M. Hannah Lauck, United States District Judge.
This matter comes before the Court on Appellant Mar-Bow Value Partners, LLC's ("Mar-Bow") appeal from several orders
"When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal." Paramount Home Entm't Inc. v. Circuit City Stores, Inc., 445 B.R. 521, 526-27 (E.D. Va. 2010) (citing In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992)). The district court reviews the bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Harford Sands Inc., 372 F.3d 637, 639 (4th Cir. 2004). A finding of fact is clearly erroneous if a court reviewing it, considering all of the evidence, "is left with the definite and firm conviction that a mistake has been committed." Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); accord In re Mosko, 515 F.3d 319, 324 (4th Cir. 2008). In cases where the issues present mixed questions of law and fact, the Court will apply the clearly erroneous standard to the factual portion of the inquiry and de novo review to the legal conclusions derived from those facts. Gilbane Bldg. Co. v. Fed. Reserve Bank of Richmond, 80 F.3d 895, 905 (4th Cir. 1996).
Although this appeal arises in the context of a chapter 11 bankruptcy,
The Debtors — Alpha Natural Resources and many of its subsidiaries — are "one of the largest coal suppliers in the United States." (McKinsey Br. 15, ECF No. 38.) The Debtors filed for chapter 11 protection in August 2015 in part because of an "historic downturn in their industry." (July 7, 2016 Hr'g Tr. 23.)
McKinsey Recovery and Transformation Services ("McKinsey") "is a global, full service restructuring advisory and crisis management firm that ... support[s] companies through all aspects of recovery and transformation." (First Carmody Decl. 3, App. 31.) Essentially, McKinsey advises struggling businesses on how to improve their profitability, and helps businesses implement the changes it suggests. McKinsey has experience providing chapter 11 advisory services, and in helping struggling businesses increase their profitability.
Mar-Bow, as relevant to the bankruptcy action, is an unsecured creditor of the Debtors. On March 23, 2016, almost nine months after the Debtors began their chapter 11 reorganization, Mar-Bow filed a proof of claim
On August 3, 2015, the Debtors began the bankruptcy proceedings by filing voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code, which allows for reorganization — rather than liquidation — of a bankruptcy estate. The Bankruptcy Court consolidated all the petitions for procedural purposes only, meaning that one chapter 11 bankruptcy action was pending.
Three weeks later, on August 24, 2015, the Debtors filed an application in the Bankruptcy Court requesting permission to employ McKinsey as a turnaround advisor for the pendency of the bankruptcy case (the "Retention Application").
On March 23, 2016, more than six months after McKinsey's employment had been approved, Mar-Bow filed its proof of claim against ANR, entering the bankruptcy proceeding. On May 1, 2016, Mar-Bow filed its first notice of appearance in the bankruptcy proceeding. Since entering the bankruptcy proceeding, Mar-Bow has raised the issue of McKinsey's Rule 2014 disclosures to the Bankruptcy Court formally at least five times.
On July 12, 2016, five days after a lengthy evidentiary hearing on the matter, the Bankruptcy Court entered a written order confirming the Debtors' Reorganization Plan.
On August 24, 2015, three weeks after filing for bankruptcy, the Debtors filed the Retention Application in the Bankruptcy Court requesting permission to employ McKinsey as a turnaround advisor for the pendency of the bankruptcy case. The Debtors sought to retain McKinsey "as their turnaround advisor ... to assist the Debtors with the development and refinement of their strategic business plan." (Retention Appl. 2-3, App. 2-3.)
In accordance with Federal Rule of Bankruptcy Procedure 2014(a),
As a term of McKinsey's employment, the Debtors agreed to indemnify McKinsey for a broad array of potential liabilities arising out of McKinsey's employment as turnaround advisor. McKinsey would not be indemnified, however, from liabilities resulting from its own "willful misconduct or gross negligence."
The Retention Application was unopposed, and on September 17, 2015, the Bankruptcy Court granted the Retention Application, approved the terms of the Engagement Letter, and authorized the Debtors "to employ and retain [McKinsey] as turnaround advisor." (Retention 0. 1-6, Supp. 291-97.) These events all occurred six months before Mar-Bow first appeared in the bankruptcy case.
Federal Rule of Bankruptcy Procedure 2014(a) requires that any application for the employment of professionals
Fed. R. Bankr. P. 2014(a). On its own and in response to motions, McKinsey filed multiple declarations pursuant to Rule 2014. Mar-Bow objected repeatedly to these disclosures, even as they became increasingly more specific and detailed. Mar-Bow, it seems, especially objected — and continues to object — to the aspect of McKinsey's disclosures that the Bankruptcy Court reviewed only in camera. Mar-Bow seeks to place these disclosures on the public record. A summary of McKinsey's Rule 2014 disclosures follows.
Pursuant to Rule 2014, the Debtors attached to the Retention Application the "Declaration of Kevin Carmody" (the "First Carmody Declaration"), which included a "Disclosure Regarding [McKinsey's] Disinterestedness." (First Carmody Decl. 10-18, App. 39-47.) In the Disclosure Regarding Disinterestedness, Carmody explained the process McKinsey used
The First Carmody Declaration disclosed McKinsey's connections by category, number of connections, and general nature of work performed for the connection, rather than identifying connections with the interested parties by name. For example, McKinsey disclosed that a member of its team "attended a proposal meeting and submitted a proposal to a Major Competitor that was not accepted." (Id. at 12, App. 41 (emphasis added).) McKinsey also reported specific connections with "one Major Unsecured Noteholder, one Lender Under A/R Facility, three Major Customers, one Revolving Facility Lender, one Other Major Supplier of Goods and Services, one Party to Material Unexpired Leases, and one Party to Joint Ventures," among numerous other categories and connections. McKinsey's initial disclosure of its connection with Interested Parties by category became a source of controversy in Mar-Bow's subsequent objections to McKinsey's Rule 2014 disclosures.
The Bankruptcy Court reviewed the First Carmody Declaration before entering the Retention Order approving McKinsey's employment as turnaround advisor. (Retention O. 2, Supp. 292.) On September 17, 2015, after its review, the Bankruptcy Court found that McKinsey qualified as "a
McKinsey filed two supplemental Rule 2014 Disclosures, even before any objections had been lodged to its initial disclosures. On November 9, 2015, and March 25, 2016, McKinsey filed Supplemental Declarations of Kevin Carmody (respectively, the "Second Carmody Declaration" and the "Third Carmody Declaration"). Each declaration was "in support of the Retention Application, and intended to "provide certain additional information." (Second Carmody Decl. 2, App. 67; Third Carmody Decl. 1-2, App. 72-73.) In each declaration, Carmody swore that McKinsey "continues to monitor the list of parties on the Interested Parties List against its own client records." (Second Carmody Decl. 3, App. 68; Third Carmody Decl. 2, App. 73.) Carmody also disclosed additional connections — again by category, number, and general nature of the work McKinsey completed for the connection.
As discussed earlier, and most relevant to Mar-Bow's objections to McKinsey's Rule 2014 disclosures, Federal Rule of Bankruptcy Procedure 2014(a) requires that a professional seeking employment in a bankruptcy proceeding file "a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee." Fed. R. Bankr. P. 2014(a). Rule 2014 contains no definition of "connections," nor does it explain further the level of detail required in a professional's Rule 2014 disclosures.
The Bankruptcy Court first heard an objection to McKinsey's Rule 2014 disclosures when the United States Trustee (the "U.S. Trustee")
(Id. at 2, App. 79.)
The U.S. Trustee expressed concern that McKinsey's "failure to provide complete disclosures may also cast a cloud over the Debtors' restructuring strategy." (Id. at 11, App. 88.) Because McKinsey had assisted the Debtors in negotiating the terms of a financing agreement and the overall restructuring strategy, the U.S. Trustee argued that the Bankruptcy Court "should order McKinsey to supplement its disclosures so that all interested parties can meaningfully consider whether the Proposed Plan Transactions may be tainted by divided loyalties." (Id. at 12, App. 89.) Apparently anticipating that McKinsey might cite confidentiality concerns as a reason for limiting its disclosures, the U.S. Trustee asserted that "McKinsey's private contractual agreements do not and cannot supersede the ethics and disclosure requirements of the Bankruptcy Code and Rules." (Id. at 13, App. 90.)
On May 19, 2016, sixteen days later, the U.S. Trustee submitted a "Stipulation Resolving Motion of the [U.S. Trustee Motion to Compel]" (the "U.S. Trustee Stipulation"). The U.S. Trustee Stipulation stated that U.S. Trustee and McKinsey had engaged in "extensive discussions" to resolve the U.S. Trustee's concerns regarding McKinsey's Rule 2014 disclosures. (U.S. Trustee Stip. 2, App. 105.) After these discussions, McKinsey had agreed to file an additional declaration disclosing more information about its connections with Interested Parties.
The same day, pursuant to the U.S. Trustee Stipulation, McKinsey filed a third Supplemental Declaration of Kevin Carmody (the "Fourth Carmody Declaration"). The Fourth Carmody Declaration included more detailed information about McKinsey's connection to the Interested Parties. It also disclosed the names of various Interested Parties that McKinsey had "served" in the past two years. Carmody swore that McKinsey had only served those clients "on matters unrelated to the Debtors and their chapter 11 cases." (Fourth Carmody Decl. 6, App. 99.)
McKinsey still omitted the names of at least three connections, which it identified as "confidential clients." (Id.) Before filing
The U.S. Trustee stated that it was satisfied that McKinsey's additional disclosures in the Fourth Carmody Declaration complied with Rule 2014.
On June 6, 2016, dissatisfied with the U.S. Trustee's proposed resolution of McKinsey's disclosures, Mar-Bow filed a 44-page Motion to Compel McKinsey to Comply with Rule 2014 (the "Mar-Bow Motion to Compel"). Mar-Bow asserted that "McKinsey's four disclosure declarations have not allowed the Court the opportunity to ... independently assess McKinsey's qualifications to serve as a fiduciary for the Debtors." (Mar-Bow Mot. Compel 5, App. 387.) Mar-Bow voiced sweeping policy arguments that McKinsey's allegedly insufficient disclosures threatened both the bankruptcy system's ability to function
Mar-Bow argued that McKinsey's disclosures were insufficiently specific to allow the Bankruptcy Court to evaluate McKinsey's disinterestedness. "McKinsey's broad, generic statements cannot supersede the specific descriptions of connections that case law interpreting Rule 2014 requires and cannot trump the obligation to perform a good faith investigation and to comply with the rule's requirements." (Id. at 21, App. 403.) Mar-Bow also contended that the process by which McKinsey conducted its search for connections was inadequate, rendering its disclosures insufficient.
The Mar-Bow Motion to Compel sought an order from the Bankruptcy Court requiring McKinsey to submit significant additional disclosures and detail regarding McKinsey's connections to the interested parties in the case. Mar-Bow also asked the Bankruptcy Court to suspend payment of McKinsey's fees, and to disgorge all of McKinsey's previously paid fees "in the event that McKinsey fails to comply with the Court's order or the Court determines that McKinsey is not qualified to serve as a professional" in the case. (Id. at 42-43, App. 424-25.) Mar-Bow further requested
On June 28, 2016, the Bankruptcy Court held a hearing on Mar-Bow's Motion to Compel. In the hearing, the Bankruptcy Court allowed lengthy argument from both sides, actively engaging the parties as to their positions. Brushing aside some of McKinsey's procedural arguments in opposition to Mar-Bow's Motion to Compel, the Bankruptcy Court stated,
(June 28, 2016 Hr'g Tr. 127, App. 2905.) The Bankruptcy Court identified "three different categories of things" that would affect its decision on the Mar-Bow Motion to Compel:
(Id. at 134, App. 2912.)
The Bankruptcy Court solicited a statement from the U.S. Trustee, who "g[a]ve the Court pretty much a synopsis of what came about, and how [the Trustee Motion to Compel] ended up being withdrawn at the end." (Id. at 143, App. 2921.) Specifically, the U.S. Trustee stated that, after McKinsey filed the Fourth Carmody Declaration, "the U.S. Trustee was satisfied that McKinsey possessed no conflicts and had greatly improved the public record of its connections." (Id. at 145, App. 2923.) When asked whether the U.S. Trustee believed that McKinsey's disclosures satisfied Rule 2014, the Trustee responded, "If it were left up to me, I think my solution to this problem would be for [McKinsey] to make the list [of their confidential clients] available and file it and ask that it be filed under seal." (Id. at 145-46, App. 2923-24.)
After lengthy argument in which the Bankruptcy Court heard from Mar-Bow, McKinsey, the U.S. Trustee, and ANR, the Bankruptcy Court ruled that it would require McKinsey to provide the Bankruptcy Court with additional information. The Bankruptcy Court stated that it would "require McKinsey to disclose the 121 [confidential] clients.... to the Court in camera." (Id. at 157, App. 2935.) The Bankruptcy Court "allow[ed] McKinsey to negotiate ... with the debtor, with the committee, with the Office of the U.S. Trustee, and [Mar-Bow]" in order to have "the proper confidentiality provisions before anything is disclosed." (Id.) The Bankruptcy Court stated that its
(Id. at 158, App. 2936.) The Bankruptcy Court also ordered that McKinsey provide it with information that "the [Bankruptcy] Court needs to have ... in order to make the disclosures that have been provided in this case meaningful." (Id.)
On July 1, 2016, three days after argument on Mar-Bow's Motion to Compel, the Bankruptcy Court entered an order granting Mar-Bow's Motion to Compel in certain respects, as stated at the June 28, 2016 Hearing (the "Order Compelling Compliance"). Specifically, the Bankruptcy Court ordered McKinsey to deliver to the Bankruptcy Court, for in camera review:
(O. Compelling Compliance 2-3, App. 1520-21.)
On July 5, 2016, four days later, Mar-Bow filed a "Motion to Clarify" the Bankruptcy Court's July 1, 2016 Order. Mar-Bow contended that, although the Order Compelling Compliance provided for in camera review of McKinsey's additional disclosures and allowed the U.S. Trustee and professionals employed by the Debtors to review the additional information, the Order Compelling Compliance "does not appear to allow Mar-Bow's professionals to review" the information. (Mot. Clarify 1-2, App. 1525-56.) Although Mar-Bow expressly stated that its Motion to Clarify was "not a motion for reconsideration," (id. at 1, App. 1525), Mar-Bow devoted more than a full page to argument about why Mar-Bow should be allowed to review the additional information because Mar-Bow was the party "that first shed light on
On July 7, 2016, the Bankruptcy Court heard argument on Mar-Bow's Motion to Clarify. Mar-Bow reasserted its position that "it seems a bit anomalous, and frankly, a bit inequitable [for Mar-Bow] to do all the work to negotiate the confidentiality agreement, and then not participate in the process that that confidentiality agreement designs." (July 7, 2016 Hr'g Tr. 16, App. 2988.) The Bankruptcy Court also heard from McKinsey and the U.S. Trustee, and stated that it would "reserve for a later time whether Mar-Bow or anybody else was going to receive [McKinsey's additional disclosures]." (Id. at 21, App. 2993.)
At the time of hearing, the Bankruptcy Court — remarkably, given the timing of Mar-Bow's Motion to Clarify — had already reviewed the additional information it ordered McKinsey to disclose. The Bankruptcy Court stated, based on its review of the in camera production, that it was "completely satisfied that there is not any type of disinterested problem with McKinsey going forward." (Id.) It further stated that it was "very satisfied with the information in" McKinsey's in camera disclosure. (Id.)
On July 15, 2016, the Bankruptcy Court entered an Order addressing Mar-Bow's Motion to Clarify (the "Clarification Order").
Also on July 15, 2016, the Bankruptcy Court entered a "Confidentiality Order Pursuant to Order Dated July 1, 2016" (the "Confidentiality Order").
On August 5, 2016, the U.S. Trustee filed a "Statement of the Recommendation of the United States Trustee on Public Disclosures by McKinsey RTS" (the "U.S. Trustee Recommendation"). The U.S. Trustee acknowledged that the Bankruptcy Court had already found that McKinsey was a disinterested person, and "the sole issue for adjudication now is what further public disclosures McKinsey ... should make." (U.S. Trustee Rec. 3, App. 2353.) The U.S. Trustee recommended that McKinsey make additional public disclosures "[b]ecause Rule 2014 does not define connections, and because transparency is critical to the integrity of the bankruptcy process." (Id.) The U.S. Trustee recommended that McKinsey make the following additional disclosures:
(Id. at 3-4, App. 2353-54.) The U.S. Trustee asserted that "[t]he disclosures made to date, with the additional disclosures recommended here, will satisfy Rule 2014." (Id. at 4, App. 2354.)
The same day, McKinsey filed the "Declaration of Kevin Carmody in Respect of Recommendation of [U.S.] Trustee" (the "Fifth Carmody Declaration"). The Fifth Carmody Declaration "provide[d] th[e] disclosure" that the U.S. Trustee recommended. (Fifth Carmody Decl. 2, App. 2392.)
While Mar-Bow and McKinsey were litigating the sufficiency of McKinsey's Rule 2014 disclosures, the rest of the bankruptcy proceedings continued to move forward. On May 25, 2016, the Debtors filed the "Second Amended Joint Plan of Reorganization of Debtors and Debtors in Possession" (the "Reorganization Plan" or "Plan"), which set forth the proposed reorganization terms.
On June 29, 2016, Mar-Bow filed its "Preliminary Objection ... to the Joint Plan" (the "Mar-Bow Reorganization Plan Objection"). Mar-Bow objected to confirmation of the Reorganization Plan because McKinsey's
(Mar-Bow Reorganization Plan Obj. 2-3, App. 1485-86.) Mar-Bow further argued that provisions of the Plan that released, excused, and indemnified various professionals from liability for actions taken in connection with the restructuring were not appropriate, as applied to McKinsey, "given that McKinsey ... has not disclosed all of its connections as required by Rule 2014. Without that complete disclosure, [Mar-Bow] is unable to determine whether the Plan is in its best interests or is tainted by a lack of disinterestedness or a conflict of interest." (Id. at 4, App. 1487.)
On July 7, 2016, after hearing argument on Mar-Bow's Motion to Clarify, the Bankruptcy Court conducted a four-and-a-half-hour long evidentiary hearing (the "Plan Confirmation Hearing"). At the Plan Confirmation Hearing, the Bankruptcy Court heard testimony and received declarations offered as exhibits. It also heard argument on Mar-Bow's Reorganization Plan Objection.
Mar-Bow asserted that its objection was "in the nature of a limited objection. And it's based on the fact the disclosure has not been made — sufficient disclosure has not been made." (July 7, 2016 Hr'g Tr. 113, App. 3085.) Mar-Bow suggested that "the way [its] limited objection could be satisfied would be to carve McKinsey's exculpation and release out of the [P]lan pending the resolution of the [Rule 2014] dispute." (Id. at 114, App. 3086.)
Expressing confusion about the link between Mar-Bow's objection and the remedy it sought, the Bankruptcy Court asked, "[W]hy would [additional Rule 2014 disclosures from McKinsey] make any difference with regard to the exculpation provisions in the [P]lan?" (Id. at 115, App. 3087.) Mar-Bow responded that it did not "believe that an adequate disclosure has been made," and that it was its "belief that McKinsey has connections with or represents, if not all, virtually all of the lenders in this case." (Id. at 116, App. 3088.) Mar-Bow seemed to argue, essentially, that McKinsey could not "demonstrate that it has undivided loyalty to the debtor, and therefore, [Mar-Bow] believe[s] that they're not disinterested, and therefore, they should not have the benefit of an exculpation or a release in this case." (Id.)
Trying again to discern the basis for Mar-Bow's objection to the release and exculpation provisions, the Bankruptcy Court stated
(Id. at 117-18, App. 3089-90.) Mar-Bow responded, "I don't necessarily agree with the proposition, Your Honor. I believe that exoneration and release will effectively preclude our ability to get to the bottom of this matter." (Id. at 118, App. 3090.)
In argument, McKinsey expressed the same confusion the Bankruptcy Court had: "I think a party standing up and saying I don't know certain names does not connect the dots as to why that has anything to do with the exculpation and releases in the plan." (Id.) Counsel for the Debtors conveyed similar bewilderment:
(Id. at 120-21, App. 3092-93.)
The Bankruptcy Court overruled Mar-Bow's objection, stating, "I think I've dealt with that And I'm absolutely satisfied, as I said before, McKinsey is [a] disinterested party based on everything that I've seen, which was far more than adequate submission that I received yesterday." (Id. at 121-22, App. 3093-94.)
During the Plan Confirmation Hearing, the Bankruptcy Court made numerous factual findings about the Reorganization Plan, the release and exculpation provisions, and the role the professionals played in developing the Plan and making it successful.
On July 12, 2016, the Bankruptcy Court entered a written order confirming the Reorganization Plan and overruling objections to it. The Bankruptcy Court found that the Plan's basic transaction would not occur without the release and exculpation provisions:
(Reorganization Plan ¶ WW, App 1763.) The Bankruptcy Court also found that "the provisions of the Plan constitute a good faith compromise and settlement of all Claims and controversies resolved pursuant to the Plan." (Id. ¶ GGG, App. 1767.) The Reorganization Plan became effective on July 26, 2016, and it was "deemed to be substantially consummated" on that day. (Id. at 84, App. 1824.)
Three days later, on July 15, 2016, Mar-Bow appealed narrow provisions of the Order Confirming the Reorganization Plan, and moved to stay implementation of the Reorganization Plan pending appeal (the "Motion to Stay"). Mar-Bow did not request an expedited hearing, and the Bankruptcy Court heard Mar-Bow's Motion to Stay on August 25, 2016, almost one month after the Reorganization Plan had become effective.
At the hearing on Mar-Bow's Motion to Stay, Mar-Bow acknowledged that part of why it sought a stay of the Confirmation Order was to "preserve and protect its appeal rights [because s]ome courts have suggested that the failure to seek a stay and the failure to obtain the stay will deprive the appellant of appeal rights on the basis of equitable mootness." (Aug. 25, 2016 Hr'g Tr. 13, App. 3459.) Mar-Bow asserted that it "is not contesting the plan, is not contesting the feasibility of the plan, is not trying to undo the plan, is not trying to impose any current or potential liability on McKinsey as it relates to its performance as the turnaround advisor, except with respect to failures to disclose." (Id. at 18, App. 3464.) Twice in the hearing, Mar-Bow asserted that "if the Court were to rule today that the exculpation and release provisions do not apply to McKinsey's obligations under Rule 2014 and the consequences that flow from its failure to satisfy its obligations, Mar-Bow wouldn't need a stay." (Id. at 13, 33, App. 3459, 3479.) The Bankruptcy Court, expressing some of the same confusion it displayed when discussing Mar-Bow's objections to the Reorganization Plan, stated, "[E]xculpation has to do with the fact that there's a burden of proof that if they've done something wrong — I mean, if it doesn't apply to Rule
The Bankruptcy Court denied Mar-Bow's Motion to Stay, concluding that Mar-Bow had not made the requisite showing to support granting a stay of the Reorganization Plan. The Bankruptcy Court also stated that it
(Id. at 47, App. 3493.)
On August 29, 2016, the Bankruptcy Court entered an order denying Mar-Bow's Motion to Stay (the "Stay Order"), and a Memorandum Opinion explaining its reasoning (the "Stay Memorandum Opinion").
On July 19, 2016, Mar-Bow filed its Appeal in this Court, noting its appeal from the Order Compelling Compliance, "but only as to ¶¶ 2-4." (ECF No. 1.) On July 20, 2016, Mar-Bow filed a second appeal, noting its appeal from the Reorganization Plan, "but only as to Findings of Fact ¶¶ J (final sentence), III-KKK, and Order ¶¶ D.31-33, J.52, J.53, and attached Second Amended Joint Plan of Reorganization of Debtors and Debtors in Possession,... §§ III.5, III.E.6, III.E.7, and
Mar-Bow filed its Opening Brief, ANR and McKinsey both responded, and Mar-Bow replied. McKinsey also filed two motions to dismiss. First, McKinsey moved to dismiss Mar-Bow's appeal of the Reorganization Plan, the Stay Order, and the Stay Memorandum Opinion as equitably moot. Mar-Bow responded, and McKinsey replied. McKinsey also moved to dismiss Mar-Bow's appeal of the Order Compelling Compliance, the Clarification Order, and the Confidentiality Order for lack of standing. Mar-Bow responded, and McKinsey replied.
For the reasons that follow, the Court will grant both of McKinsey's motions to dismiss. The Court will dismiss Mar-Bow's appeal of the Plan, the Stay Order, and the Stay Memorandum Opinion as equitably moot. The Court will dismiss Mar-Bow's appeal of the Order Compelling Compliance, the Clarification Order, and the Confidentiality Order for lack of standing.
Mar-Bow appeals three of the Bankruptcy Court's rulings relating to the Reorganization Plan. First, Mar-Bow appeals narrow provisions of the Reorganization Plan itself, as outlined below. Second, Mar-Bow appeals the Bankruptcy Court's denial of its Motion to Stay, as ruled on in the August 25, 2016 hearing and set forth in the Stay Order, and the Stay Memorandum Opinion.
Mar-Bow appeals only several narrow aspects of the Reorganization Plan itself. Specifically, Mar-Bow appeals the Reorganization Plan "only as to Findings of Fact ¶¶ J (final sentence), III-KKK, and Order ¶¶ D.31-33, J.52, J.53, and attached Second Amended Joint Plan of Reorganization of Debtors and Debtors in Possession, ... §§ III.5, III.E.6, III.E.7," and "only as to [McKinsey]." (Mar-Bow I, No. 3:16cv613, ECF No. 1-1.) As clarified in the extensive briefing before the Court and in Mar-Bow's arguments to the Bankruptcy Court, Mar-Bow appeals the portions of the Reorganization Plan that indemnify, exculpate, and release McKinsey from liability in certain circumstances. According to Mar-Bow,
(Mar-Bow Plan Obj. 4, App. 1487.) The Bankruptcy Court overruled Mar-Bow's objection, stating that it was "absolutely satisfied, as I said before, McKinsey is a disinterested party based on everything that I've seen, which was far more than adequate submission that I received yesterday." (July 7, 2016 Hr'g Tr. 122, App. 3094.) The Bankruptcy Court approved the Reorganization Plan, and Mar-Bow appealed.
The specific sections of the Plan that Mar-Bow appeals are the Bankruptcy Court's findings that:
(Reorganization Plan ¶ J, App. 1752.)
(Id. ¶ III, App. 1769-70.)
(Id. ¶ JJJ, App. 1770.) Mar-Bow also appeals the sections of the Reorganization Plan's orders that grant and implement the releases. Mar-Bow appeals each of these orders "only as to [McKinsey]."
In its opening appellate brief, Mar-Bow devoted three pages of its sixty-one page brief to arguing that the Bankruptcy Court erred in confirming the Reorganization Plan and entering the Plan Confirmation Order. In its statement of the issues presented, Mar-Bow framed the question before the Court as:
(Mar-Bow Br. 3, ECF No. 24 (emphasis added).)
Mar-Bow, however, seems to admit that the Bankruptcy Court never ruled on whether the release and exculpation provisions prevent this Court or would in the future prevent the Bankruptcy Court from considering any potential Rule 2014 violation by McKinsey: "[W]hile the bankruptcy court held that McKinsey had earned the release and exculpation provisions, it did not address their effect on potential McKinsey sanctions." (Mar-Bow Reply Br. 28 (emphasis added).) Moreover, Mar-Bow asserts that "[t]here is absolutely no evidence that any parties expected that the release and exculpation provisions in the
McKinsey counters that "Mar-Bow cannot appeal conditionally on how the District Court interprets the release. If Mar-Bow believes the release is ambiguous, it must ask the Bankruptcy Court what it thought it was approving. It cannot ask this Court for an interpretation and then determine whether it wants the interpretation reversed." (McKinsey Br. 54, ECF No. 38.) McKinsey further argues that, because Mar-Bow appeals the Reorganization Plan "if and to the extent" that it would prevent this Court from considering Mar-Bow's Rule 2014 challenges or the Bankruptcy Court from issuing sanctions against Mar-Bow for not complying with Rule 2014, the appeal "is no longer an `appeal' within the meaning of Part VIII of the Bankruptcy Rules."
McKinsey also argues that, even if Mar-Bow's appeal of the Reorganization Plan Rulings is properly before the Court, it should be dismissed as equitably moot. McKinsey asserts that the Court should "deploy the doctrine of equitable mootness to block the retroactive deprivation of releases that Mar-Bow now seeks in the appeal." (Mot. Dismiss Equitably Moot 8, ECF No. 32.) McKinsey argues that the Court should dismiss Mar-Bow's appeal as equitably moot because: (1) Mar-Bow failed to obtain a stay of the Reorganization Plan pending Appeal; (2) the Plan has been substantially consummated; (3) failure to apply the release and exculpation provisions to McKinsey would imperil the success of the Plan; and, (4) the relief Mar-Bow requests would unfairly prejudice third parties.
Mar-Bow argues that equitable mootness should not bar its appeal because the relief Mar-Bow seeks "is very narrow and does not impair plan effectiveness or the rights of third parties that relied upon the confirmation order." (Mar-Bow Resp. Mot. Dismiss Equitably Moot 1.) Mar-Bow asserts that equitable mootness does not merit dismissal of its appeal because "Mar-Bow's appeal challenges only a small part of the Plan, not its very foundation, and even then seeks only a narrow holding regarding the effect of that provision." (Id. at 10.) Mar-Bow contends that because it has "argued only that the bankruptcy court erred in approving the application of these provisions to McKinsey if and to the extent they barred the court from ruling that McKinsey violated Rule 2014 and sanctioning its non-compliance," the Court should not dismiss its appeal as equitably moot. (Id. at 12.)
"The doctrine of equitable mootness represents a pragmatic recognition by courts that reviewing a judgment may, after time has passed and the judgment has been implemented, prove `impractical, imprudent, and therefore inequitable.'" In
The United States Court of Appeals for the Fourth Circuit has "identified certain factors that aid the determination of whether the requested relief can, as a practical matter, be granted." In re US Airways, 369 F.3d at 809. Those factors include:
Mac Panel, 283 F.3d at 625. No one factor of this four-part balancing test is dispositive, and the "question ... is whether these factors, taken together, suggest that, irrespective of the merits of the appeal, it would be imprudent to disturb the Plan at this late date." In re Anderson, 349 B.R. 448, 454 (E.D. Va. 2006). "Equitable mootness in the bankruptcy setting thus requires the district court to carefully balance the importance of finality in bankruptcy proceedings against the appellant's right to review and relief."
The Court finds that each of the four factors weighs in favor of finding Mar-Bow's appeal of the Reorganization Plan Rulings equitably moot, and that, considering the totality of the circumstances, it would be imprudent and inequitable to upset the Reorganization Plan at this late date.
It is undisputed that, although Mar-Bow moved for a stay of the Reorganization Plan on July 15, 2016, Mar-Bow did not seek expedited consideration of its Motion to Stay, and the Bankruptcy Court did not hear Mar-Bow's Motion to Stay until August 25, 2016, almost one month after the Plan had become effective. The Bankruptcy Court orally denied Mar-Bow's Motion to Stay at the hearing, and entered an Order and Memorandum Opinion memorializing its ruling and reasoning on August 29, 2016. Although Mar-Bow has appealed the Bankruptcy Court's denial of its Motion to Stay, it failed to move in this Court for either a stay or an expedited appeal.
This factor, therefore, weighs in favor of finding that Mar-Bow's appeal of the Reorganization Plan Rulings is equitably moot. See U.S. Airways, 369 F.3d at 810.
Mar-Bow, appropriately, does not contest that the Plan has been substantially consummated. Substantial consummation, as defined within the Bankruptcy Code, requires three events:
11 U.S.C. § 1101(2); see also Mac Panel, 283 F.3d at 625-26.
First, the Plan itself provides that it is "deemed to be substantially consummated" on the day it became effective — here, July 26, 2016. (Reorganization Plan 84, App. 1824.) Mar-Bow does not challenge that provision of the Plan on appeal.
Moreover, a substantial amount of the transactions contemplated by the Reorganization Plan have taken place. The core transaction of the Plan, the Stalking Horse APA, occurred on the effective date of the Plan. Also on the effective date, executory contracts and unexpired leases were assumed, assumed and assigned, or rejected. Numerous settlements of creditors' claims were approved by the Bankruptcy Court on the effective date. Every encumbrance against the NewCo assets was "deemed to be released" as of the effective date. (Reorganization Plan 36, App. 1776.) Thus, not only did the Plan state that it would be "deemed to be substantially consummated" on the Plan's effective date, but the terms of the Plan also provide that the majority of the reorganization occurring under the Plan would happen on the effective date. The Plan was substantially consummated, as defined by 11 U.S.C. § 1101(2), on July 26, 2016, three months before Mar-Bow filed its opening brief in this case, and nearly six months before the briefing in this appeal was completed.
This factor, therefore, also weighs in favor of finding that Mar-Bow's appeal of the Reorganization Plan Rulings is equitably moot. See, e.g., Mac Panel, 283 F.3d at
The Bankruptcy Court made several factual findings regarding the interrelated nature of the Plan provisions that Mar-Bow has not challenged on appeal, and those findings remain the law of the case. During the Plan Confirmation Hearing, the Bankruptcy Court stated that "the releases.... are part of a plan[, and were] ... baked into the plan." (July 7, 2016 Hr'g Tr. 176, App. 3148). Moreover, the Plan's core transaction was conditioned in part on the release and exculpation provisions applying to all involved professionals:
(Reorganization Plan ¶ WW, App. 1763.)
The Bankruptcy Court also found that the Reorganization Plan involved a "web of interrelated settlements that had been painstakingly woven together," (Stay Mem. Op. 15, App. 2463), and that Mar-Bow's attempt to prevent the Release and Exculpation Provisions from applying to McKinsey "threatens to disrupt the hard-fought global peace achieved among the Debtors and all of their major stakeholders that is memorialized in the confirmed Plan," (id. at 24, App. 2474). Although Mar-Bow has appealed these findings of the Bankruptcy Court, Mar-Bow has pointed to nothing indicating that the findings are clearly erroneous and, considering all the evidence in the record, the Court cannot so find. See Bessemer City, 470 U.S. at 573, 105 S.Ct. 1504 (stating that a finding of fact is clearly erroneous if a court reviewing it, considering all of the evidence, "is left with the definite and firm conviction that a mistake has been committed").
Thus, based on the Bankruptcy Court's factual findings and the provisions of the Reorganization Plan itself, if this Court were to grant Mar-Bow the relief it requests — a ruling that the release and exculpation provisions do not apply to McKinsey — it would risk not only disrupting the core transaction of the Plan, the Stalking Horse APA, but unravelling the "web of interrelated settlements that had been painstakingly woven together" and the "hard-fought global peace" that the Plan achieved. (Stay Mem. Op. at 15, 24, App. 2463, 2474.) This factor, therefore, also weighs in favor of finding that Mar-Bow's appeal is equitably moot.
The Bankruptcy Court held that the release and exculpation provisions in the Plan were important, in part because McKinsey and the other professionals involved had expended "extensive efforts to reach the interconnected settlements in the face of multiple, significant[,] and competing interests," and they "should not be subject to the potential of frivolous future litigation as a result of their efforts." (Stay Mem. Op. 17, App. 2465.) The Bankruptcy Court also found that, "[a]ny professional, including McKinsey ..., that is not released and exculpated, will have to implead other professionals and parties in the event it is sued. It will have to take discovery from other professionals and other parties, as well." (Id. at 23, App. 2471.) Based on those and other findings, the Bankruptcy Court found that Mar-Bow's appeal of the release and exculpation provisions "threatens to disrupt the hard-fought global peace achieved among the Debtors and all of their major stakeholders that is memorialized in the confirmed Plan." (Id. at 24, App. 2472.)
Mar-Bow attempts to refute these findings by asserting that the evidence the Bankruptcy Court relied on in coming to these conclusions — the declaration of Andy Eidson, Executive Vice President and Chief Financial Officer of ANR — "were generic and made no reference to McKinsey or other professionals." (Mar-Bow Resp. Mot. Dismiss Equitably Moot 5.) The record, however, belies Mar-Bow's arguments and supports the Bankruptcy Court's factual findings.
Importantly, McKinsey's Engagement Letter with the Debtors provided that the Debtors would indemnify McKinsey for all "losses, claims, penalties, damages[,] or liabilities" arising out of McKinsey's engagement, except for "any loss, claim, damage, penalty, liability, cost, fee[,] or expense which is finally judicially determined by a court of competent jurisdiction on the merits to have resulted from the willful misconduct or gross negligence of [McKinsey]." (Engagement Letter 5-6, App. 23-24.) Thus, if the release and exculpation provisions were excised from the Reorganization Plan, even only as to McKinsey, McKinsey would be entitled to seek indemnification from the Debtors. Any amount of indemnification would come from the Estate, and its cost would be borne by the remaining creditors.
(Eidson Decl. ¶ 36, ECF No. 33-1.) Not only is Eidson's testimony unrebutted, but it is consistent with general bankruptcy practice. See In re Chemtura Corp., 439 B.R. 561, 610 (S.D.N.Y. 2010) ("[E]xculpation provisions are included so frequently in chapter 11 plans because stakeholders all too often blame others for failures to get the recoveries they desire; seek vengeance against other parties; or simply wish to second guess the decisionmakers in the chapter 11 case."). When "professionals have created substantial value for the estates through their efforts ..., they should not be subjected to future litigation involving ... frivolous claims." In re Health Diagnostic Lab., Inc., 551 B.R. 218, 234 (E.D. Va. 2016). The Bankruptcy Court found that the professionals — including McKinsey — involved in the chapter 11 reorganization had made significant contributions, and "[i]n fact, this reorganization would not occur but for those [contributions]." (July 7, 2016 Hr'g Tr. 176, App. 3148.) Mar-Bow has not established that the Bankruptcy Court's finding that the release and exculpation provisions conferred a benefit on the Estate, which would therefore be harmed without them, was clearly erroneous.
Finally, if the Court were to grant Mar-Bow the relief it requests and find that McKinsey is not entitled to the protection of the release and exculpation provisions, it would "shake the reliance that businesses, investors, and the public place on the finality of bankruptcy confirmation orders.... [and] would render substantially more difficult the successful completion of large reorganization efforts such as the present one." U.S. Airways, 369 F.3d at 810-11. Mar-Bow has provided the Court with no compelling reason to do so, and the Court sees none. This factor, therefore, also weighs in favor of finding that Mar-Bow's appeal is equitably moot.
The Court finds that McKinsey has sufficiently established that each of the four factors weighs in favor of finding Mar-Bow's appeal equitably moot. Mar-Bow failed to obtain a stay of the Reorganization Plan pending appeal, the Plan has been substantially consummated, and granting Mar-Bow the relief it requests would significantly affect the success of the plan and the interests of third parties. Considering the totality of the circumstances in this case, it would be imprudent and inequitable to disturb the Reorganization Plan at this late date. The Court will dismiss Mar-Bow's Reorganization Plan Appeal as equitably moot.
Mar-Bow appeals three of the Bankruptcy Court's rulings regarding McKinsey's Rule 2014 disclosures: (1) the Order Compelling Compliance; (2) the Clarification Order; and, (3) the Confidentiality Order.
Mar-Bow asserts that the Bankruptcy Court erred in failing to order McKinsey to file publicly additional information about the "connections" it had with the Interested Parties and in allowing McKinsey to submit information regarding its email response rates to the Court in camera. For relief, Mar-Bow asks the Court to
(Mar-Bow Br. 60-61, ECF No. 24.)
McKinsey counters that its Rule 2014 disclosures were adequate in the circumstances of this case, and that the information the Bankruptcy Court ordered to be filed in camera is not a "connection" that Rule 2014 requires to be filed, and is therefore immaterial in determining whether McKinsey complied with Rule 2014. McKinsey also has moved to dismiss Mar-Bow's appeal of the Rule 2014 Rulings for lack of standing. McKinsey argues that "not a penny would further inure to Mar-Bow's benefit — even if McKinsey ... were forced to disgorge all its fees[, and a] party must have a financial interest to possess the requisite standing to maintain an appeal from a bankruptcy court order." (McKinsey Standing Mot. Dismiss 1, ECF No. 37.) McKinsey asserts that Mar-Bow has no standing to appeal the Rule 2014 Rulings because Mar-Bow lacks the requisite financial interest in those rulings, and its appeal must therefore be dismissed.
Mar-Bow acknowledges that courts generally require a party to have a pecuniary interest in the outcome in order to have standing to appeal a bankruptcy court's ruling, but asserts that this "rule is a prudential standing limitation, not an Article III one." (Mar-Bow Resp. Standing Mot. Dismiss 7, ECF No. 43.) According to Mar-Bow, courts have recognized exceptions to the pecuniary interest standing requirement and "afford[ed] appellate standing to preserve the integrity of the bankruptcy system and vindicate the public interest." (Id. at 8.) Thus, Mar-Bow asserts, although it "might not realize a pecuniary benefit from an order compelling McKinsey to comply fully with Rule 2014," (id. at 13), "Mar-Bow's appeal presents issues central to the integrity of the bankruptcy system," and the Court therefore should not dismiss it as equitably moot, (id. at 19).
"The test for standing to appeal a bankruptcy court's order to the district court is well-established: the appellant must be a person aggrieved by the bankruptcy order." In re Urban Broad. Corp., 401 F.3d 236, 243 (4th Cir. 2005) (citing In re Clark, 927 F.2d 793, 795 (4th Cir. 1991)). The "person aggrieved" test was originally codified in the original Bankruptcy Code, but abandoned when Congress repealed it in 1978. In re Clark, 927 F.2d at 795. Courts, however, continue to use the test. Id. "[I]t is well-established that a person aggrieved is a party directly
As an initial matter, the relief that Mar-Bow purports to seek in this Appeal might itself divest Mar-Bow of standing because Mar-Bow seeks nothing that would necessarily result in a pecuniary gain. Mar-Bow asks the Court to direct the Bankruptcy Court to enter orders requiring McKinsey to: (1) file its "in camera submissions ... in the public record"; (2) make unspecified additional disclosures "sufficient in detail and description to permit the court and any party in interest to ascertain whether McKinsey has a disqualifying connection";
However, even had Mar-Bow sought relief that was pecuniary in nature, Mar-Bow lost any pecuniary interest in the outcome of the Rule 2014 Appeal on July 12, 2016, when the Reorganization Plan was confirmed. When the Plan was finalized, the expected recovery for Mar-Bow's class of claim became fixed.
Mar-Bow lacks any pecuniary interest in the outcome of the Rule 2014 Appeal, it is not a "person aggrieved" by the Bankruptcy Court's order, and it therefore lacks standing to appeal those rulings. The Court will dismiss Mar-Bow's appeal of the Rule 2014 Rulings.
For the foregoing reasons, the Court will grant McKinsey's Motion to Dismiss the Appeal of the Reorganization Plan Rulings, (ECF No. 32), and dismiss Mar-Bow's appeal of the Confirmation Order as equitably moot. The Court will grant McKinsey's Motion to Dismiss the Appeal of the Rule 2014 Rulings, (ECF No. 37), and dismiss Mar-Bow's appeal of the Rule 2014 Rulings for lack of standing. The Court will dismiss Mar-Bow's appeal.
As discussed more fully below, see infra note 32, Mar-Bow filed duplicative notices of appeal as to the Fee Application Rulings in this case and in Mar-Bow II. The Court addresses Mar-Bow's appeals of the Fee Application Rulings only in the Mar-Bow II Memorandum Opinion.
Given Mar-Bow's numerous appeals in both cases and the related nature of the facts underlying the appeals, the Court notes throughout this Memorandum Opinion which rulings it assesses in this appeal, and which rulings it evaluates in the Memorandum Opinion in the Mar-Bow II Memorandum Opinion.
Section 327(a) permits the employment of "professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons," to assist in conducting bankruptcy proceedings. 11 U.S.C. § 327(a). Section 328(a) governs the "terms and conditions" of "the employment of a professional person under section 327," 11 U.S.C. § 328(a), and Rule 2014(a) states the procedures by which an application for professional employment must be filed, Fed. R. Bank. P. 2014(a). Section 1107(b) authorized the Debtors to employ McKinsey during the bankruptcy, even though they had employed McKinsey "before the commencement of the case." 11 U.S.C. § 1107(b). Finally, Local Bankruptcy Rule 2014-1 governs service of motions. E.D. Va. Loc. Bankr. R. 2014-1.
Fed. R. Bankr. P. 2014(a). Relevant to the Engagement Letter, Rule 2014(a) requires that an application to employ a professional include "the professional services to be rendered, [and] any proposed arrangement for compensation." Fed. R. Bankr. P. 2014(a).
(Retention Appl. 3, App. 3.)
(First Carmody Decl. 11, App. 40.)
11 U.S.C. § 101(14).
As noted, Mar-Bow filed its proof of claim on March 23, 2015, and entered its first appearance in the bankruptcy proceeding on May 1, 2016. Thus, it appears that Mar-Bow contacted the U.S. Trustee regarding McKinsey's Rule 2014 disclosures even before it was involved in the underlying bankruptcy proceeding.
(June 28, 2016 Hr'g Tr. 93-94, App. 2871-72.)
The Court cannot discern why Mar-Bow attempts to appeal the same three rulings in two different cases. Mar-Bow not only fails to acknowledge its duplicative appeals in the filings before this Court, but also directs the Court to no authority — substantive or procedural — entitling it to appeal the same orders two separate times. The Court, therefore, will address Mar-Bow's appeal of the December 20, 2016 Memorandum Opinion, the Order Granting McKinsey's Motion to Dismiss Mar-Bow's Final Fee Objection, and the Order Granting McKinsey's Final Fee Application in the Mar-Bow II Memorandum Opinion.
(Mar-Bow Resp. Mot Dismiss Equitably Moot 12, ECF No. 33.) That argument, however, takes Mar-Bow out of the frying pan and puts it into the fire. Were the Court to find that Mar-Bow appealed the release and exculpation provisions only "if and to the extent" they bar a ruling that McKinsey violated Rule 2014, the Court likely would have to dismiss Mar-Bow's appeal of those provisions for lack of jurisdiction.
28 U.S.C. § 158(a) grants this Court jurisdiction to hear appeals, as relevant here, "from final judgments, orders, and decrees" of bankruptcy courts. 28 U.S.C. § 158(a)(1). It grants no jurisdiction to interpret the rulings of bankruptcy courts on issues not before the Court. The Court can find nowhere in the record that the Bankruptcy Court ruled that the release and exculpation provisions would bar a ruling that McKinsey violated Rule 2014 or prevent a court from sanctioning such non-compliance, and Mar-Bow identifies none. To the contrary, even Mar-Bow asserts that, "while the bankruptcy court held that McKinsey had earned the release and exculpation provisions, it did not address their effect on potential McKinsey sanctions." (Mar-Bow Reply Br. 28, ECF No. 47 (emphasis added).)
Moreover, Mar-Bow itself appears to acknowledge that the Bankruptcy Court made no such ruling by phrasing the issue it wants this Court to rule on as a hypothetical. This Court is not in the business of issuing advisory opinions.
In an abundance of caution, so as not to deny Mar-Bow the consideration of its appeal, the Court will therefore interpret Mar-Bow's appeal of the release and exculpation provisions in accordance with the issues Mar-Bow identified in its Notice of Appeal and will rule on them accordingly.
