Client Alert

Deepening Insolvency: A Separate Actionable Tort?

June 23, 2006

Jesse H. Austin, III and Toronda Silas

Recovery by creditors based on a theory of deepening insolvency is premised on the allegedly intentional expansion of corporate debt and prolongation of a corporations life beyond insolvency, resulting in damage to the corporation and its creditors. As the words deepening insolvency are neither defined in the Bankruptcy Code, nor do they arise under any other provision of federal law, bankruptcy courts considering the theory sit in the role of soothsayer, predicting how their respective state courts would rule when considering this new cause of action. Two recent bankruptcy court decisions have reached opposite conclusions in determining whether to recognize a separate cause of action for the tort of deepening insolvency.

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