The Bottom Line
In a one-paragraph affirmance of the lower court, in Mar-Bow Value Partners LLC v. McKinsey Recovery & Transformation Services US LLC (In re Alpha Natural Resources Inc., Nos. 17-2268; 17-2269 (4th Cir. Sept. 6, 2018), the Fourth Circuit affirmed a decision by the district court that an appellant must have a “pecuniary interest” in the outcome of the appeal in order to be a “person aggrieved” with standing to pursue the appeal. Merely purporting to uphold the integrity of the bankruptcy system — without benefiting monetarily from the outcome of the appeal — is not a sufficient rationale to avoid dismissal for lack of standing. The Fourth Circuit also affirmed that the doctrine of equitable mootness barred overturning a confirmed plan of reorganization (including the release and exculpation provisions contained therein). In its brief per curiam ruling, the Fourth Circuit overruled arguments by Mar-Bow “for the reasons stated by the district court,” and thus this post analyzes the district court opinion in depth as well.
Alpha Natural Resources, one of the largest coal suppliers in the United States, and certain of its subsidiaries filed for Chapter 11 protection in August 2015. Shortly thereafter, the debtors filed an application to retain McKinsey as turnaround advisor, and the engagement was approved by the Bankruptcy Court.
Mar-Bow is beneficially owned and funded by Jay Alix, the founder of AlixPartners, a consulting firm that competes with McKinsey in the turnaround consulting field. Mar-Bow was also an unsecured creditor that filed a proof of claim. The district court opinion notes McKinsey asserted that Mar-Bow purchased the claim to litigate against McKinsey.
Mar-Bow appeared for the first time in the bankruptcy cases more than six months after McKinsey’s retention had been approved, and thereafter raised the issue of McKinsey’s Rule 2014 disclosures at least five times. Among other things, Mar-Bow objected to various of McKinsey’s fee applications, filed pleadings to compel further compliance with Rule 2014 and ultimately objected to the plan of reorganization.
Approximately nine months after the bankruptcy commenced (and two days after Mar-Bow first appeared), the U.S. Trustee filed a motion to compel McKinsey to comply with Rule 2014, asserting that McKinsey’s disclosures of connections to other parties in interest were too vague and amorphous. (The record indicated that Mar-Bow urged the U.S. Trustee to file such motion.) The motion was resolved with McKinsey agreeing to file additional disclosures, although the names of certain connections were still not publicly disclosed. The U.S. Trustee was apparently satisfied with this resolution, but Mar-Bow pressed on.
Mar-Bow then filed its own motion to compel McKinsey to comply with Rule 2014, alleging that McKinsey’s insufficient disclosures threatened the integrity of the bankruptcy proceeding. Mar-Bow also asked the Bankruptcy Court to suspend payment of McKinsey’s fees and disgorge previously paid fees.
The Bankruptcy Court ruled that it would require McKinsey to provide additional information for an in camera review, while Mar-Bow sought to have such disclosures filed publicly, or at least have Mar-Bow’s professionals be able to review such information. Satisfied with McKinsey’s additional disclosures, the Bankruptcy Court continued to find that McKinsey’s disclosures were adequate and that the firm was disinterested.
Mar-Bow then also objected to the proposed plan of reorganization, on the basis that the release, exculpation and indemnification provisions should not apply to McKinsey as it had, according to Mar-Bow, not fully complied with Rule 2014. The Bankruptcy Court expressed confusion about the connection between additional Rule 2014 disclosures and plan confirmation, and in July 2016 confirmed the debtor’s Chapter 11 plan, including the release and exculpation provisions, holding that the plan reflected a web of interrelated settlements and that the basic transaction underlying the plan would not occur without the release and exculpation provisions.
Mar-Bow appealed the various Bankruptcy Court orders to the district court.
When ruling on Mar-Bow’s appeals, the district court held that Mar-Bow lacked standing because Mar-Bow’s recovery as a creditor was fixed in the plan and thus Mar-Bow had no pecuniary interest in the appeals’ outcome, even in the event McKinsey’s fees were denied or disgorged as Mar-Bow desired. As a result, Mar-Bow was not a “person aggrieved” and lacked standing. Quoting Kane v. Johns-Manville Corp., 843 F. 2d 636, 642 (2d Cir. 1988), the district court noted that if standing is not so limited, “bankruptcy litigation will become mired in endless appeals brought by the myriad of parties who are indirectly affected by every bankruptcy court order.” In addition, the Bankruptcy Court found that Mar-Bow failed to establish a concrete, particularized injury.
Further, the district court explained that Mar-Bow’s appeals were equitably moot, as it would be imprudent and inequitable to upset the plan at such a stage. The district court found that each of the relevant factors supported a finding of equitable mootness — namely, (i) Mar-Bow failed to obtain a stay, (ii) the plan was substantially consummated, (iii) the relief sought would significantly affect the plan’s success and (iv) the relief sought would significantly affect the interests of third parties. In short, the plan involved a web of interrelated settlements, which a ruling in favor of Mar-Bow could unravel.
After Mar-Bow appealed the district court rulings to the Fourth Circuit, the Fourth Circuit issued a very brief per curiam opinion affirming the district court for the “reasons stated” by the district court.
Why This Case Is Interesting
This case is notable for a couple of reasons. On a broad level, the case reinforces the importance of meeting the “person aggrieved” standard in order for a party to have standing. Further, although perhaps not outcome-determinative here, the case also highlights the necessity to timely raise issues as well as the consequences of delay; even if a claim might have merit, confirmation of a plan (and the fixing of creditors’ recoveries) may lead to a finding that such party lacks standing and divests the ability to appeal, because the outcome of the appeal will not impact such party monetarily. Similarly, confirmation may render an appeal equitably moot.
However, the saga is not yet over. In July 2018, Mar-Bow asked the Bankruptcy Court to reopen the bankruptcy case on the grounds that McKinsey concealed certain connections.