Carlos J. Cuevas

In a prior article I contended that McKinsey & Co. (McKinsey), the strategic consultant to the Financial Management and Oversight Board (the FOMB) in the Puerto Rico bankruptcy case, was not disinterested under Bankruptcy Code. Carlos J. Cuevas, PROMESA and McKinsey’s Lack of Disinterestedness, N.Y.L.J. (Jan. 7, 2019). Subsequently, McKinsey, through its ethics counsel, published a rebuttal to my article. Ronald Barliant, Upholding a Rational Standard for Disinterestedness in Puerto Rico, N.Y.L.J. (Jan. 17, 2019). It is important to state that I have no pecuniary stake in the Puerto Rico bankruptcy case, and do not represent any of the creditors. I have written about the Puerto Rico bankruptcy case as a person who has studied, taught, practiced and written about bankruptcy law for over 30 years. My sole interest is to see an equitable resolution of the Puerto Rico debt crisis in which all parties are treated fairly.

The jurisprudence concerning Bankruptcy Code §327(a) is robust and clear. Each day court appointed fiduciaries in bankruptcy cases must comply with the requirements of Bankruptcy Code §327(a). It is my contention that if Bankruptcy Code §327(a) were applicable to the Puerto Rico bankruptcy case, McKinsey could not have been retained because it is not disinterested. Given McKinsey’s central role in the Puerto Rico bankruptcy case, it is vital that McKinsey render dispassionate advice to the FOMB that is not tainted by a conflict of interest or the appearance of a conflict of interest so as to not compromise the legitimacy of the Puerto Rico bankruptcy case.

McKinsey’s participation is consequential because the Puerto Rico bankruptcy case is the largest municipal bankruptcy case ever filed. The Puerto Rico bankruptcy case has tremendous ramifications for its creditors and the U.S. municipal bond market. Equally significant, the Puerto Rico bankruptcy case will have tremendous ramifications for the people of Puerto Rico because it will determine the scope of their government services for the next decades. Finally, McKinsey experience in the Puerto Rico bankruptcy case is important because it is an example of what occurs when the disclosure and retention requirements for professionals are waived in a bankruptcy case.

McKinsey’s Role as Strategic Consultant to the FOMB

McKinsey was retained to provide “comprehensive advisory services” to the FOMB. Fee Examiner’s Third Interim Report on Professional Fees and Expenses (Feb. 1, 2018-May 31, 2018) In re the Financial Oversight and Management Board for Puerto Rico, Case No. No. 17 BK 3283-LTS, Dkt. No. 4126 p. 10, U.S. Bankruptcy Court for the District of Puerto Rico. McKinsey’s work in advising the FOMB concerning the Puerto Rico bankruptcy case has been described “as both central and indispensable to the Oversight Board’s work.” Id.

McKinsey’s Affiliates Hold at Least $20M of Puerto Rico’s Debt

On Sept. 26, 2018, the New York Times published an article stating: “Affiliates of McKinsey revealed their investments in filings in federal court in Puerto Rico’s capital, San Juan.” Mary Williams Walsh, McKinsey Advises Puerto Rico on Debt. It May Profit on the Outcome, New York Times (Sept. 26, 2018). According to the New York Times, McKinsey, according to regulatory filings and court documents, owns at least $20 million, and possibly more, of Puerto Rico debt. Id. The New York Times states:

The giant consulting firm has millions of dollars riding on the outcome. The reason: McKinsey owns bonds issued by Puerto Rico.

That creates a potential conflict of interest between McKinsey’s client, which wants to save as much money as possible, and McKinsey itself, which wants to make as much money as possible on the bonds.

Id. In this article, Prof. Lynn LoPucki of the UCLA School of Law is quoted as stating: “It’s a conflict of interest.” Id.

In the same article, the New York Times reported that some of the McKinsey retirement funds hold Puerto Rico debt:

Another McKinsey investment in Puerto Rico appears to be through a company called Whitebox Advisors, which as of 2016 managed about $100 million for McKinsey’s retirement plans, according to regulatory filings.

Whitebox, through various investment funds, holds more than $140 million of Puerto Rican bonds. One of those funds is called Pandora Select, which as of 2016 held money on behalf of McKinsey.


Under Applicable Case Law McKinsey Is Not Disinterested

Over 50 years ago, Judge Friendly of the U.S. Court of Appeals for the Second Circuit stated: “The conduct of bankruptcy proceedings not only should be right but must seem right.” Marantz v. Seligson In the Matter of Ira Haupt & Co., 361 F.2d 164, 168 (2d Cir. 1966).

The U.S. Court of Appeals for the First Circuit has made the following comments concerning the policy underlying the retention requirements contained in Bankruptcy Code §327(a):

These statutory requirements-disinterestedness and no interest adverse to the estate-serve the important policy of ensuring that all professionals appointed pursuant to section 327(a) tender undivided loyalty and provide untainted advice and assistance in furtherance of their fiduciary responsibilities.

Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir. 1994). The fiduciary obligations contained in Bankruptcy Code §327(a) are to be rigidly applied. In re Martin, 817 F.2d 175, 181 (1st Cir. 1987); In re Leslie Fay Companies, 175 B.R. 525, 532 (Bankr. S.D.N.Y. 1994).

Under Bankruptcy Code §327(a) a court appointed professional must not hold or represent an adverse interest and must be disinterested. 11 U.S.C. §327(a). An adverse interest has been construed to mean a predisposition of bias against the estate. In re Granite Partners, L.P., 219 B.R. 22, 33 (Bankr. S.D.N.Y. 1998). Moreover, the adverse interest includes any interest, however slight, that would even faintly influence the independence and impartial attitude required by the Bankruptcy Code and Rules. Id. The concepts of adverse interest and disinterestedness are intertwined. In re Martin, 817 F.2d 175, 181 (1st Cir. 1987). The disinterestedness requirement was inserted in Bankruptcy Code §327(a) to avoidance the appearance of impropriety. Id. Therefore, a disinterestedness person should be divested of a scintilla of any personal interest which might be reflected in his or her decisions concerning estate matters. Id.

Under applicable case law, McKinsey is not disinterested. United States Trustee v. Price Waterhouse, 19 F.3d 138 (3d Cir. 1994) (Opinion by Justice Alito); In re Siliconix, 135 B.R. 378 (N.D.Cal. 1991); In re HUB Business Forms, 146 B.R. 315 (Bankr. D. Mass. 1992). In HUB Business Forms, supra, the court denied the retention of an accountant who had a claim of $7,033.12, which was 2 percent of the debt in the case. McKinsey, through its affiliates, holds at least $20,000,000 through its affiliates for investment purposes. Contrary to McKinsey’s protestations, as the prior discussion demonstrates, there is no de minimis exception under Bankruptcy Code §327(a) for the disinterestedness requirement. Assuming arguendo that there was a de minimis exception, it is counterintuitive to posit that $20,000,000.00 is de minimis.

Congressional Response to McKinsey

In a letter dated Dec. 20, 2018, Sen. Elizabeth Warren and Congresswoman Nydia Velasquez have written to McKinsey concerning what they perceive to be McKinsey’s conflicts of interest (the Letter). The Letter identifies three points of the conflicts of interest:

(1) McKinsey, as a consultancy, has paved the way for many of Puerto Rico’s creditors to receive handsome payouts; (2) McKinsey, as a creditor, is poised to benefit significantly; and (3) McKinsey’s disclosures have been opaque or non-existent.

The Letter also requests that McKinsey answer several questions concerning McKinsey’s apparent conflicts of interest. This is significant because Senator Warren was a preeminent bankruptcy scholar and tenured bankruptcy law professor at Harvard Law School.

Legislation has also been introduced in Congress to require disclosure from the court retained professionals in the Puerto Rico bankruptcy case. Mary Williams Walsh, Transparency of Puerto Rico Bankruptcy Is the Aim of a New Bill, New York Times (Dec. 19, 2018). The legislation was introduced to rectify McKinsey’s transgressions:

“The people of Puerto Rico can’t have faith that this oversight board is putting their interests first if consultants helping implement the restructuring could profit from how much debt service is available under the very fiscal plans they design,” said Representative Nydia M. Velázquez, the New York Democrat who is the lead sponsor of the bill.



Justice Cardozo has made the following observations concerning fiduciaries:

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties.

Meinhard v. Salmon, 249 N.Y. 458, 464 (1928).

The disinterestedness test is an excellent metric to determine whether a court appointed professional has a disabling conflict of interest. A conflict of interest or perceived conflict of interest is consequential because McKinsey’s work is central to the Puerto Rico bankruptcy case. Thus, McKinsey’s continued participation could imperil the legitimacy of the Puerto Rico bankruptcy case.

Carlos J. Cuevas is a solo practitioner in Yonkers, N.Y., and a research associate at the University of Houston School of Law.