David Margulies

Document Type

Research Memorandum

Publication Date




The tort of “deepening insolvency” refers to an action asserted by a representative of a bankruptcy estate against directors, officers, lenders, or others based on their pre-petition interactions with the debtor. 9 NORTON BANKR. L. & PRAC. 3d § 174:22. Liability under deepening insolvency has been imposed where “the defendant’s conduct, either fraudulently or even negligently, prolongs the life of a corporation, thereby increasing the corporation's debt and exposure to creditors.” In re LTV Steel Co., Inc., 333 B.R. 397, 421 (Bankr. N.D. Ohio 2005). Damages under the theory are sometimes awarded to a bankrupt corporation when, by delaying liquidation, the company incurs additional debts that would not have arisen if it had filed for bankruptcy at an earlier date. Fehribach v. Ernst & Young LLP, 493 F.3d 905, 908 (7th Cir. 2007). However, recovery under deepening insolvency appears to be subject to increasing limitations. Recently, in Fehribach v. Ernst & Young LLP, 493 F.3d 905 (7th Cir. 2007), the United States Court of Appeals for the Seventh Circuit rejected the notion that a financial auditor is obligated to investigate circumstances external to a company’s records to determine whether a going-concern qualification should be included in an audit report. The Seventh Circuit opined that the auditor is required to factor into its audit report information about external matters that it is “told by the firm or otherwise leans.” Id. at 911. In so holding, the Court, though not entirely casting out the theory of deepening insolvency from future consideration, arguably sent out a warning sign for future claimants in its jurisdiction that these claims are not easy to establish. In particular, the Fehribach decision marks a victory for financial auditors who would otherwise be possible targets for creditors in bankruptcy.



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.