CHAPTER 8 Deepening insolvency Claims against Other Target Defendants
Jurisdiction | United States |
CHAPTER 8: Deepening insolvency Claims against Other Target Defendants
1. Generally
Deepening insolvency claims have been brought against a variety of types of defendants in addition to officers and directors. For example, deepening insolvency actions have been brought against lenders, accountants, auditors, financial advisors and attorneys. This chapter discusses actions against each of these parties.
2. Lenders
A. Claims Stated against Lenders
The following courts have found that claims were sufficiently alleged against lenders on a theory of deepening insolvency:
• OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp.) (predicting that Delaware, New York and North Carolina law would recognize deepening insolvency claim, holding allegations against debtors' banks that they misused their extensive authority over debtor to cause debtor to continue and expand unprofitable program solely for purpose of generating fees for banks while debtor slid even more deeply into insolvency were sufficient to state deepening insolvency cause of action).389
• Official Committee of Unsecured Creditors v. Credit Suisse First Boston (In re Exide Technologies Inc.) (predicting that Delaware Supreme Court would recognize a claim for deepening insolvency and finding that creditors stated claim against lenders for deepening insolvency, based on allegations that lenders, in order to gain control, caused debtor to fraudulently continue its business and acquire another corporation causing debtor to become more deeply insolvent).390
• Nisselson v. Ford Motor Co. (In re Monahan Ford Corp. of Flushing) (finding that claim was stated against lender where lender's fraudulent acts contributed to the continued operation of the debtor and its increased debt).391
• Adelphia Recovery Trust v. Bank of America N.A. (finding that creditors' committee had standing to bring aiding-and-abetting breach of fiduciary duty claims against banks based on deepening insolvency claim that "defendants have expanded a debtor's debt out of all proportion to the debtor's ability to repay and ultimately forced the debtor to seek bankruptcy protection").392
B. Claims Not Stated against Lenders
The following courts have found that deepening insolvency claims were not sufficiently plead against lenders:
• Kittay v. Atlantic Bank of New York (In re Global Services Group LLC) (dismissing deepening insolvency claim and finding that mere fact that bank made a loan that it knew or should have known debtor could not repay, which enabled debtor to prolong business and incur more debt, was not sufficient for deepening insolvency, especially given total absence of allegations that bank extended loan to enable debtor's principals to commit some wrongdoing; however, court noted that plaintiff could demonstrate deepening insolvency against lender by showing that defendant prolonged the company's life by breach of a separate duty or committing an actionable tort that contributed to the continued operation of a corporation and its increased debt).393
• Official Committee of Unsecured Creditors of VarTec Telecom Inc. v. Rural Telephone Finance Cooperative (In re VarTec Telecom Inc.) (predicting that Texas Supreme Court would not recognize deepening insolvency as an actionable separate tort and finding that no claim was stated for deepening insolvency in absence of allegations that secured creditor was controlling debtor's actions and then breached some duty of care).394
• The Official Committee of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners LLC (In re Radnor Holdings Corp.) (dismissing claim for deepening insolvency under Delaware law and finding that the making of a loan or an investment in stock of a financially struggling corporation does not increase insolvency and therefore does not support claim for deepening insolvency; "simply calling a discredited deepening insolvency cause of action by some other name does not make it a claim that passes muster").395
• Bondi v. Bank of America (In re Parmalat) (finding no separate claim for deepening insolvency based on duty of lender "not to intentionally, knowingly prolong the life of a business enterprise that it knows to be insolvent, by designing and implementing transactions which conceal the insolvency").396
• The Official Committee of Unsecured Creditors of Propex Inc. v. BNP Paribas (In re Propex Inc.) (dismissing creditors' committee's claim for deepening insolvency against bank for inducing debtors to agree to amendment to credit agreement where it was alleged that the lending of money to debtor under amendment "deepened the debtors' insolvency by requiring the prepayment of $20 million, raising the previous interest rate, and permitting the debtors to remain operational with the additional funding").397
3. Accountants, Auditors and Financial Advisors
This section is an analysis of decisions where courts have considered whether claims for deepening insolvency were properly stated against accountants, auditors or financial advisors.
A. Claims Stated against Accountants and Auditors
The following courts found that deepening insolvency claims against accountants and auditors were sufficiently alleged:
• Smith v. Andersen (finding that a trustee had standing based on damages described as deepening insolvency where the allegations were that the defendants "misrepresent[ed] (not necessarily intentionally) the firm's financial condition to its outside directors and investors").398...
• Silverman v. KPMG LLP (In re Allou Distributors Inc.) (finding that trustee had adequately alleged that the accountant's conduct in performing an inadequate audit and in failing to discover fraud enabled the principals of the debtor to continue the diversion and depletion of the debtor's assets, and deepening insolvency was used as a description of the damages).399
• Ario v. Deloitte & Touche LLP ("This Court concludes that where deepening insolvency damages are sought, if the underlying action is based upon a compiled financial statement, as in CitX Corp., deepening insolvency damages may not be available. However, where, as in Allegheny Health, the accountants have prepared an audited financial statement and the plaintiff has asserted independent causes of action, such as negligence, based upon the compiled financial statement, deepening insolvency damages are available. Thus, we conclude that while we do not recognize the deepening insolvency theory as an independent cause of action, if negligence is alleged and proven, the
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