More Questions from the 3rd Circuit's Recent "Deepening Insolvency" Decision

Last month, in a post entitled "Deepening Insolvency: The Third Circuit Steps Back from the Breach," I discussed the Third Circuit's recent decision in CitX Corp., Inc. v. Detweiler, Hershey & Assocs., P.C., 2006 WL 1453117 (3d Cir. 5/26/06) (pdf), in which the Court delivered two bombshells:  the first, that negligence alone will not establish liability for deepening insolvency; the second, that deepening insovlency is not a valid theory of damages to support a negligence claim.

Most bombshells raise many questions in their aftermath, and this case is no different.  Yesterday, the Andrews Bankruptcy Litigation Reporter published an article entitled "Deepening Insolvency or Deepening Confusion?" (Westlaw only), co-authored by Jenner & Block's Ron Peterson, Jerry Switzer, and Phil Nelson.  

The article reviews the history of deepening insolvency and the decision itself, and finishes by mentioning a few of the "unanswered questions" raised by the decision, including:

  • "Is a deepening insolvency cause of action the only claim a plaintiff may bring for harm to an already-insolvent company? Surely the 3d Circuit did not intend this result."  

     

  • "As [In re] Global [Service Group, LLC, 316 B.R. 451 (Bankr. S.D.N.Y. 2004)] suggests, when, if ever, will a defendant have deepened a company's insolvency without committing some other intentional tort or breaching an independent fiduciary duty?"  

     

  • "If a plaintiff brings claims for fraud and breach of fiduciary duty in addition to a deepening insolvency claim, what is the proper measure of damages for these causes of action if not the deepening of the corporation's insolvency?"  

     

  • "Must a plaintiff show two different (and presumably conflicting) measures of its damages, one for the deepening insolvency cause of action and one for all other claims? Surely that cannot be the case, but CitX suggests otherwise."

In the end, the authors conclude, "it appears that CitX went too far."  They write:

If the 3d Circuit was intent on holding that mere negligence is not the proper basis for a deepening insolvency claim, it should have stopped there. By going farther to hold, unnecessarily, that deepening insolvency is not a valid theory of damages for other independent torts, the 3d Circuit has created an unworkable situation that simply deepens the confusion regarding deepening insolvency.

© Steve Jakubowski 2006

Written By:Mark T On July 7, 2006 12:51 PM

The criticism of the CitX decision is completely unfounded and unwarranted. As Sabin Willett put it more eloquently in his Business Lawyer article, the concept of a company damages for the deepening of its insolvency makes no sense as a matter of law and even less as a matter of economics.

[Ed.Note: The Sabin Willett article is at 60 Bus. Law. 549 (2005)]