CHAPTER 1 introduction to Deepening insolvency

• Jurisdiction: United States

CHAPTER 1: introduction to Deepening insolvency

1. Generally

Deepening insolvency may be the holy grail of damage liability for plaintiffs seeking to recover losses through litigation. Stakes are high as plaintiffs and defendants battle over the theory of deepening insolvency and its existence, meaning and application. The theory is used as a hook to sue defendants with deep pockets for enormous damages based on allegedly wrongful conduct that prolonged the corporate life of a debtor past the point of insolvency. Defendants, however, are quick to point out the flaws in the theory of deepening insolvency, including problematic policy issues as well as practical difficulties in calculating damages.

Officers and directors are frequent targets of deepening insolvency claims because of the nature of their decision-making authority and the role of their fiduciary duties. In addition to those insiders, however, deepening insolvency claims may also reach the professionals retained by corporate entities such as lawyers, accountants and auditors, as well as the company's financial institutions and lenders.

The potential for liability arises from a defendant's acts or failures to act that allegedly cause injury to the debtor corporation through increased liabilities or a decline in net value, which unreasonably prolongs the life of the corporation. Plaintiffs argue that, but for the wrongful conduct of the defendant, the corporation could have and would have dissolved, liquidated or filed for bankruptcy; therefore, the corporation and its creditors were harmed by the unreasonable delay.

In the meantime, courts are struggling to understand, interpret and apply the concept of deepening insolvency as a theory of recovery. Some courts find that deepening insolvency is an independent tort claim for relief.¹ Other courts find that it is only a theory of damages requiring a distinct underlying tort claim for relief.² Other courts have rejected the theory outright under any interpretation.³

This book explores the import of deepening insolvency from both the plaintiffs' and defendants' perspectives. It offers a historical analysis of the doctrine, its significance in calculating damages in a variety of liability scenarios, the interplay of the doctrine with fiduciary duties, and potential defenses that may be asserted to deepening insolvency allegations. The chapters in this book focus on the following:

• the interplay of deepening insolvency with the fiduciary duty obligations of officers, directors and other potential targets;
• the competing concerns regarding deepening insolvency and why courts have split on the application of the theory;
• deepening insolvency as an independent tort claim;
• deepening insolvency as a measure of damages;
• a state-by-state analysis of how courts have applied deepening insolvency;
• an

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