Deepening insolvency is often asserted as an independent state-law cause of action against a debtor’s advisers for actions taken in their attempt to prolong the life of a failing company, to the detriment of the company and its creditors. Because state-law decisions involving deepening insolvency remain sparse, many bankruptcy courts are forced to predict how the state’s highest court would rule.
As Delaware continues to have one of the most active business bankruptcy caseloads in the country, practitioners naturally look to Delaware law as a benchmark. To the dismay of many plaintiffs lawyers, the Delaware Supreme Court recently issued a ruling affirming the holding, and adopting the reasoning, of the Delaware Court of Chancery in Trenwick America Litigation Trust v. Ernst & Young LLP, wherein the Chancery Court ruled, among other things, that Delaware law does not recognize any cause of action for “deepening insolvency.”
