D. Delaware Law Does Not Recognize A Cause Of Action For So-Called “Deepening Insolvency”
In Count II of the complaint, the Litigation Trust seeks to state a claim against the
former Trenwick America directors for “deepening insolvency.” The Count consists of
the following cursory allegations:
From 2000 until 2003, these [Trenwick America] Defendants fraudulently concealed the true nature and extent of [Trenwick America’s] financial problems by expanding the amount of debt undertaken by [Trenwick America]. 99
The [Trenwick America] Defendants knew that [Trenwick America] would not be able to repay this increased debt, but fraudulently represented to creditors and other outsiders that the debt would be repaid. 100
By these actions, [Trenwick America’s] officers and directors prolonged the corporate life of [Trenwick America] and increased its insolvency, until [Trenwick America] was forced to file for bankruptcy on August 20, 2003. 101
As a result of [those] actions, [Trenwick America] suffered damages to be proven at trail, which [the Litigation Trust] is entitled to recover. 102
The concept of deepening insolvency has been discussed at length in federal
jurisprudence, perhaps because the term has the kind of stentorious academic ring that
tends to dull the mind to the concept’s ultimate emptiness.
Delaware law imposes no absolute obligation on the board of a company that is
unable to pay its bills to cease operations and to liquidate. Even when the company is
insolvent, the board may pursue, in good faith, strategies to maximize the value of the
Compl. ¶ 104.