Off the Deep End -- The Demise of “Deepening Insolvency”
by Marc J. Winthrop and Peter W. Lianides
Winthrop Couchot PC; Newport Beach, Calif.
In the last several years, there has been a flurry of cases asserting causes of action under a theory known as “deepening insolvency.” A deepening insolvency claim purportedly arises when fiduciaries in control of an insolvent entity cause that entity to become further insolvent and thereby harm its creditors. See American Bankruptcy Institute, Suits Against Fiduciaries and Their Counsel, 060713 ABI-CLE 1 (2006). The term “deepening insolvency” has sometimes been referred to as the “fraudulent prolongation of a corporation's life beyond insolvenc,” In re Enivid Inc., 345 B.R. 426, 453 (Bankr. D. Mass. 2006); Baena v. KPMG LLP, 389 F.Supp.2d 112, 117 (D. Mass. 2005), and “an injury to the debtors' corporate property from the fraudulent expansion of corporate debt and prolongation of corporate life,” Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co. Inc., 267 F.3d 340, 347-48 (3d Cir. 2001).
Read the full article. (Materials from 2007 Bankruptcy Battleground West)
The War on Corporate Fiduciaries: Have the Fiduciaries Won?
by David B. Shemano and Jennifer Waldner Leland
Peitzman, Weg & Kempinsky LLP; Los Angeles
Bankruptcy lawyers advise clients that when a corporation is in the “vicinity” or “zone” of insolvency, the fiduciary duties of the officers and directors “shift” or “expand” to encompass the interests of creditors. Implicit in such advice is the assumption that the substantive choices an officer or director may make in the vicinity of insolvency is constrained compared to the time prior to the vicinity of insolvency, and that certain conduct that would satisfy the fiduciary duty outside of the vicinity of insolvency would breach the fiduciary duty in the vicinity of insolvency.
Read the full article. (Materials from 2007 Bankruptcy Battleground West)
So Where Exactly Is the Vicinity of Insolvency?
by Edward M. Wolkowitz
Robinson, Diamant & Wolkowitz; Los Angeles
In 1824, creditors of the Hallowell and Augusta Bank sued the bank’s directors for making a distribution to shareholders, leaving the creditors high and dry. In Wood v. Dummer, the court found that because the bank was insolvent, the act of making a distribution to the shareholders amounted to “misconduct” on the part of the bank’s directors requiring the shareholders to return the distribution to the creditors. Indeed, the court noted that shareholders have an interest only in the “residuum” of the corporation, so when the corporation becomes insolvent, its assets are held in trust for the benefit of creditors.
Read the full article. (Materials from 2007 Bankruptcy Battleground West)
Minutes for 2006 Winter Leadership Conference
The Young and New Members Committee met jointly with the Business Reorganization Committee on Friday, Dec. 1, 2006. The program, entitled "You Can Run, But Can You Hide? - Are Third-Party Releases Permissible in Plans of Reorganization?" discussed the propriety of such releases for professionals, officers and directors and third-party co-defendants. The panel, comprised of Hon. Judith Fitzgerald, from the U.S. Bankruptcy Court for the Western District of Pennsylvania, Ronald Barliant from Goldberg Kohn Bell Black Rosenbloom & Moritz Ltd. and Bill Kosturos from Alvarez & Marsal, was moderated by Brian Shaw of Shaw Gussis Fishman Glantz Wolfson & Towbin LLC. The panel addressed the reasons for third-party releases, the typical requirements for obtaining such releases (if permitted) and the practical methods by which to obtain and implement them through the confirmation process. Noting that such releases are not universally accepted, the panel also keyed the audience into the different positions taken by the circuits with respect to third-party releases. Given the diverse perspectives on the panel -- debtors' and creditors' counsel, a jurist and a business advisor -- the discussion provided an interesting and insightful presentation to all who attended.