CHAPTER 7 Deepening insolvency Claims against Officers and Directors

• Jurisdiction: United States

CHAPTER 7: Deepening insolvency Claims against Officers and Directors

1. Generally

Deepening insolvency claims against officers and directors have generated conflicting authorities. These claims often borrow from the general body of fiduciary law. Authorities that reject such claims often rest their decisions based on an exculpatory clause in a corporate charter, on redundancy of claims, or on a lack of facts sufficient to show causation.

2. Claims Stated against Officers, Directors and Their Corporations

The following cases upheld claims for relief against officers and directors on a deepening insolvency theory or with deepening insolvency as a theory of damages:³⁶⁰

• Official Committee of Unsecured Creditors v. R.F. Lafferty & Co. (finding that under Pennsylvania law, "deepening insolvency" may give rise to a cognizable injury. Creditor's committee had standing to bring "deepening insolvency" claim on behalf of debtor corporations against sole shareholders of corporation).³⁶¹
• Collins v. Kohlberg & Co. (In re Southwest Supermarkets LLC) (finding that deepening insolvency properly pled as a theory of damages against corporate parent and officers for causes of action based on breach of fiduciary duty, gross negligence and mismanagement).³⁶²
• In re LTV Steel Co. (finding that a claim was stated against officers and directors of corporate debtor where they had concealed or misstated the debtor's true financial condition, thereby permitting a deepening of the insolvency of the corporation).³⁶³
• In re Total Containment Inc. (finding that trustee stated a claim for deepening insolvency against officers, directors and controlling shareholders for continuation of corporate debtor's business, which increased debtor's debt by $17 million).³⁶⁴
• Rahl v. Bande (finding that claim was stated for deepening insolvency against officers and directors of debtor corporation).³⁶⁵
• Alberts v. Tuft (In re Greater Southeast Community Hospital Corp. I) (finding that breach-of-fiduciary-duty claims were stated against some officers and directors where damages were pleaded on the basis of deepening insolvency).³⁶⁶
• Campbell v. Cathcart (In re Derivium Capital LLC) (finding that claim was stated against members of the debtor limited liability company who wrongfully prolonged the debtor's corporate life, causing the debtor to incur additional liabilities).³⁶⁷
• In re Fleming Packaging Corp. (finding that trustee's complaint stated a claim against corporate officer for deepening insolvency where it was alleged that officer caused fraudulent and dishonest continuation of corporate business causing substantial injury to the corporation's property).³⁶⁸
• Buckley v. O'Hanlon (finding that 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, so deepening insolvency claim was permitted to proceed and business judgment rule did not preclude deepening insolvency claim where bad faith was alleged).³⁶⁹
• In re Eugenia VI Venture Holdings Ltd. Litigation (finding that New York recognizes deepening insolvency as a theory of damages to support a separate tort, including breach of fiduciary duty; however, stating that "a manager's negligent but good faith decision to operate insolvent business will not subject him to liability for deepening insolvency").³⁷⁰
• Official Committee of Unsecured Creditors v. Hendricks (In re Dwight's Piano Co.) (finding that in claim against debtor's former chief executive officer for breach of fiduciary duty, "a specific and quantified injury that has resulted from a breach of fiduciary duty need not be proven" and that deepening insolvency is a valid measure of damages under Delaware corporations law).³⁷¹
• Kapila v. Clark (In re Trafford Distributing Center Inc.) (finding that deepening insolvency was a valid theory of damages to support trustee's claim against debtor's principal for alleged breach of fiduciary duty where conduct of debtor's sole shareholder and director in months preceding corporation's bankruptcy filing engaged in scheme to drain corporation of its assets).³⁷²
• Official Committee of Administrative Claimants v. Bricker (holding that the creditors' committee had standing to bring cause of action against debtor's former CEO).³⁷³

3. Claims Not Stated against Officers and Directors

The following cases have found that plaintiffs cannot properly state a claim for deepening insolvency against officers, directors and shareholders:³⁷⁴

• Feltman v. Prudential Bache Securities ("The Court agrees with Plaintiffs that an 'artificial and fraudulently prolonged life ... and ... consequent dissipation of assets' constitutes a recognized injury for which a corporation can sue under certain conditions [citation omitted]. The Court finds, however, that under the circumstances alleged

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