Alix v. McKinsey & Co. is one of the more interesting of the high-profile (covered in the New York Times and Wall Street Journal) RICO cases filed in the last few years. Alix is the owner/assignee (from the corporation which competes with McKinsey in the lucrative bankruptcy “advising” business) claiming the international consulting firm cheated it out of contracts with clients needing such services in federal bankruptcy courts. According to Alix, McKinsey should have been disqualified from bidding for many of these high-paying opportunities, such bids are then considered and awarded by federal bankruptcy judges and trustees, because of conflicts of interest which it omitted from disclosure statements filed in bankruptcy courts in order to obtain the contracts.

Alix filed a lengthy complaint which estimated it would have received, based on past patterns of awarding these contracts, 75% of those not awarded to McKinsey, and therefore alleged it was directly injured by the bankruptcy fraud, which is a RICO predicate offense.

The district court dismissed the suit, believing the injury to Alix was not directly caused by the bankruptcy fraud. In its view the decisions of the bankruptcy court judges and trustees were “intervening” acts which required independent judgment and more directly caused Alix to lose the contracts. Given that the RICO violation must “directly” cause the RICO injury in order to establish the elusive concept of “proximate causation,” which is required in RICO as in tort law generally, the court dismissed the case with prejudice. Basically, the district court believed if there was a RICO case it had to be brought by the bankruptcy courts and/or trustees, not Alix.

In a surprising decision, the Second Circuit reversed and allowed the case to proceed reasoning that neither the bankruptcy court not the bankruptcy trustees assigned to the cases Alix was suing over were “better suited” to sue McKinsey because they did not possess the relevant information that Alix had about the bankruptcy fraud and many of the cases were closed. It reasoned “fraud on the bankruptcy court… causes direct harm to litigants who are entitled to a level playing field…” The Second Circuit acknowledged the case was unusual in that it involved fraud on a federal court which convinced it to loosen the direct injury analysis which has doomed many RICO plaintiffs. The fraud on the court aspect of this case probably deprives the decision of much precedential force. Very few RICO cases involve bankruptcy fraud or fraud on any court. Plaintiffs’ lawyers hoping the decision will allow more cases to go forward which have causation problems will probably be disappointed.

The decision also noted that the Second Circuit’s decisions on proximate causation in RICO were “less than pellucid,” which is a polite way of saying exceedingly hard to reconcile and understand.

Nevertheless, the decision allows McKinsey to try and prove its defense theory that the intervening decisions of the bankruptcy courts and trustees defeat Alix’s case at the summary judgment stage of the case or at trial, should it go that far. Large respectable businesses like McKinsey often decide that RICO cases which survive summary judgment motions are too risky to try because being a convicted racketeer, even in a civil case, can result in a lot of bad public relations. On the other hand, every RICO defendant wants to be exonerated and that can only happen by prevailing in summary judgment or trial. As we have written before, RICO is not a thermonuclear devise, and the same considerations which go into fighting or settling fraud or antitrust cases, with their stigmas, apply to RICO as well.