U.S. Bankruptcy Judge Harlin D. Hale of Dallas, Texas recently decided not to recognize the theory of "deepening insolvency" as an independent tort in Texas, but left open the possibility that it may still be used as a theory of recovery for breach of a separate duty owed to the debtor. Typically, such "other" duties have included the breach of the officers' or directors' fiduciary duties owed to the corporation, fraud or negligent preparation in relation to financial statements, or a lender obtaining control of the debtor and using such control to prolong the debtor's life to the detriment of the debtor and its creditors. Under the ruling, "deepening insolvency" could serve only as a measure of damages for some other tort committed by the defendant. In the case, the unsecured creditors committee filed suit against the debtors' primary lender for deepening the insolvency of the debtor by allowing the debtor to become more insolvent and exist past the point of insolvency. The court reasoned that, since "deepening insolvency" is not addressed in the Bankruptcy Code or other federal law, for the theory to be actionable it must be actionable under state law. Looking at tort law in Texas and the history behind the theory of "deepening insolvency," Judge Hale predicted that Texas state courts would not recognize "deepening insolvency" as an independent cause of action. (In contrast, the Third Circuit, Delaware Bankruptcy Court, Tennessee Bankruptcy Court and Ohio Bankruptcy Court have ruled that "deepening insolvency" can serve as a separate and independent tort.) Accordingly, in order to recover damages for "deepening insolvency," the committee would have to have shown that the lender breached some duty under Texas law. The borrower/ lender relationship generally does not give rise to a special or fiduciary duty that would impose an extra-contractual duty on the lender. The majority of cases that have found a lender liable for deepening the insolvency of the debtor have involved facts where the lender was controlling the debtor's business activities. By stepping into the shoes of the debtor, the lender's actions gave rise to a fiduciary duty which, when breached, supported "deepening insolvency" damages. As the committee in this case had not plead facts showing the lender took over management and control of the debtors, there was no independent duty, and the committee could not recover damages for "deepening insolvency." Here is a link to the full opinion: http://www.txnb.uscourts.gov/opinions/hdh/04-81694_Adv05-3514_20051216.pdf Leslie