that 22 1 matter, in any other relevant authority. But the fact that this case is a “one off” 2 does not reduce our responsibility to superintend the integrity of bankruptcy 3 processes. Of course, proximate cause is merely one hurdle. McKinsey might 4 well prevail on summary judgment or at trial, and to be sure, uncertainties at 5 those stages might exist. But in light of our supervisory responsibilities, we 6 remand in order for a more complete record to be developed: one that will 7 disclose more about who did what, when, and with what reasonably likely 8 consequences. 9 For the guidance of the parties on remand, we note that uncertainty on 10 how to calculate damages should not be confused with proximate cause because 11 they are distinct concepts. See Anza, 547 U.S. at 466 (“Proximate cause and 12 certainty of damages, while both related to the plaintiff's responsibility to prove 13 that the amount of damages he seeks is fairly attributable to the defendant, are 14 distinct requirements.”) 15 Alix alleges that if McKinsey had disclosed what it was required to 16 disclose, McKinsey would have been disqualified and the thirteen assignments 17 would have been added to the pool available to Alix Partners and McKinsey’s 18 other competitors. McKinsey’s three largest competitors would have received 23 1 75% of these assignments (and revenue), just as they historically received 75% of 2 assignments and revenue. 3 Of course, we cannot tell which particular assignments would have been 4 within AlixPartners’ 24% and therefore cannot determine exactly its losses. But 5 certainty as to the amount of damages is not required at the pleading stage. And 6 whatever uncertainty exists does not undermine the fact that Alix plausibly 7 alleged that McKinsey’s fraud caused Alix some damage. 8 9 The law is well-settled that uncertainty as to amount of damages is not a reason to deny a plaintiff some recovery. Story Parchment Co. v. Paterson 10 Parchment Co., 282 U.S. 555, 251-52 (1931). There the Court said that “[t]he 11 wrongdoer is not entitled to complain that [damages] cannot be measured with 12 the exactness and precision that would be possible if the case, which he alone is 13 responsible for making, were otherwise…the risk of the uncertainty should be 14 thrown upon the wrongdoer instead of upon the injured party.” Id.; see also 15 Eastman Kodak Co. of New York v. S. Photo Materials Co., 273 U.S. 359, 379 (1927). 16 Uncertainty as to the amount of damages can arise in a somewhat 17 analogous context where wrongdoing has injured one member of a group, but it 18 is not known which one. The Seventh Circuit has offered the example of several 24 1 job applicants who were passed over on racial grounds for one promotion. “If 2 four people competing for one position lost an equal chance to get it, then each 3 should receive 25% of the benefits available.” Biondo v. City of Chicago, 382 F.3d 4 680, 688 (7th Cir. 2004). See BCS Services, Inc. v. Heartwood 88, LLC, 637 F.3d 750, 5 758 (7th Cir. 2011). Finally, McKinsey has not demonstrated that anyone else is “better 6 7 situated to sue” than Alix. See Empire Merchants, 902 F.3d at 144. Unlike in Empire 8 Merchants or in Anza where the alternative and “more immediate victim” was the 9 state with its plenary enforcement authority to address tax evasion, see id., we are 10 not persuaded that the Bankruptcy Court or the U.S. Trustee, which McKinsey 11 argues would be a more appropriate alternative plaintiff, would be in a position 12 to gather information about McKinsey’s conduct were Alix not in the picture. 13 Although the Bankruptcy Court has the inherent authority to investigate and 14 remedy fraud on the court, see Chambers v. NASCO, Inc., 501 U.S. 32, 44, (1991), 15 we have no reason to believe that a belated investigation may be launched into 16 an already-closed matter. 5 That task is usually assigned to the United States The GenOn bankruptcy matter, for example, is closed and has not been active since June 30, 2020, when the Final Decree was filed. Final Decree Closing the Remainder of the Chapter 11 Cases, In re: GenOn Energy, Inc., et al. (S.D. Tx. June 30, 2020) (No. 17- 5 25 1 Attorney’s Office. To be sure, in an ordinary civil or criminal case, a court would 2 “vacate its own judgment upon proof that a fraud has been perpetrated upon the 3 court.” Chambers, 501 U.S. at 44. While, theoretically, that may also be possible 4 here, we are not persuaded that, under the circumstances presented here, either 5 the Bankruptcy Court or the U.S. Trustee would be in a superior position to find 6 out what McKinsey did (or did not do). In other words, adjudicating any 7 potential claims of the U.S. Trustee or the Bankruptcy Court would not be more 8 “straightforward” than adjudicating Alix’s claims. See Empire Merchants, 902 9 F.3d at 144 (quoting Anza, 547 U.S. at 460). For these reasons, we conclude that 10 Alix has alleged a sufficiently direct relationship between the asserted injury to 11 AlixPartners and McKinsey’s purported racketeering activities in all thirteen 12 bankruptcies. 13 14 III. The district court dismissed Alix’s RICO claims predicated on the pay-to- 15 play scheme because it found that the allegations failed to meet the pleading and 16 proximate cause standards. It concluded that the pay-to-play allegations were 33695), ECF No. 2176. Even when the case was active, nothing in the record suggests that the U.S. Trustee or any of the private parties with pecuniary interests filed an objection or otherwise tried to vindicate the integrity of the bankruptcy system in that case. 26 1 “devoid of any supporting specifics” and inadequate to meet the pleading 2 requirements, and that even if they did, that they failed to show a sufficiently 3 direct link between the allegedly unlawful conduct and injury. We disagree. We 4 hold that Alix adequately pleaded bankruptcy fraud under Federal Rule of Civil 5 Procedure 9(b) and that the allegations show a sufficiently direct link between 6 the alleged fraud and injury. 7 A. 8 Alix alleges that McKinsey’s pay-to-play scheme violated 18 U.S.C. § 9 152(6), which requires a showing that the defendant acted “fraudulently” in 10 “giv[ing], offer[ing], receiv[ing], or attempt[ing] to obtain any money or 11 property, renumeration, compensation, reward, advantage, or promise thereof 12 for acting or forbearing to act in any [bankruptcy cases].” In alleging that 13 McKinsey violated this statute, Alix was required to plead with sufficient 14 particularity the circumstances constituting the fraud. See Fed. R. Civ. P. 9(b). 15 Crucially, however, “allegations may be based on information and belief when 16 facts are particularly within the opposing party’s knowledge,” provided that 17 they “adduce specific facts supporting a strong inference of fraud.” Wexner v. 18 First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). 27 1 The district court found Alix’s pay-to-play allegations insufficient because 2 they did not “specify any single act of ‘paying’ or ‘playing’” or connect instances 3 of corruption to a particular bankruptcy case. However, the amended complaint 4 does identify several engagements that Alix believes had been influenced by the 5 pay-to-play scheme. For example, it specifically alleges the influence of the pay- 6 to-play scheme in the Alpha Natural Resources, NII Holdings, and Edison 7 Mission Energy bankruptcies because AlixPartners was “never even asked to 8 pitch for the work” despite its strong relationship with the debtors or extensive 9 expertise in the relevant industries. 10 Moreover, the details that the district court found lacking are rarely within 11 the knowledge of a victim of fraud and are more appropriately left for discovery. 12 At this stage, Alix’s pay-to-play allegations need only suggest “a strong inference 13 of fraud.” Wexner, 902 F.2d at 172. The allegations in the complaint about specific 14 cases, when combined with the unusually detailed allegations (see pp. 8-10) 15 regarding Alix’s meetings with Barton, one of which allegedly led to Barton 16 admitting McKinsey’s role and participation in an illegal scheme and supposed 17 agreement to take steps to end that scheme, easily raise a strong inference of 18 fraud. See Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 171 28 1 (2d Cir. 2015) (“In determining the adequacy of [a plaintiff’s] fraud pleading[] . . . 2 [a court] view[s] the alleged facts in their totality, not in isolation.”). Accordingly, 3 we conclude that Alix’s detailed pay-to-play allegations comfortably meet the 4 Rule 9(b) standard. 5 6 B. Even if they are adequately pleaded, McKinsey contends that the pay-to- 7 play allegations suffer from the same problem of insufficient causal connection as 8 the allegations concerning fraudulent disclosure statements. The pay-to-play 9 allegations, McKinsey argues, “narrow” the gap between the alleged predicate 10 acts and injury but fall short of “eliminat[ing]” that gap because of the 11 independent decisions of debtors and the bankruptcy court. Specifically, 12 McKinsey contends that Alix’s RICO claim predicated on the pay-to-play scheme 13 necessarily fails when the allegations do not show that the debtors would have 14 hired AlixPartners in the absence of the scheme. 15 We disagree. At the motion to dismiss stage, Alix need only plausibly 16 allege that the pay-to-play scheme proximately caused AlixPartners’ harm. We 17 believe that the pay-to-play allegations are sufficiently robust to plausibly allege 18 that the causal connection has been met. Whether Alix can substantiate his 29 1 allegations is a question for summary judgment or trial, but at this juncture we 2 find that the allegations are sufficient to allege proximate cause. The injury alleged due to the fraudulent disclosure statements is, as we 3 4 have discussed, the loss of assignments as a bankruptcy consultant. 6 Pay-to-play 5 is different because the purported injury is the lost opportunity to compete in an 6 unrigged “beauty contest.” Where this occurs, competitors who do not pay are 7 ipso facto harmed. In this sense, the allegations concerning the pay-to-play 8 scheme are like those in Bridge, where the Court recognized the existence of an 9 injury resulting from the rigged lottery system. Here, Alix likewise plausibly 10 alleges a direct causal chain between AlixPartners’s loss (the opportunity to 11 participate in an unrigged contest) and McKinsey’s pay-to-play scheme that was 12 intended to buy off the competition. For each pay-to-play engagement, Alix 13 specifically alleges that AlixPartners “was never even asked to pitch for the 14 work” in cases in which it ordinarily would have competed for an assignment 15 absent the scheme. Furthermore, it follows from Alix’s pay-to-play allegations, 16 which we must accept as true at this point, that McKinsey eviscerated what had Of the thirteen total engagements in dispute, all of which the amended complaint alleges have been affected by McKinsey’s fraudulent disclosure statements, three engagements are alleged to also have been influenced by the pay-to-play scheme. 6 30 1 historically been an even playing field in the bankruptcy advising marketplace. 2 Suffice it to say that it is implausible—indeed inconceivable—that any 3 Bankruptcy Court would have approved McKinsey’s retention if Alix’s 4 allegations were substantiated. There is accordingly a plausibly alleged direct 5 causal link between McKinsey’s purported marketplace manipulation and the 6 harm to Alix of being excluded from a market that had been rigged. 7 In view of Alix’s allegations that competitors had been bought off, we, in 8 the absence of discovery and on an undeveloped record, are not in a position to 9 identify intervening causes that could have severed this causal chain. And given 10 this Court’s responsibility to oversee the integrity of the bankruptcy process, we 11 see no other victims with the appropriate incentive to remedy the harm caused 12 by McKinsey’s scheme as alleged by Alix. Accordingly, we hold that the pay-to- 13 play allegations plausibly allege RICO proximate causation. 14 15 16 CONCLUSION For the foregoing reasons, we VACATE and REMAND for further proceedings consistent with this opinion. 17 18 31
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