“Deepening Insolvency” is a rather new theory of either liability or damages in cases brought by a plaintiff (typically a bankruptcy trustee, litigation trust, or some other party “filling in” for an insolvent corporation, or debtor) against directors, officers, attorneys, or other professionals, based on their dealings with the debtor. “Deepening insolvency” has been defined as “injury to the debtors' corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life.” The theory of deepening insolvency has become a highly debated by attorneys, creditors, and the courts.
The courts, both state and federal, have continued to disagree on the appropriate view of deepening insolvency. Some courts have held that deepening insolvency should be viewed as an independent tort claim. Other courts have held that deepening insolvency should be considered as a means for measuring damages arising from another cause of action, such as negligence or malpractice. Finally, other courts have refused to recognize deepening insolvency altogether.
This Article discusses the three different approaches courts have taken when interpreting the theory of “deepening insolvency.” Part I discusses the history of the doctrine of “deepening insolvency.” Part II discusses the case law recognizing “deepening insolvency” as a separate cause of action. Part III discusses the case law recognizing “deepening insolvency” as a means of measuring damages. Part IV discusses the case law that refuses to recognize “deepening insolvency” altogether. Finally, Part V discusses the implications of each of the three views of “deepening insolvency.”