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Delaware Court of Chancery rules that “deepening insolvency” is not a recognizable cause of action in Delaware

In Trenwick America Litigation Trust v. Ernst & Young, LLP, 906 A.2d 168 (Del. Ch. 2006), the Delaware Court of Chancery definitively weighed in on the tort claim that has become known by the popular name “deepening insolvency” when it dismissed a “deepening insolvency” claim brought by a litigation trust to recover money for the benefit of the creditors of a bankrupt estate.

USA, Insolvency & Restructuring, Litigation, Locke Lord LLP, Bankruptcy, Shareholder, Surety, Fiduciary, Board of directors, Accounting, Debt, Due diligence, Holding company, Business judgement rule, Line of credit, Subsidiary, Court of Chancery, Delaware Court of Chancery, Delaware Supreme Court
Holding debt and equity investments in a financially distressed company may survive recharacterization claims

Investors who hold both debt and equity in a financially distressed company may be confronted with efforts to have their debt investments recharacterized as equity. Recharacterization is an equitable remedy that bankruptcy courts have used as a basis to look past the form and characterization of an obligation as debt and find the subject obligation to be equity. In his recent decision in Official Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC (In re Radnor Holdings Corp.), Adv. Proc. No. 06-50909 (Bankr. D. Del.

USA, Insolvency & Restructuring, Litigation, Fried Frank Harris Shriver & Jacobson LLP, Unsecured debt, Collateral (finance), Market liquidity, Debt, Preferred stock, Distressed securities, Secured loan, Lehman Brothers, United States bankruptcy court, Third Circuit