The Trap of Merchant Cash Advances and Financing

If you have a business, you have no doubt received advertisements for “merchant cash advances,” “merchant loans” or “merchant financing,” whether or not those specific terms are used. If in doubt, just do a search for those terms and you will get a couple pages of sponsored ads (but be warned the big brother of the internet will flood you with ads after that). Based on cases I have now, and calls I have received, business has picked up considerably for those lenders post-covid. Although you might be tempted by the relatively easy cash promised as soon as the next business day, you might fall into a trap you cannot easily escape.

Initially, let’s review the setup. You find “ABC Finance” online, through a google search or an advertisement, promising your company immediate financing and a quick, easy approval process. ABC asks you for basic information about your business, and a list of your accounts receivable, including the names of your customers, and you complete the short online application. Great news! Your financing is approved and all you need to do is sign the documents, provide your bank account information, and your money will be wired the next day!

Now let’s review the actual deal, using a real world example from my files for a business that has $100,000.00 in receivables (click the images for a larger version). The main document you sign is titled a “Purchase Agreement” and you have agreed to sell that $100,000.00 of receivables to ABC for a purchase price of $75,000.00, which they will wire to you. However, in reality, it is not a sale because you have agreed to pay ABC back the $100,000.00 (not the $75,000.00), plus a long list of various fees. In this example, you agree to pay ABC $639.20 per day through automatic drafts from your business bank account. If all goes well, you repay the “loan” in 7-8 months, with an effective annual interest rate of 75-100%. As you get close to the payoff date, ABC will probably be happy to make a new deal for the same receivables or give you more money. After all, they have almost doubled their money already.

If you are not able to make those daily payments — every single business day — the situation can go downhill very quickly. At best, if you make up those “bounced” payments they will come with hefty fees from ABC and your bank for every daily payment missed. If you cannot make these payments up, ABC might drain your bank account because you gave them a security interest in your accounts and perhaps other business property. More importantly, you will review your files and realize that not only did you sign a personal guaranty for the “loan” you also signed a consent judgment or “confession of judgment.” That means that ABC can get a judgment against you personally and your company for the loan balance and hefty legal fees merely by filing the consent judgment with the court (often a New York court). You have lost a lawsuit in a distant court even before you know you have been sued. In some cases ABC might even contact your credit card merchant and all of the customers you told them about and threaten them with legal action if they do not send the receivables to ABC, effectively shutting down your business. In a flash, your personal and business finances are in shambles.

Even if the merchant debt is your only significant debt (which is not uncommon) it can kill your business if you just go through a slow period or your bank account balance just happens to be low for a few days. You should consider carefully the real cost of this financing and the consequences described above before you enter into this relationship. If you are already in this situation, contact a qualified lawyer to discuss how it may be resolved and your business saved.

Scott Riddle’s practice focuses on bankruptcy and reorganization for businesses and business owners. Scott has represented businesses and other parties in Bankruptcy and reorganization cases for almost 30 years. You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com. For more information, click here.

In Case of First Impression 11th Circuit Holds Debt of PACA Trustee Not Excepted From Discharge Pursuant to 11 U.S.C. §523(a)(4).

By Scott Riddle Posted in Eleventh Circuit Cases

In a case of first impression in the Eleventh Circuit, the Circuit Panel addressed the dischargeability of debts incurred by a produce buyer who is acting as a trustee under the Perishable Agricultural Commodities Act (“PACA”). In re Forrest, 2022 WL 3908803 (11th Cir. August 31, 2022)(click here for .pdf). The court concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4), which excepts debts “for fraud or defalcation while acting in a fiduciary capacity…”

The basic, undisputed facts are:

The Forrests [Debtors] are owners and officers of Central Market of FL, Inc. (Central Market), which buys and sells produce. [Spring Valley Produce, Inc. (“SVP”)] sold $261,504.15 worth of produce to Central Market for which Central Market never paid. During the transactions at issue, SVP and Central Market were licensed under PACA. SVP preserved its right as a PACA trust beneficiary by including the required statutory statement on its invoices to Central Market. Upon receiving and accepting SVP’s produce shipments, Central Market became a PACA trustee of a trust res consisting of that produce… On May 15, 2020, the Forrests filed a Chapter 7 bankruptcy petition hoping to discharge their business debts, including the debt owed to SVP. On August 14, 2020, SVP commenced this adversary proceeding, seeking a declaration that the debt is nondischargeable under § 523(a)(4). That statute excepts from discharge debts “for fraud or defalcation while acting in a fiduciary capacity[.]”

The Panel noted that the “Fiduciary Capacity Exception” had existed since 1841, and reviewed U.S. Supreme Court cases on the Exception.

These early Supreme Court cases thus give us the following rules. First, the Fiduciary Capacity Exception does not apply to trusts implied by contract but applies to technical trusts or trusts in the technical sense. [Chapman v. Forsyth, 43 U.S. (2 How.) 202, 208, 11 L.Ed. 236 (1844)]. Second, the debtor must be acting in a fiduciary capacity before the act of defalcation creating the debt for the exception to apply. [Upshur v. Briscoe, 138 U.S. 365, 378, 375, 11 S.Ct. 313, 34 L.Ed. 931 (1891)]. Third, the substance of the transaction, rather than its form, controls in determining whether a transaction fits the “strict and narrow” definition of a technical trust. [Davis v. Aetna Acceptance Co., 293 U.S. 328, 333-34, 55 S.Ct. 151, 79 L.Ed. 393 (1934)].

The Panel next addressed the core issue of “what type of trust-like duties are sufficient to create a technical trust under the Fiduciary Capacity Exception,” stating that “[o]ur precedent has generally emphasized two duties: the duty to segregate trust assets and the duty to refrain from using trust-assets for non-trust purposes.” After reviewing case law, the court created the following test:

But synthesizing all of these cases, we hold that the following test applies in determining whether a debtor is acting in a “fiduciary capacity” under § 523(a)(4). First, the fiduciary relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. This tracks the traditional and narrow definition of trusts in early Supreme Court cases as well as our own approach and the approach taken by bankruptcy courts in this Circuit. Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. Based on our caselaw, the two most important trust-like duties, and the ones that we have held create a technical trust, are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose. Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt.

(emphasis added). Getting to the facts of this case, the Panel held that PACA creates a trustee, identifiable beneficiaries and an identifiable trust res, and thus the first requirement is met. However, PACA does not meet the second requirement of imposing “trust like duties.” There is no requirement the trust assets be segregated, or not used for non-trust purposes. There is a requirement of keeping accurate records, but while a “typical “trust like duty” that alone is insufficient to create a technical trust. A PACA Trust is closer to a “constructive” or “resulting” trust.

The Panel, therefore, concluded that debts incurred by a produce buyer acting as a PACA trustee are not excepted from discharge pursuant to 11 U.S.C. §523(a)(4).

Image: SBR (Market in Barcelona, Spain).

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for almost 30 years. You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com. For more information, click here.

New Chapter 11 Filing Alert – Governors Gun Club Kennesaw, LLC

By Scott Riddle Posted in News and Comments, Northern District Cases, Small Business Bankruptcy

The Governors Gun Club of Kennesaw filed a Chapter 11 case in the Northern District of Georgia on August 17, 2022. Case No. 22-20787-jrs. The reason for the filing, as stated in pleadings filed with the Court –

Like so many other small businesses, the Debtor suffered a series of setbacks at the hands of the pandemic. Debtor is a membership based business that offers its members a luxury experience for indoor shooting facilities, including an indoor shooting range, professional firearms training, concerts, and a situational training simulator. Debtor also offers packages for corporate and social events at its club.

The Debtor has identified South State Bank as the primary secured lender, with a balance owed of $8,619,776.00. The Bank has security interest in the Debtor’s real property and primary place of business, 1005 Cobb Place Blvd. NW, Kennesaw, Georgia 30144. The property is co-owned by Web IV, LLC, which also filed its own Chapter 11 case on August 17, 2022. Case No. 22-20790-jrs.

In a Case of First Impression, 11th Circuit Rules “New Value” Can Be Both Preference Defense and Administrative Claim

By Scott Riddle Posted in Eleventh Circuit Cases, Northern District Cases

In Auriga Polymers, Inc. v. PMCM2, LLC, as Liquidating Trustee, No. 20-14647, 2022 WL 2800195 (11th Cir. July 17, 2022) (click here for .pdf) the creditor, Auriga, received transfers of more than $2.2 million in the 90 days before the Debtor, Beaulieu Group, LLC, filed its Bankruptcy case on July 16, 2017. During the 90 day preference period, Auriga had also delivered to the Debtor over $3.523 million of goods, with at least $694,502.00 of the goods delivered within 20 days of the Petition Date.

Auriga filed two claims in the case: 1) a general unsecured claim in the amount of $3.596 million, and 2) an administrative claim in the amount of $694,502.00 pursuant to §503(b)(9) of the Bankruptcy Code for the value of the goods delivered within 20 days of the Petition Date. After confirmation of the Debtor’s Plan, which gave authority to the Liquidating Trust to pursue avoidance actions, the Liquidating Trustee filed a proceeding against Auriga to avoid and recover the $2.2 million Pre-Petition Transfers under §547(b), to reclassify any portion of Auriga’s § 503(b)(9) request that was included as part of its new value defense as a general unsecured claim, and to disallow any claims by Auriga until it disgorged any amounts successfully avoided by Trustee. Auriga counterclaimed seeking a declaratory judgment that (1) its use of the new value defense under § 547(c)(4) does not preclude it from using the same value to recover under § 503(b)(9), and (2) the Trustee cannot use 11 U.S.C. § 502(d) to disallow Auriga’s § 503(b)(9) request for administrative expense treatment.

Auriga and the Trustee subsequently stipulated that the payments made to Auriga in the preference period were avoidable preferences, and the new value defense protected all but $421,119.00 of the preferential transfers. “That $421,119 in value conveyed by Auriga to Beaulieu was part of Auriga’s $694,502 § 503(b)(9) request; the parties dispute Auriga’s ability to also use that $421,119 value as part of its § 547(c)(4) new value defense. The parties agreed, however, that Auriga had an allowed § 503(b)(9) claim for $273,382 (the difference between the total request for $694,502 and the $421,119 disputed portion).”

On summary judgment, the Bankruptcy Court entered an Order that, inter alia, held that “funds held in reserve to pay § 503(b)(9) claims are ‘otherwise unavoidable’ transfers for purposes of a § 547(c)(4) defense and cannot be used to offset preference liability. Click here for .pdf; see also In re Beaulieu Grp., LLC (“Fabric Sources”), 616 B.R. 857 (Bankr. N.D. Ga. 2020) (wherein the Bankruptcy Court previously ruled on this issue). In other words, using the same “value” as both an administrative claim and a new value defense was, in essence, a double recovery for the creditor.

Auriga appealed to the District Court, which stayed the case for immediate direct appeal to the Eleventh Circuit.

The precise question warranting direct appeal is:

whether a Liquidation Trustee’s post-petition reservation of funds sufficient to pay a defendant’s administrative expense claim under § 503(b)(9) amounts to an “otherwise unavoidable transfer” within the meaning of § 547(c)(4) such that it precludes the use of such new value as part of the defendant’s affirmative defense of subsequent new value under § 547(c)(4) of the Bankruptcy Code.

Judge Bonapfel – When Are Educational Loans Business Debts For Purposes of Qualifying for Chapter 7?

By Scott Riddle Posted in Consumer Bankruptcy Guide, Northern District Cases

In the case of In re Ruff, 2022 B.R. 1638964, Ch. 7 Case No. 20-68855-pwb (Bankr. N.D.Ga. March 31, 2022) (click here for .pdf) the issue was whether the educational loans owed by the Debtor were “consumer” debts as defined by 11 U.S.C. §101(8) of the Bankruptcy Code, and incorporated into 11 U.S.C. §707(b). If the student loan debt is a “consumer debt” the Debtor would not qualify for Chapter 7 as her consumer debt would be more than her non-consumer/business debt. The United States Trustee opposed the Debtor’s position that the debt was not a consumer debt, and moved for dismissal of the Chapter 7 case.

Debtor attended college from 1995-1999 but never received a degree. She had no outstanding debt from her initial stint in college. In 2011, Debtor had a “midcareer evaluation” and decided to return to school and get a degree in Organizational Management. The degree was not a requirement for her employment, but she believed it was necessary to advance to a better position in the insurance underwriting field. In pursuit of her degree, which she received in 2014, she incurred student loans with a current balance of around $55,000. In 2017 she was laid off, but subsequently obtained a position in the same insurance underwriting field. The new position, which she still holds, did not require a degree. Debtor also had a side business in 2016, but it failed in 2020. Debtor filed a Chapter 7 case in July 2020, scheduling $55,586.00 in educational loans and $22,573.00 in other unsecured debt and stated in her petition that her debts were not primarily consumer debts. The categorization of the student loans as non-consumer/business debt was opposed by the U.S. Trustee.

11th Circuit Rules On The Georgia Real Property Remedial Statute – Who Is A “Subscribing Witness?”

By Scott Riddle Posted in Eleventh Circuit Cases, Northern District Cases

Once again, a Bankruptcy case leads to a key opinion in Georgia real estate law and, as often the case, the Chapter 7 Trustee prevails. In In re Lindstrom, 2022 WL 1041192 (11th Cir. April 7, 2022) (click here for .pdf) the issue was the validity of a security deed, the interpretation of the Georgia “Remedial Statute” and the definition of “subscribing witness.” The basic, undisputed facts are:

When [Debtor] Virginia Lindstrom needed to put up collateral for a $174,500 loan from LoanDepot.com, LLC, she executed a security deed for a piece of property in Lawrenceville, Georgia. As part of that process, her sister attested the deed, signing that she had witnessed its execution. At some point later that same day, Lindstrom also acknowledged the deed to her closing attorney (a public notary), who certified the acknowledgment on the deed’s final page. Although no one recognized it then, the deed was invalid on its face. Under Georgia law, a deed must be attested by two witnesses, and at least one of them needs to be an official such as a notary or court clerk. O.C.G.A. §§ 44-2-15, 44-14-61. The attorney was a notary, but he failed to attest the deed. And his certification of Lindstrom’s acknowledgment was not enough to make the deed valid. There is likely an easy, if unsatisfying, explanation for this oversight: a statutory amendment. Indeed, had the deed been signed only a few weeks earlier, it would have been completely valid. At that time Georgia law permitted deeds to be either attested by or acknowledged before an official. See O.C.G.A. § 44-14-61 (1931) (amended July 1, 2015); O.C.G.A. § 44-14-33 (1995) (amended July 1, 2015). Lindstrom had acknowledged the deed, but the old law no longer governed.

The Debtor filed a Chapter 7 petition in February 2017 and the Chapter 7 Trustee filed an adversary proceeding against LoanDepot and Pingora Loan Servicing (who had taken over the loan) to avoid the security deed. Scarver v. LoanDepot.com and Pingora Servicing, LLC, Adv. Proc. No. 18-05174 (Bankr. N.D.Ga.) (Sigler, J.). Bankruptcy Judge Sigler granted the Trustee’s Motion for Summary Judgment (click here for .pdf of summary judgment order). The lenders appealed and the District Court reversed (click here for District Court opinion). The Trustee appealed to the 11th Circuit Court of Appeals and the Circuit reversed the District Court. Continue Reading

District Court Upholds Georgia Bankruptcy Court’s Restrictions On Chapter 7 Trustee Attorneys’ Fees

By Scott Riddle Posted in Northern District Cases

[Updated – The Trustee has filed a Motion for Rehearing (click here for .pdf of motion). That Motion was denied on July 12, 2022 (click here for Order].

In this lengthy post, we discuss Judge Paul Bonapfel’s 73-page Order in which he skewered the fee application of a Chapter 7 Trustee and effectively changed the way all judges in the Northern District of Georgia view fee applications for Trustees’ counsel. In re McConnell, Case No. 19-67128-pwb, 2021 WL 203331 (Bankr. N.D.Ga. October 28, 2019). Many of the judges have required that attorneys now include in employment orders language such as this – “The approval of employment of counsel is limited to those duties that are not trustee duties. See generally, In re McConnell, 19-67128-PWB, 2021 WL 203331 (Bankr. N.D. Ga, Jan. 4, 2021)” (this is an actual note I received from chambers after submitting an employment order). Judges have scrutinized fee applications from the bench, asking lawyers if they have complied with McConnell. You can read the full, very detailed opinions – the initial twenty-four page Order and Notice (click here for .pdf) and the seventy-three page Final Order (click for .pdf or the Westlaw link). The Trustee appealed Judge Bonapfel’s Order to the District Court and on March 11, 2022 the District Court entered its Order. Gordon v. McConnell and Gargula, Civil Action No. 1:21-cv-304-AT (N.D. Ga. March 11, 2022) (click here for .pdf of District Court Order).

The short #tldr summary of the 38-page District Court Order is that it is not good for Chapter 7 Trustees and their attorneys. The District Court essentially upheld Judge Bonapfel’s analysis of what are, or are not, “Trustee duties” that are included in the Trustee commission and not separately compensable as attorneys’ fees. See January 4, 2021 Bonapfel Order at pp. 20-34. After reviewing the facts of the Bankruptcy Case at pp. 2-10, the District Court identified the issues on appeal.

Appellant [Trustee] raises eleven issues in his brief on appeal. However, by Appellant’s own admission, these eleven issues can be distilled into three general grounds for error: that the bankruptcy court erroneously concluded

1. that the firm be denied compensation for services that were the performance of the Trustee’s statutory duties;

2. that the firm’s services in opposing conversion to chapter 13 are not allowable because they were not necessary or beneficial to the estate; and

3. that the firm should be denied compensation for services in connection with Appellant’s retention of the firm and its application for compensation.

Eleventh Circuit Addresses Deadlines to Appeal Order of District Court (when Acting as Bankruptcy Appellate Court) to Court of Appeals

By Scott Riddle Posted in Eleventh Circuit Cases

In a relatively brief opinion, the Eleventh Circuit Court of Appeals ruled on the deadlines for appealing an order from the District Court (acting as an appellate court for a Bankruptcy Court Order) to the Court of Appeals. Appellants appealed a Bankruptcy Court Order to the District Court for the Northern District of Georgia. On July 15, 2021 the District Court dismissed the appeal after finding that Appellants lacked standing, and a Judgment was entered the same day. Four days later, on July 19, 2021, an Amended Judgment was entered that only corrected the court division in the header. Appellants appealed the District Court Order and Judgment on August 17, 2021.

When an appeal is taken from a judgment or order of a district court exercising appellate jurisdiction in a bankruptcy appeal, the Federal Rules of Appellate Procedure apply with certain exceptions not relevant to this appeal. See Fed. R. App. P.
6(b)(1)(A). This includes Rule 4(a)(1), which provides that a notice of appeal must be filed with the district clerk within 30 days after entry of the judgment or order appealed from. Fed. R. App. P. 4(a)(1). If the last day of a period falls on a weekend or holiday, the period runs until the next day that is not a weekend or holiday. Fed. R. App. P. 26(a)… Because the amended judgment did not change a matter of substance or resolve a genuine ambiguity, the time to appeal did not begin anew. See FTC v. Minneapolis-Honeywell Reg. Co., 344 U.S. 206 (1952). Thirty days after the July 15 final judgment was a Saturday, August 14, so the period ran until Monday, August 16. See Fed. R. App. P. 4(a)(1), 6(b)(1), 26(a). [Appellant’s] August 17 notice of appeal was thus one day late.

Appellants also argued that the deadline to appeal should be extended three days because the judgment was received by mail. See Fed. R. Civ. Proc. 6(d) (“When a party may or must act within a specified time after being served and service is made under Rule 5(b)(2)(C) … 3 days are added after the period would otherwise expire under Rule 6(a)”).

But we have held that the 30-day requirement of Appellate Rule 4(a)(1) is not affected by former Civil Rule 6(e), now Civil Rule 6(d), because the time to appeal starts from entry of the judgment, not from service of the notice. See Fed. R. App. P. 4(a)(1); Lashley v. Ford Motor Co., 518 F.2d 749, 750 (5th Cir. 1975). Although Lashley was a civil case, Rule 4(a)(1) applies to appeals from an order of the district court exercising appellate jurisdiction in a bankruptcy appeal, and Lashley’s reasoning also applies here. See Fed. R. App. P. 4(a)(1), 6(b)(1). Therefore, [Appellants’] notice of appeal was untimely.

Appeal dismissed.

In re SUGARLOAF CENTRE, LLC., 2022 WL 663020 (11th Cir. March 4, 2022)

When Does a Judgment Lien and FiFa Attach to Real Property in Georgia?

By Scott Riddle Posted in Georgia State Cases, Middle District Cases

In Georgia, does a judgment lien attach to real property as of the date the judgment was entered or as of the date and time the writ of fieri facias on that judgment is properly recorded in the county records, as required under Georgia law? The Supreme Court of Georgia answered this question in Synovus Bank v. Kelley, No. S20Q0843 (August 24, 2020) (click here for .pdf). The case came to the Georgia Supreme Court after the United States District Court for the Middle District of Georgia certified the question to the Court. Specifically, the following two questions were certified:

Whether as between a creditor, who obtains a judgment against a debtor’s real property, and the judgment debtor, OCGA § 9-12-80 creates a lien on the debtor’s real property or rather is a lien against the debtor’s real property created at the time of recordation pursuant to OCGA § 9-12-86. If such lien is created at the time of recordation, whether the effective date of creation of that lien relates back to the date of the judgment for purposes of establishing the date a creditor obtained a lien against the judgment debtor’s real property.

The basic, relevant facts were stipulated to by the parties. On December 7, 2016 Synovus obtained a judgment against the Brownlees in Tift County, Georgia and the Writ of Fieri Facias (“FiFa”) was issued on December 22, 2016 and recorded on the court’s General Execution Docket. On January 25, 2017 the FiFa was recorded on the GED of the Superior Court of Worth County, where the Brownlees owned real property. On March 21, 2017, the Brownlees filed a Chapter 11 Bankruptcy petition, and the case was converted to Chapter 7 on March 7, 2018. In July 2018, Chapter 7 Trustee Walter Kelley filed an adversary proceeding to avoid the judicial lien on the Brownlee’s real property as preferential transfers, as the recording of the FiFa in both counties was within 90 days of the Bankruptcy petition date.

Both the Trustee and Synovus filed motions for summary judgment. The Bankruptcy Court granted the Trustee’s motion “holding that ‘[u]nder Georgia law, only recording a judgment creates a judicial lien on real property’ and thus the transfer of interest in the Brownlees’ real property occurred on the date the Fi. Fa. was recorded, not the date the judgment was entered.” In re Brownlee, 593 BR 916, 923 (IV) (Bankr. M.D. Ga. 2018). Synovus appealed to the District Court, which certified the above questions to the Georgia Supreme Court. For purposes of this post, knowledge of preferential transfer law is presumed and the focus is on Georgia real estate law. Continue Reading

Elite Bankruptcy Consulting Firms Battle It Out With Fraud and RICO Claims Related to Bankruptcy Disclosures and Lost Engagements

By Scott Riddle Posted in Corporate & Fiduciary Litigation, Miscellaneous Cases

In Jay Alix, as assignee of AlixPartners, LLP v. McKinsey & Co., Inc., 2022 WL 163800 (2nd Cir., January 19, 2022) (click here for .pdf), two major competitors in the niche market of Bankruptcy advising to estates with a billion dollars or more of assets were in court against each other over lucrative consulting assignments. Alix sued McKinsey, three of its subsidiaries and several current or former employees under state law and the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 USC §1961, et seq.

The amended complaint alleges that McKinsey secured lucrative consulting assignments in this market by knowingly and repeatedly filing disclosure statements in the Bankruptcy Court containing incomplete, misleading, or false representations concerning conflicts of interest. Alix alleges that this pattern of misrepresentations to the Bankruptcy Court resulted in injury to AlixPartners through the loss of engagements it otherwise would have secured and of substantial revenues those assignments would have generated, as well as through the loss of the opportunity to compete for them in an unrigged market… Alix alleges that AlixPartners was directly harmed by McKinsey’s conduct because, had McKinsey truthfully and timely disclosed its conflicts to the Bankruptcy Court, McKinsey would have been disqualified from obtaining at least some of the assignments it secured. In turn, Alix alleges that AlixPartners, because of its major presence in this niche market, would have been retained in at least some of the cases.

Alix also alleges a “pay-to-play” scheme under which McKinsey arranged meetings between its clients and bankruptcy attorneys in exchange for exclusive bankruptcy assignment referrals from those attorneys. Consistent with this scheme, Alix alleges that McKinsey offered to introduce AlixPartners to its clients if Alix would “drop the issues he had raised concerning McKinsey’s acknowledged pay-to-play scheme and its illegal disclosure declarations.”

The District Court dismissed Alix’s RICO claims for failure to show a causal connection between the alleged RICO violations and Alix’s injuries. See 470 F.Supp.3rd 310 (S.D.N.Y. 2020). The Third Circuit reversed and found that the amended complaint adequately alleged proximate causation under RICO, and remanded the case. Continue Reading