CHAPTER 6 Summary of Positions on Deepening insolvency by State

• Jurisdiction: United States

CHAPTER 6: Summary of Positions on Deepening insolvency by State

Applying and interpreting deepening insolvency as a cause of action is a matter of state law. Some states do not have any reported decisions on deepening insolvency as either an independent tort or as a theory of damages; others have significant case law on the subject.

1. Alabama

• No relevant reported decisions were found.

2. Alaska

• No relevant reported decisions were found.

3. Arizona

• Collins v. Kohlberg & Co. (In re Southwest Supermarkets LLC) ("A motion to dismiss is not an appropriate procedure to test the Trustee's deepening insolvency theory of damages. The complaint adequately specifies other damages, such as the acquisition and management fees, tax overpayment and Pack buyout, that are sufficient to state a claim for breach of fiduciary duty. The Court therefore need not now determine whether the Trustee may also be able to prove whether additional damages also flowed from the Defendants' breaches of fiduciary duty.").²²⁵
• Smith v. Arthur Andersen LLP (agreeing with "the Third Circuit's observation in Lafferty that 'prolonging an insolvent corporation's life through bad debt may' dissipate corporate assets and thereby harm the value of corporate property," but declining to make "any general pronouncements on the deepening insolvency theory, not least because it is difficult to grasp exactly what the theory entails," and further stating "that the complaint states a cognizable harm to [Debtor] when it alleges that the defendants 'prolonged' the firm's existence, causing it to expend corporate assets that would not have been spent 'if the corporation [had been] dissolved in a timely manner, rather than kept afloat with spurious debt'").²²⁶
• Biltmore Associates LLC v. Thimmesch (finding that damages on the fiduciary duty claim presented by an expert as the increased insolvency of the debtor during the relevant time period could be used at trial, although other portions of expert testimony would be excluded relative to opinion on breach of fiduciary duty).²²⁷

4. Arkansas

• Robertson v. White (finding that consolidated claim on behalf of debtor and investor class against debtor's accountants for prolonging existence of debtor after insolvency was allowed to proceed on behalf of both plaintiffs because "[t]he operation of a corporation beyond the point of its insolvency works a fraud upon creditors and investors, at least to the extent that they have been misinformed as to the true status of the corporation's affairs").²²⁸

5. California

• Poonja v. Bridgespan Title Company (In re Bridgspan Corp.) (declining to dismiss deepening insolvency claim "because of the apparent reluctance of appellate courts, and particularly the Ninth Circuit, 'to decide one way or another whether deepening insolvency can be raised as a separate claim'").²²⁹

6. Colorado

• No relevant reported decisions were found.

7. Connecticut

• No relevant reported decisions were found.

8. Delaware

• 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 caused debtor to fraudulently continue its business for nearly two years, causing debtor to become more deeply insolvent).²³⁰
• Rafool v. The Goldfarb Corp. (In re Fleming Packaging Corp.) (declining to dismiss trustee's claim for deepening insolvency where court could not distinguish at the pleading stage whether deepening insolvency claim was duplicative of breach of fiduciary duty claim and given the "uncertainty surrounding the theory of deepening insolvency").²³¹
• In re LTV Steel Co. (recognizing growing acceptance of "deepening insolvency" cause of action where "defendant's conduct, either fraudulently or even negligently, prolongs life of corporation, thereby increasing corporation's debt and exposure to creditors").²³²
• In re Insilco Technologies Inc. (finding that deepening insolvency claim asserted by liquidating trustee against parties using their control over debtor corporation to further their own interests is not a core matter and not within core jurisdiction of bankruptcy court).²³³
• Rafool v. The Goldfarb Corp. (In re Fleming Packaging Corp.) (finding that allegations in trustee's adversary proceeding against former officers and directors of debtor stated claim for deepening insolvency under Delaware law).²³⁴
• OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp.) (declining to dismiss deepening insolvency claim against debtors' banks because it predicted that Delaware, New York and North Carolina law would recognize deepening insolvency claim, but that fraud, and not mere negligence, is a necessary element).²³⁵
• Official Committee of Unsecured Creditors of Wickes Inc. v. Wilson (granting creditors' committee's motion for mandatory abstention because claim of deepening insolvency is not the creature of bankruptcy law, but rather is a state law claim).²³⁶
• Official Committee of Unsecured Creditors of Verestar Inc. v. American Tower Corp. (In re Verestar Inc.) (dismissing creditors' committee's deepening insolvency claim against debtor's parent corporation, financial advisor, debtor's former officers and directors, and parent's former director and president as duplicative of breach-of-fiduciary-duty claims and because it was precluded by the exculpatory provision in Verestar's charter relating to duty of care).²³⁷
• Boles v. Filipowski (In re Enivid Inc.) (dismissing liquidation trust's deepening insolvency claim against debtor's former officers and directors for failure to state a claim because no harm was alleged and because claim was subsumed in other claims).²³⁸
• Trenwick America Litigation Trust v. Ernst & Young LLP (declining to recognize deepening insolvency as a tort and stating that, "Put simply, under Delaware law, 'deepening insolvency' is no more of a cause of action when a firm is insolvent than a cause of action for 'shallowing profitability' would be when a firm is solvent. Existing equitable causes of action for breach of fiduciary duty, and existing legal causes of action for fraud, fraudulent conveyance, and breach of contract, are the appropriate means by which to challenge the actions of boards of insolvent corporations").²³⁹
• Rafool v. The Goldfarb Corp. (In re Fleming Packaging Corp.) (declining to dismiss deepening insolvency claim against debtor's former officers and directors because Delaware Supreme Court must speak on whether Delaware will recognize a separate cause of action for deepening insolvency).²⁴⁰
• Alberts v. Tuft (In re Greater Southeast Community Hospital Corp. I) (finding that deepening insolvency should be treated as theory of harm, not as separate cause of action).²⁴¹
• The Official Committee of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners LLC (In re Radnor Holdings Corp.) (dismissing causes of action for breach of fiduciary duty and aiding and abetting breach of fiduciary duty against investor-lenders for making a loan to a financially struggling corporation because "simply calling a discredited deepening insolvency cause of action by some other name does not make it a claim that passes muster").²⁴²
• Buckley v. O'Hanlon (declining to dismiss claim for deepening insolvency against officers and directors where defendants knowingly misrepresented the state of the debtor's financial health with the intent to cause the debtor to continue to incur more liabilities than it could repay, since court predicted that Delaware Supreme Court would recognize claim for deepening insolvency).²⁴³
• Miller v. McCowan De Leeuw & Co. (In re The Brown Schools) (declining to dismiss deepening insolvency claim because the law of the state of incorporation and the Delaware Supreme Court had not yet spoken on the issue).²⁴⁴
• Royal Indemnity Co. v. Pepper Hamilton LLP (recognizing uncertainty in area of "deepening insolvency," but finding that plaintiff, a credit risk insurer, had pled sufficient facts to state a claim for deepening insolvency against attorneys and accountants for insured under either Delaware, North Carolina or Pennsylvania law).²⁴⁵
• Trenwick America Litigation Trust v. Billet (affirming Chancery Court decision in Trenwick America Litigation Trust v. Ernst & Young LLP, 906 A.2d 168, 173 (Del. Ch. 2006), and affirming that Delaware does not recognize deepening insolvency as a separate claim for relief).²⁴⁶
• Joseph v. Frank (In re Troll Communications LLC) (dismissing deepening insolvency claims because deepening insolvency is not a valid cause of action or theory of damages under Delaware law).²⁴⁷
• Miller v. McCowan De Leeuw & Co. (In re The Brown Schools) (dismissing deepening insolvency count following the Delaware Supreme Court's ruling in Trenwick that Delaware does not recognize a claim for relief for deepening insolvency, yet declining to dismiss other independent claims, finding that "Trenwick required dismissal of the deepening insolvency claim, but cannot be read so broadly as to require dismissal of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, and civil conspiracy claims").²⁴⁸
• Shandler v. DLJ Merchant Banking (In re Insilco Technologies Inc.) (district court affirmed bankruptcy court's dismissal of deepening insolvency claim because court did not have jurisdiction over claim as a result of preservation clause in confirmed chapter 11 plan).²⁴⁹
• Buchwald v. The Renco Group Inc. (In re Magnesium Corp. of America) (noting that deepening insolvency is not recognized as a separate cause of action under the law of Delaware and holding that trustee lacks standing to pursue claim against company's principals and investment bank, rejecting "the contention that deepening insolvency theory results in

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