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Deepening Insolvency Trend Expands to Delaware
Spurred on by the current economic downturn, the use and acceptance of deepening insolvency as a cause of action in the bankruptcy arena continues to become more established and recognized. The Third Circuit already aided this development by recognizing deepening insolvency as a cause of action under Pennsylvania law in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340 (3d Cir. 2001). Now, the Delaware Bankruptcy Court in In re Exide Technologies, Inc., 2003 WL 22079513 (August 21, 2003) has recognized deepening insolvency — this time as a valid cause of action under Delaware law – in a lawsuit by an unsecured creditors committee against lenders of a bankrupt company.
Background
In 1997, Credit Suisse First Boston and Solomon Smith Barney, as agents, lead a syndicate of 81 other lenders in establishing a $650 million credit facility in favor of Exide Technologies, Inc., and certain of its subsidiaries, all of which are in the stored-energy business. In 2000, these same lenders provided $200 million in additional financing to allow Exide to acquire a competitor, GNB Dunlop. After that acquisition, Exide's financial condition began to deteriorate rapidly. On Oct. 26, 2001, Exide replaced its CFO with a turnaround consultant, at the direction of the lenders. Not long thereafter, Exide and its lenders amended the loan documents to suspend certain financial covenants, in exchange for which the lenders were granted liens on the assets and capital stock of Exide's foreign subsidiaries.
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