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Commentary- New Scrutiny Facing Professional Disclosures in Bankruptcy Cases in Wake of 'Jay Alix'

ABI Bankruptcy Brief

February 14, 2019

ABI Bankruptcy Brief

Commentary: New Scrutiny Facing Professional Disclosures in Bankruptcy Cases in Wake of 'Jay Alix'*

In May 2018, Jay Alix, the founder and now minority shareholder of consulting firm AlixPartners, commenced an action against McKinsey & Co. in the U.S. District Court for the Southern District of New York alleging, among other things, that while serving as an adviser for debtors in several multimillion and multibillion-dollar chapter 11 cases, McKinsey’s restructuring arm — known as McKinsey RTS — violated bankruptcy law by failing to disclose its financial and consulting relationships to creditors and other stakeholders to benefit the firm and its network of clients. Jay Alix also accuses McKinsey & Co., its affiliates and half a dozen individuals of violating the Racketeer Influenced and Corrupt Organizations Act (RICO) by failing to disclose disqualifying conflicts of interest in big bankruptcy cases. The case has stirred new interest and focus on the types of disclosures required by prospective bankruptcy professionals when seeking employment under § 327(a) of the Bankruptcy Code, according to a commentary by Mariaelena Gayo-Guitian in the Daily Business Review. The Jay Alix case is having a snowball effect across the country. Recently, Judge Kevin Huennekens of the U.S. Bankruptcy Court for the Eastern District of Virginia reopened the bankruptcy case of Alpha Nature Resources, a 2015 case, to consider accusations that the powerful consultancy McKinsey & Co. had defrauded his court while advising a bankrupt coal company. McKinsey also faces similar claims of misconduct from Jay Alix in the bankruptcy case of another energy company, Westmoreland Coal, pending in the Southern District of Texas. Likewise, questions have arisen as to how McKinsey & Co. is acting as an adviser in the bankruptcy-like restructuring of Puerto Rico while also holding some of the territory’s bond debt through an affiliated entity. McKinsey & Co. denies the allegations and filed a motion to dismiss in October 2018. Both sides have briefed the Rule 2014 disclosure issues, but no hearing has been set by the bankruptcy court as of this date.

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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Retail Real Estate Finds New Life as Warehouse Space

An analysis by CBRE found that developers have started 24 projects since 2016 across the country to convert former retail space into warehousing, reported. These projects will result in 10.9 million square feet of new industrial space from what was once 7.9 million square feet of retail space. CBRE expects this trend to continue and grow. The projects are predominantly located in areas with a median household income below the national average and in markets with an industrial vacancy rate below 5 percent — indicators that elevate the value of industrial usage in locations that no longer support typical retail concepts. Freestanding big-box stores closer to population centers than warehouse districts are the primary candidates for conversions; the retail structures typically offer dock doors, ample parking and clear heights compatible with industrial usage.

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Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

In Need of Workers, the Midwest Recruits from Puerto Rico

Tens of thousands of Puerto Ricans have fled the U.S. territory’s struggling economy in recent years. While they mostly concentrate in traditional landing spots like New York and Florida, a number are venturing to the Midwest, where jobs in many places are more plentiful than people, the Wall Street Journal reported. In the past decade, Puerto Rico has lost roughly half a million people as its economy deteriorated, according to U.S. Census Bureau estimates, and the unemployment rate was 8.3 percent in December. A September report by the Center for Puerto Rican Studies at New York’s Hunter College estimated that nearly 160,000 residents relocated to the mainland in the year after Hurricane Maria. A number were drawn by employers that stepped up recruiting in Puerto Rico after finding it hard to secure workers locally or via the H-2B visa program that allows immigrants to work temporarily in the U.S. in nonagricultural jobs. (Subscription required.)

Avenatti to Give Up Financial Control of Law Firm After He's Accused of Hiding Millions

Michael Avenatti agreed Wednesday to relinquish financial control of his longtime law firm hours after a former partner filed papers accusing him of hiding millions of dollars from the court that oversaw its bankruptcy, the Los Angeles Times reported. The celebrity lawyer and his firm, Eagan Avenatti, consented to the appointment of a receiver to take possession of its bank accounts, case files, computers and other assets. Avenatti also promised to cooperate with efforts by Jason Frank, a former lawyer at Eagan Avenatti, to collect on his $10-million judgment against the firm. Avenatti will continue to work as the lead lawyer in his law practice, which he now calls Avenatti & Associates. The agreement came after Frank asked a federal court Tuesday night to appoint a receiver to seize Eagan Avenatti and stop the firm from draining its assets. U.S. Magistrate Judge Karen E. Scott in Orange County signed an order late Wednesday naming Newport Beach accountant Brian Weiss as the receiver.

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Report: Defined-Contribution Plans Surpass Half of Pension Assets

Defined-contribution retirement plans accounted for more than half of total pension assets last year in the seven countries with the largest share of these assets, according to a report from consulting firm Willis Towers Watson, the Wall Street Journal reported. It was the first time these plans had reached that threshold in those countries — Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S., which together hold 91 percent of total global pension assets, according to Willis Towers Watson. The milestone caps a steady march by companies and public agencies away from defined-benefit plans, in which employers steer the investment portfolio and guarantee a set payout for life. According to the report by Willis Towers Watson’s Thinking Ahead Institute, defined-contribution plans climbed to slightly more than 50 percent of pension assets last year from 30 percent in 1998. In recent decades, an increasing number of workers have saved for retirement by funding their 401(k) accounts as companies shifted away from employer-funded and guaranteed pensions by freezing such plans to new entrants. Over the past 10 years, defined-contribution assets in the seven countries have grown 8.9 percent while defined-benefit assets have climbed at a rate of 4.6 percent, according to the report. (Subscription required.)

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A Hedge Fund’s ‘Mercenary’ Strategy: Buy Newspapers, Slash Jobs, Sell the Buildings

When the building housing the downtown Memphis Commercial Appeal newspaper sold last April, the name of the buyer — Twenty Lake Holdings LLC — seemed of little consequence. But Twenty Lake Holdings is not just another commercial real estate investor. It is a subsidiary of Alden Global Capital, the New York City hedge fund that backed the purchase of and dramatic cost-cutting at more than 100 newspapers — causing more than 1,000 lost jobs, according to a Washington Post report. For Alden and its subsidiary, the Gannett empire’s newspapers are clearly an attractive feature. But by purchasing the Memphis building and others like it, Alden has already begun coming for what it may consider a bigger prize: Gannett’s real estate. The hedge fund’s newspaper business, Digital First Media, is bidding to buy Gannett, operator of the nation’s largest chain of daily newspapers by circulation, including USA Today — as well as its $900 million in remaining property and equipment — for more than $1.3 billion. The tactics employed by Alden and Digital First Media are well-chronicled: They buy newspapers already in financial distress, including big-city dailies such as the San Jose Mercury News and the Denver Post, reap the cash flow, and lay off editors, reporters and photographers to boost profits. In a 2018 court case, Alden disclosed it has a series of affiliated real estate companies whose business is focused primarily on efficiently buying, selling, leasing and redeveloping newspapers’ offices and printing plants.

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Analysis: The Next Wave of ‘Unicorn’ Start-Ups

Technology start-ups worth $1 billion, once as rare as unicorns, are now plentiful enough and old enough that there’s a new generation behind them — one that looks very different, the New York Times reported. Silicon Valley’s current crop of highly valued tech start-ups, which include now-household names like Uber and Airbnb, all benefited from the spread of smartphones and cheap cloud computing. Many of these companies built global empires by simply taking existing businesses — like taxis, food delivery and hotels — and making them mobile. Some of the start-ups became giants: Uber, for instance, may reach a $120 billion valuation this year. But as those companies have matured and prepare to go public, the easy opportunities for disrupting old-line industries are drying up. Now, many of the up-and-coming start-ups that may become the next unicorns have names like Benchling and Blend. And they largely focus on software for specific industries like farms, banks and life sciences companies. That’s according to an analysis for The New York Times by CB Insights, a firm that tracks venture capital and start-ups. CB Insights used a variety of data — including financial health and the strength and size of the market a company serves — to identify 50 start-ups that may be on a path to achieving a $1 billion valuation (though there is no guarantee they will get there).

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New on ABI’s Bankruptcy Blog Exchange: Consumer Protection After the Global Financial Crisis

A recent post by Prof. Melissa Jacoby on the Credit Slips blog provides a glimpse of a paper that she wrote with historian Ed Balleisen that looks at consumer protection, financial crises, and inputs into post-crisis policymaking.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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