It can be hard to recognize when throwing more money at a problem will not fix it. It is even harder to tell a bank “no” when it recommends it.

Published February 17, 2017.

All people make mistakes including business owners. While trying to run a business, mistakes are going to be made. Most of the time, these mistakes will have little, or no impact on the business. However, there are times when the mistake will put the business in a dire situation. Once a mistake has been made and the business faces remedying the problem, it is common to inadvertently cause greater harm. It can be hard to recognize when throwing more money at a problem will not fix it. Many business owners trust their bank or lending institution and tend to seek their advice and expertise. Unfortunately, this way of thinking can cause greater harm to the business. Banks and lending institutions are notorious for looking out for their own best interest. The only real tool banks have is to provide more funds. Pushing more money at a problem typically fails to improve an issue and only makes the hole deeper.

“Deepening insolvency” is one of the more controversial areas of lender liability law. It generally refers to an action asserted by a representative of a bankruptcy estate against directors, officers, lenders, underwriters, accountants, and others based on their dealings with the debtor prior to bankruptcy. Under this theory of recovery, “[a] defendant may be liable for ‘deepening insolvency’ where the defendant’s conduct, either fraudulently or even negligently, prolongs the life of a corporation thereby increasing the corporation’s debt and exposure to creditors.” One court summarized the state of deepening insolvency in 2006 as “debatable.” [1] Courts seem divided between those that believe deepening insolvency is a cause of action on its own and those that believe deepening insolvency is a measure of damages used with other causes of actions. Those that examine the theory as a cause of action, however, have struggled with the elements of the cause of action and the scope of the tort. This paper will attempt to briefly summarize some of the development and diverging views of deepening insolvency. [2]


The genesis of the theory has been credited to the court in Bloor v. Dansker [3]. In that case, the defendant accounting firm certified financial statements which allegedly overstated income and assets and which allegedly induced other parties to invest in the debtor prior to filing bankruptcy. The court rejected the defendant’s contention that the corporation benefited simply by virtue of its continued existence facilitated by continued funding, stating: “A corporation is not a biological entity for which it can be presumed that any act which extends its existence is beneficial to it.”[4] The concept began as a theory of damages in the Bloor case, and thereafter was often raised in response to affirmative defenses that argued increased debt, while potentially injurious to creditors, was beneficial to the borrower corporation. More recently, some courts have accepted the theory that insolvent corporations may suffer distinct injuries when they continue to operate and incur more debt, and these courts have treated deepening insolvency as an independent cause of action. The earliest developments of the theory of deepening insolvency and its place as a corporate injury are best illustrated by three cases—Schact v. Brown, Allard v. Arthur Andersen & Co., and Official Committee Of Unsecured Creditors v. R.F. Lafferty & Co.

Schact v. Brown[5]

Schact is one of the earliest decisions addressing deepening insolvency. In this case, the Seventh Circuit refused to dismiss a complaint filed by the liquidator of an insolvent insurer against officers, directors and accountants for damages under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act arising out of alleged “fraudulent acts” involving “sham reinsurance, falsification of financial statements and fraudulent dealings with state insurance regulators, which allowed [defendants] to prolong [the insurer’s] life beyond insolvency and thus exacerbate its financial woes.” To survive a motion to dismiss, the plaintiff had to prove a direct casual connection between the alleged acts and the corporation’s injury. The court found that the insurance company was injured by the defendants’ conduct because the “fraudulent prolongation of a corporation’s life beyond insolvency increased the company’s exposure to creditor liability” and denied shareholders “their right to dissolve the corporation in order to cut their losses.”

Allard v. Arthur Andersen & Co.[6]

In Allard, the bankruptcy trustee sued the debtor’s former auditor for failing to detect or disclose misappropriation of funds alleging malpractice, negligence, breach of contract, unjust enrichment, common-law fraud, aiding and abetting fraud, securities fraud and violations of RICO. The defendant argued that the trustee could not recover damages based on the debtor’s indebtedness to trade creditors. The court, citing Schact, reasoned that additional debt may in some cases prove harmful to the corporation. “Trade credit may provide an illusory financial cushion that lulls shareholders into postponing their decision to dissolve the corporation. Shareholders may under these circumstances miss an opportunity to ‘cut their losses’ by shutting down operations before management can fritter away whatever valuable assets that corporation may still possess.” The court denied summary judgment because under a “deepening insolvency” theory there can be “damages flowing from indebtedness to trade creditors.”

Official Committee of Unsecured Creditors v. R.F. Lafferty & Co.[7]

In Lafferty, a creditors’ committee sued the debtor’s former accountants, attorneys and underwriters for participating in a fraudulent “Ponzi scheme”, which had “wrongfully expanded the debtors’ debt out of all proportion of their ability to repay and ultimately forced the debtors to seek bankruptcy protection.” The committee sued based upon violations of federal securities laws, common law fraud, negligent misrepresentation, mismanagement, breach of fiduciary duty, and professional malpractice. Several defendants moved to dismiss the case, arguing that the committee lacked standing because “the Debtors have not sustained a ‘cognizable injury’ separate and apart from any injury sustained by investors who had purchased the Debtors’ debt securities.”

The Third Circuit rejected this argument and stated that:

[e]ven when a corporation is insolvent, its corporate property may have value. The fraudulent and concealed incurrence of debt can damage that value in several ways. For example, to the extent that bankruptcy is not already a certainty, the incurrence of debt can force an insolvent corporation into bankruptcy, thus inflicting legal and administrative costs on the corporation. . .When brought on by unwieldy debt, bankruptcy also creates operational limitations which hurt a corporation’s ability to run its business in a profitable manner. Aside from causing actual bankruptcy, deepening insolvency can undermine a corporation’s relationships with its customers, suppliers, and employees. The very threat of bankruptcy, brought about through fraudulent debt, can shake the confidence of parties dealing with the corporation, calling into question its ability to perform, thereby damaging the corporation’s assets, the value of which often depends on the performance of other parties. . .These harms can be averted, and the value within an insolvent corporation salvaged, if the corporation is dissolved in a timely manner, rather than kept afloat with spurious debt.[8]

While perhaps the seminal case in support of the theory of deepening insolvency, other jurisdictions around this time were more skeptical of the viability of such arguments. [9]


In Official Committee of Unsecured Creditors v. Credit Suisse First Boston (In re Exide Technologies, Inc.), the Delaware Bankruptcy Court seemed to convert the “injury” of deepening insolvency into an independent claim.[10] The court in Exide Technologies recognized deepening insolvency as an independent cause of action (as opposed to an injury) and held that such a claim could be asserted against lenders.

In Exide Technologies, a creditors’ committee sued the pre-petition lenders alleging, among other things, fraudulent transfer, equitable subordination, and a “claim” for deepening insolvency. The complaint alleged that “the Lenders caused the Debtors to [engage in certain transactions] so that they could obtain the control necessary to force the Debtors fraudulently to continue business for nearly two years at ever-increasing levels of insolvency. The conduct by the Lenders caused the Debtors to suffer massive losses and become more deeply insolvent, costing creditors substantial value.”

The allegations provided that in 1997 a syndicate of banks established a credit facility for Exide and many of its subsidiaries. Exide’s losses increased until the spring of 2000 when Exide was insolvent on a balance-sheet basis. Later in 2000, in exchange for additional collateral, the banks made an additional loan of $250 million to Exide to finance its acquisition of a competitor. Exide’s financial condition deteriorated rapidly after the acquisition. In June 2001, Exide informed the banks of its financial distress and announced significant layoffs in September 2001. In October 2001, the banks caused Exide to replace its CFO with a restructuring advisory firm. The banks and Exide continued to negotiate and amend the loan agreement which granted the banks additional rights when the banks knew bankruptcy was inevitable. Finally, the complaint alleged, the banks caused Exide’s bankruptcy filing to be delayed until mid-April 2002 in an effort to prevent their liens from being voidable as preferences in bankruptcy.

The creditors’ committee sought to avoid various transfers to the banks and asserting various affirmative damage claims, including aiding and abetting breach of fiduciary duty, equitable subordination, and recharacterization of debt to equity. While the allegations looked identical to lender-liability type claims, the complaint also asserted a count for “deepening insolvency.” The banks moved to dismiss the complaint, including the deepening insolvency claim, arguing that such a claim was not recognized under Delaware law.

The Exide court first noted the lack of a decision by Delaware’s highest state court or any of its intermediate courts as to whether Delaware law recognizes a claim for deepening insolvency. The court went on to note, however, that the Third Circuit Court of Appeals had previously opined that a claim for deepening insolvency should be recognized under Pennsylvania law, even though no Pennsylvania court had ruled on the question. As a result, the Delaware bankruptcy court concluded that the Delaware Supreme Court would also recognize a claim for deepening insolvency where there has been damage to corporate property and, therefore, denied the banks’ motion to dismiss.

Until 2006, deepening insolvency was gaining “growing acceptance” in bankruptcy courts. However, more recently, federal courts have scaled back deepening insolvency claims and damages assertions.


A number of federal courts which have examined the issue have been reluctant to find that deepening insolvency as a tort exists without clear guidance from state courts as to the matter.[11] In the 2nd Circuit, the court in In re Hydrogen, L.L.C. [12], found New York had not recognize the tort of deepening insolvency as an independent cause of action. In the 6th Circuit, the court in In re Propex, Inc. [13], found that such a cause of action had not been recognized under Tennessee law; see also In re Propex, Inc. [14], (Bankruptcy court found that “The current state of affairs with regard to deepening insolvency, as the court sees it, is that the theory is still obscure and difficult to distinguish from existing torts [and] that it duplicates existing legal remedies...”).

Similarly, the court in In re VarTec Telecom, Inc. [15], took a particularly harsh view of the individual tort action based upon deepening insolvency. The court held:

Much like the little old lady in the fast food commercials, the Court looks at the bottom of the deepening insolvency hamburger bun and is forced to ask “where’s the tort?” If Texas courts were to apply the theory of deepening insolvency as a tort separate and apart from torts already existing under Texas law, does a cause of action for “deepening insolvency” fit the definition of a tort? As Judge Bernstein in Global Service Group indicates, and as commentators have recently addressed, asking this question usually results in leaving what is before a court to be simply a measure of damages or a breach of tort that has already been established. [16]

A court in the 7th Circuit interpreting Delaware law, in In re Fleming Packaging Corp. [17], noted that it was not really clear whether Delaware would adopt tort of deepening insolvency as a separate cause of action separate from traditional claim of breach of fiduciary duty.


As indicated, many of the Courts that reject deepening insolvency as a separate cause of action suggest that such a cause of action would be duplicitous of other causes of action. The argument contends courts do not need to create a new cause of action for deepening insolvency because creditors and shareholders of insolvent companies already have well established remedies.

As argued by William Bates III in “Deepening Insolvency Into the Void,” [18]:

Directors and officers are not guarantors of business success. In particular, they make no guarantee that an insolvent company will stop losing money. There is no absolute duty to liquidate a corporation upon insolvency. Creditors that do not wish the value of their claims to be diminished by a corporate debtor's slide into insolvency have remedies, including involuntary bankruptcy. Even that remedy does not necessarily avert deepened insolvency, however, for there is no duty to liquidate in bankruptcy where there is hope of rehabilitation. Indeed, chapter 11 corporate debtors commonly operate at a loss, deepening insolvency while attempting to reorganize. "Deepening insolvency" is not a strict liability offense.

On the other hand, managers may be legally responsible for corporate losses if they engage in proscribed conduct. Directors owe duties to their corporation, including duties of loyalty and due care. Although these duties vary in particulars from state to state, as a general principle directors must put the company's interest above their own (loyalty) and act with the care of an ordinarily prudent person in pursuing what they believe to be the corporation's best interests (due care). They must also observe the law in dealing with third parties. They may not, for example, defraud those with whom they deal.

Courts that recognize a cause of action for "deepening insolvency" devote little space to whether and how it alters these traditional precepts. A seminal case described "deepening insolvency" as the "fraudulent prolongation of a corporation's life beyond insolvency," and that description flags the problem. If the cause of action involves "fraudulent" activity, how is it different from, and what does it add to, fraud as a theory of liability? Similarly, a Delaware court has acknowledged that in insolvency, "[t]he directors continue to have the task of attempting to maximize the value of the firm," which "might require" them to undertake an efficient liquidation if "the procession of the firm as a going concern would be value destroying." What does "deepening insolvency" add to that duty of due care? Conduct proscribed by traditional precepts often seems to accompany deepening insolvency. Common examples include fraudulent representations to creditors that debts can be repaid, or fraudulent promises of repayment, when the debtor secretly knows there is no hope and/or has no intention to repay. When officers or directors engage in self-dealing or loot their corporations, insolvency sometimes occurs. In insolvency, it is a breach of fiduciary duty for management to gamble whatever assets are still available to pay creditors on risky strategies in the hope of restoring value to equity holders.

There is a preexisting body of law to redress the injuries caused by such behavior. Despite language in some cases finding a cause of action for "deepening insolvency," in none of them has the alleged conduct been blameless under these traditional legal rubrics.

These detractors argue that deepening insolvency has no defined elements or established parameters and that all of the cases seeking to define the elements can be understood from the perspective of different causes of action. For example, if directors or officers of an insolvent company cause the company to fraudulently incur additional liability or waste corporate assets, the appropriate remedy is a claim for breach of fiduciary duty. If third parties (e.g., auditors, third-party professionals or lenders) knowingly participate in a breach of fiduciary duty, the appropriate remedy is a claim for aiding and abetting a breach of duty. If a third-party professional negligently misrepresents the true financial state of the company, the appropriate remedies are claims of misrepresentation and professional malpractice. If a lender exercises excessive controls, dominates a borrower’s affairs in a manner that harms the borrower or its creditors or otherwise engages in inequitable conduct, then the appropriate remedy is a claim under the numerous common law lender liability theories, including breach of fiduciary duty. Additionally, a creditor that engages in inequitable conduct causing harm to other creditors can have its claim in a resulting bankruptcy case subordinated to the claims of injured creditors.

The court in In re Parmalat [19], found that deepening insolvency could be fit into the traditional theory of breach of fiduciary duty without having to decide issue of whether North Carolina law recognized tort of deepening insolvency. Similarly, the court in In re National Century Financial Enterprises, Inc., Inv. Litigation [20], found that the deepening insolvency claim in that case was duplicative of a claim for breach of fiduciary duty.

Similarly, in South Carolina, the Bankruptcy Court, after deciding that it did need to decide if South Carolina would recognize the tort of deepening insolvency stated:

[T]he Trustee appears to be asserting that Debtor's deepening insolvency was one of the ways in which Debtor was harmed as a result of Defendants' breach of fiduciary duty. Courts in other jurisdictions have recognized that deepening insolvency can be asserted as a measure of damages. Schnelling v. Crawford (In re James River Coal Co.) [21]. The theory of deepening insolvency has been viewed alternatively as a theory of damages rather than a separate tort."); Alberts v. Tuft (In re Greater Southeast Community Hospital Corn. I) [22], ("Unless and until this court is told differently by a higher court in its own circuit, deepening insolvency will remain a viable theory of damages in this jurisdiction.") Based on this precedent, it appears that deepening insolvency may be a possible theory of damages if asserted in connection with a breach of fiduciary duty claim. See, Viera v. AGM II, LLC (In re Worldwide Wholesale Lumber, Inc.).[23]

Back in 2007, the Delaware Chancery Court held that Delaware law does not recognize an independent cause of action for deepening insolvency, reasoning as follows:

If the board of an insolvent corporation, acting with due diligence and good faith, pursues a business strategy that it believes will increase the corporation’s value, but that also involves the incurrence of additional debt, it does not become a guarantor of that strategy’s success. That the strategy results in continued insolvency and an even more insolvent entity does not in itself give rise to a cause of action. Rather, in such a scenario the directors are protected by the business judgment rule …]

The rejection of an independent cause of action for deepening insolvency does not absolve directors of insolvent corporations of responsibility. Rather, it remits plaintiffs to the contents of their traditional toolkit, which contains, among other things, causes of action for breach of fiduciary duty and for fraud. The contours of these causes of action have been carefully shaped by generations of experience, in order to balance the societal interests in protecting investors and creditors against exploitation by directors and in providing directors with sufficient insulation so that they can seek to create wealth through the good faith pursuit of business strategies that involve a risk of failure. If a plaintiff cannot state a claim that the directors of an insolvent corporation acted disloyally or without due care in implementing a business strategy, it may not cure that deficiency simply by alleging that the corporation became more insolvent as a result of the failed strategy.

Moreover, the fact of insolvency does not render the concept of “deepening insolvency” a more logical one than the concept of “shallowing profitability.” That is, the mere fact that a business in the red gets redder when a business decision goes wrong and a business in the black gets paler does not explain why the law should recognize an independent cause of action based on the decline in enterprise value in the crimson setting and not in the darker one. If in either setting the directors remain responsible to exercise their business judgment considering the company’s business context, then the appropriate tool to examine the conduct of the directors is the traditional fiduciary duty ruler. No doubt the fact of insolvency might weigh heavily in a court’s analysis of, for example, whether the board acted with fidelity and care in deciding to undertake more debt to continue the company’s operations, but that is the proper role of insolvency, to act as an important contextual fact in the fiduciary duty metric. In that context, our law already requires the directors of an insolvent corporation to consider, as fiduciaries, the interests of the corporation’s creditors who, by definition, are owed more than the corporation has the wallet to repay.

Trenwick America Litigation Trust v. Ernst & Young, L.L.P. [24].

In a more recent case out of Pennsylvania, the Third Circuit reversed a decision of the lower court to dismiss a deepening insolvency case. Official Committee of Unsecured Creditors v. Baldwin (In re: Lemington Home for the Aged)[25]. In Lemington, the district court had granted summary judgment on (a) deepening insolvency and (b) the defense of in pari delecto. The third circuit held that the factual contentions presented by the Plaintiffs created a genuine issue of material fact as to whether the officers and directors had caused the deepening insolvency and applied the adverse interest rule as the exception to the in pari delecto defense.[26]


As an independent tort, the concept of deepening insolvency raises a myriad of important issues to all parties transacting with the insolvent or nearly insolvent corporation. Notably, there is a long list of potential targets for claims that parties have contributed to keeping the company on “life support.” Defendants to deepening insolvency claims have included directors and officers, equity-holders, lenders (particularly when the additional financing serving as the corporation’s lifeline is tied to additional collateral and/or better terms for the lender), and professional advisors to the company, such as accountants, advisers, and attorneys.

As with most actions, the most important element is the measure of harm (i.e. damages). Just as many scholars and courts, it seems, have struggled to grapple with this element of the theory of deepening insolvency as have those that struggle with the idea of it as a stand-alone cause of action. Again, in his article, Mr. Bates states:

What measure makes sense? Where the insolvent corporation (or its representative) asserts a claim, "dissipation of assets" is the logical measure of damage. Where an insider loots, the corporation should recover the value of the looted assets. Where directors bet the remaining assets on a high risk strategy in violation of fiduciary duties, the amount of the bet should be recoverable. The looted or squandered assets have been removed from the corporation, thus increasing its insolvency.

If a creditor is a direct victim of the fraud that prolonged a corporation's life and thus is a proper plaintiff, the measure of damages would be different. Each creditor cannot sue for the deepening of the hole in the corporation's balance sheet that was dug during the wrongdoing. To be sure, the creditor body as a whole suffers whatever deepened insolvency is visited upon the corporation, but individual creditors feel that loss as measured against the amount of their credit extensions.

A defrauded creditor's economic damage is the shortfall between the dollars it contributed and the pennies ultimately distributed on those dollars by the debtor or its bankruptcy estate (plus interest). If a creditor extended terms before looting or insolvency began, it would have been fully repaid but for the wrongdoing that later occurred. If credit was extended while the looting or insolvency was fraudulently concealed, the creditor will say it was damaged because it would not have extended credit had it known that which was wrongfully concealed. In either case, its damage is its shortfall.

Neither the corporation's damage measure (dissipated assets) nor the creditor's measure (out of pocket loss) is novel. These have long been the damage measures in fiduciary breach and fraud suits. Neither measure necessarily equals the amount by which a corporation's insolvency increased during a period of wrongdoing. For example, not all assets acquired by fraudulent declarations of solvency may have been looted. Some money may have been spent on legitimate business operations that kept up appearances (but lost money) while insiders looted other funds. That money will not be recovered by a fiduciary breach suit. Nor will every creditor be able to prove a fraud claim. Some creditors will have extended credit in hopes that a company on the ropes could be kept in business, or because they did not check the borrower's credit, or for a myriad of other reasons that are not attributable to misconduct. The sum of creditors' recoveries is therefore unlikely to total the corporation's increased insolvency. There is no reason to think that adding the recoveries of defrauded creditors and the corporate representative will hit this number, either.

The damage measures that make economic sense are the ones employed in traditional attacks on the chicanery of directors, officers and their confederates. "Deepening insolvency"—a corporation's further losses during a period of wrongdoing—is not such a measure, nor are traditional recoveries likely to equal that amount. "Deepening insolvency" is no more a good damage measure than it is a good cause of action.[27]

Mr. Bates makes a great deal of sense in his first paragraphs. Bankruptcy courts need a measure of damages to the creditor body as a whole. Mr. Bates last paragraph misses the mark. The “traditional recoveries” don’t compensate the creditor body as a whole for the damage done. This recovery is the strongest argument for deepening insolvency. Where there is harm, there should be a recovery. If the “traditional recoveries” don’t compensate the creditors for the full extent of the harm, bankruptcy courts need the concept of deepening insolvency.

The South Carolina Bankruptcy Court has recognized this. In Derivium Capital, LLC, the Bankruptcy Court states:

The claim is also not duplicative of other claims brought by Plaintiff. See Verestar, 343 B.R. at 477 (dismissing a claim for deepening insolvency as duplicative of other tort claims). A plain reading of the Complaint indicates that Plaintiffs deepening insolvency claim relates to damages sustained by Debtor as a result of the individual Movants allegedly wrongfully prolonging the corporate life of Debtor and causing it to incur additional liabilities; whereas, Plaintiffs breach of fiduciary duty claim appears primarily aimed at recovering distributions to Movants that caused insolvency.[28]

Fortunately, the South Carolina Bankruptcy Court understands the need for deepening insolvency. Similarly, North Carolina bankruptcy Courts are cognizant of the need when there exists harm to the creditors generally.

Corporate waste and deepening insolvency are claims designed for the protection of creditors and shareholders in general because they are derivative of an injury to the corporation, and are not the result of a direct injury sustained by a single creditor. [29]

Other courts, while discouraging the framing of the cause of action as “deepening insolvency, similarly understand the need for this remedy. In Maryland, the District Court held:

The Defendants argue that the claims for breaches of fiduciary duties to K Capital's creditors should be dismissed because they are disguised as improper deepening insolvency claims. See ECF No. 41–1 at 22. A deepening insolvency claim seeks to hold directors liable for breaching their fiduciary duties to creditors “by failing to consider a bankruptcy filing, [and] instead incurring additional debt.” In re Midway Games Inc.[30] Delaware courts have rejected deepening insolvency as a theory of damages, stating that there is “no absolute obligation on the board of a company that is unable to pay its bills to cease operations and liquidate.” Maryland courts have not addressed whether deepening insolvency is a cause of action in Maryland.

Although the amended complaint includes allegations consistent with a deepening insolvency claim, it also alleges that the Defendants breached their fiduciary duties to K Capital's creditors in other ways beyond failing to consider filing bankruptcy. See ECF No. 17 ¶¶ 72–92. Directors of insolvent corporations may be liable for breach of fiduciary duties even if there is no independent cause of action for deepening insolvency. See Trenwick [31], at 205. A plaintiff may state a claim for breach of fiduciary duty if he alleges that a director of an insolvent corporation “acted disloyally or without due care in implementing a business strategy.” [32]


The 4th Circuit Court of Appeals has yet to step into the conversation of how such a legal theory of deepening insolvency should be considered.

Jo Ann J. Brighton offered some practical advice as to what considerations lenders and attorneys would be wise to follow:

Until this uncertainty is resolved, recent case law developments do provide a few suggestions from a practice perspective: 1. Before bringing a deepening insolvency claim in the future, do not simply add it as a separate cause of action in your "kitchen sink" complaint. Decide which state's law may apply, and check the case law of that state or states to ascertain the specific requirements which must be plead to allege fraud under Rule 7009. Further, in analyzing future prospects for recovery and counseling clients, be mindful of the expense and difficulty in successfully litigating a complaint based on fraud. 2. In defending a claim of deepening insolvency, raise issues of the validity of the claim as a separate cause of action in the state in which the complaint is brought. Also question whether it is duplicative of a cause of action that already exists under state law (i.e., breach of fiduciary duty, aiding/abetting breach of fiduciary duty, fraud, etc.) or whether an independent fiduciary duty is necessary. 3. Where your client is a professional or a lender, question the validity of deepening insolvency as a measure of damages for the particular cause of action which has been pleaded. 4. Explore the possibility of filing a motion to dismiss a separate count of deepening insolvency if the pleading requirements of Rule 7009 have not been met, or there is a good-faith basis to assert that applicable state law would not recognize it.[33]

Before a practitioner tries to become to clever in their pleadings, it would also be wise to review some of the analysis discussed in Russell C. Silberglied, “Keep Your Deepening Insolvency Materials: Harmonizing Brown Schools with Radnor Holdings and Post-Citx Case Law: Part I” Am. Bankr. Inst. J., September 2008.

V. Conclusion

The theory of deepening insolvency has its detractors. This article has attempted to present both the pluses and the minuses of this theory, whether seen as an independent cause of action or seen as a measure of damage.

[1] In re Oakwood Homes Corp., 340 B.R. 510, 527–28 (Bankr. D. Del. 2006) (“Courts and commentators have expressed divergent views about the theory of deepening insolvency.”)

[2] This history is extensively derived from an article by James M. Peck, David M. Hillman and Elizabeth L. Rose for NYU’s Journal of Law and Business. See “Deepening Insolvency”: Litigation Risks for Lenders & Directors When Out-of-Court Restructuring Efforts Fail, NYU Journal of Law & Business at 293 (Fall 2004).

[3] Bloor v. Dansker (In re Investors Funding Corp. of New York Securities Litigation), In re Investors Funding Corp. of New York Securities Litigation, 523 F. Supp. 533, Fed. Sec. L. Rep. (CCH) P 97696 (S.D. N.Y. 1980)

[4] Id.

[5] Schact v. Brown, 711 F.2d 1343 (7th Cir. 1983)

[6] Allard v. Arthur Andersen & Co., 924 F.Supp. 488, 494 (S.D.N.Y. 1996)

[7] Official Committee Of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 349 (3d Cir. 2001).

[8] Id.

[9] See, e.g., Florida Dept. of Ins. v. Chase Bank of Texas Nat. Ass’n, 274 F.3d 924, 935–36 (5th Cir. 2001) (questioning whether Texas recognizes the cause of action); Askanase v. Fatjo, 1996 WL 33373364 (S.D. Tex. 1996) (rejecting bankruptcy trustee’s “deepening insolvency” argument because “[t]he shareholders … could not be damaged by additional losses incurred after the point of insolvency because they had already lost their equity interest in the company”); Coroles v. Sabey, 2003 UT App 339, 79 P.3d 974, 983 (Utah Ct. App. 2003) (rejecting deepening insolvency as a theory of damages because, “[a]lthough deepening insolvency might harm a corporation’s shareholders, it does not, without more, harm the corporation itself”); see also Feltman v. Prudential Bache Securities, 122 B.R. 466, 473–74 (S.D. Fla. 1990) (accepting that deepening insolvency is a recognized cause of action but finding that insolvent corporations were not harmed by artificial extensions of corporate lives where complaint alleged that corporations were shams and served as conduits for stolen money).

[10] In re Exide Techs., Inc., 299 B.R. 732, 740 (Bankr. D. Del. 2003).

[11] It simply escapes the elder author as to why these federal courts would ever think that the issue of deepening insolvency would be heard in a state court matter and therefore have a state court rule on the existence of the cause of action. The elder author is reminded of a speech he heard in law school from the former Chief Justice of the South Carolina Supreme Court, Julius “Bubba” Ness. In this speech, Justice Ness lamented as to all of the time that the law school spent on anti-trust litigation stating that in all of his many hears as a circuit court judge and then as a justice of the South Carolina Supreme Court he had not heard a single anti-trust law suit. The elder author has often wondered whether Justice Ness was just kidding around or whether he did not realize the exclusive jurisdiction of the federal courts on these issues.

[12] In re Hydrogen, L.L.C., 431 B.R. 337 (Bankr. S.D. N.Y. 2010)

[13] In re Propex, Inc., 415 B.R. 321 (Bankr. E.D. Tenn. 2009)

[14] In re Propex, Inc., 415 B.R. 321, 331 (Bankr. E.D. Tenn. 2009)

[15] In re VarTec Telecom, Inc., 335 B.R. 631, 45 Bankr. Ct. Dec. (CRR) 205 (Bankr. N.D. Tex. 2005)

[16] Id.

[17] In re Fleming Packaging Corp., 2005 WL 2205703 (Bankr. C.D. Ill. 2005)

[18] William Bates III in “Deepening Insolvency Into the Void,” ABI Journal, March 2005

[19] In re Parmalat, 383 F. Supp. 2d 587 (S.D. N.Y. 2005)

[20] In re National Century Financial Enterprises, Inc., Inv. Litigation, 604 F. Supp. 2d 1128 (S.D. Ohio 2009)

[21] Schnelling v. Crawford (In re James River Coal Co.) , 360 B.R. 139, 178 (Bankr. E.D. Va. 2007)

[22] Alberts v. Tuft (In re Greater Southeast Community Hospital Corn. I), 353 B.R. 324, 338 (Bankr. D. D.C. 2006)

[23] Viera v. AGM II, LLC (In re Worldwide Wholesale Lumber, Inc.), 378 B.R. 120, 126-27 (Bankr. D.S.C. 2007)

[24] Trenwick America Litigation Trust v. Ernst & Young, L.L.P. , 906 A.2d 168, 205 (Del. Ch. 2006), judgment aff’d, 931 A.2d 438 (Del. 2007)

[25] Official Committee of Unsecured Creditors v. Baldwin (In re: Lemington Home for the Aged), No. 10-4456 (3rd Cir. Sept. 21, 2011)

[26] See In Campbell v. Cathcart (In re Derivium Capital, LLC), 380 B.R. 407, 417 (Bankr. D.S.C. 2006)(the South Carolina Bankruptcy Court similarly recognized the adverse interest rule as an exception to in pari delecto).

[27] “Deepening Insolvency Into the Void,” supra, (citations omitted)

[28] In re Derivium Capital, LLC, supra.

[29] In re Buildnet, Inc., No. 01-82293, 2004 WL 1534296, at *7 (Bankr. M.D.N.C. June 16, 2004)

[30] In re Midway Games Inc., 428 B.R. 303, 315 (Bankr.D.Del.2010)

[31] Trenwick America Litigation Trust v. Ernst & Young, L.L.P. , 906 A.2d 168, 205 (Del. Ch. 2006), judgment aff’d, 931 A.2d 438 (Del. 2007), supra

[32] Goldstein v. Berman, No. CIV. WDQ-12-2507, 2014 WL 824050, at *5-6 (D. Md. Feb. 28, 2014)

[33] “Deepening the Blows Against Deepening Insolvency The Third Circuits CitX Opinion and PostCitX Opinions,” ABI Journal, September 2006

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