The Delaware bankruptcy court recently gave new life to the concept of “deepening insolvency” in a manner that raises particular concerns for LBO sponsors. Even though deepening insolvency has been rejected as a separate cause of action by the Delaware Chancery Court, a recent decision, In re The Brown Schools, 2008 WL 1849790 (Bankr. D. Del. April 24, 2008), held that a sponsor may be liable for “deepening insolvency” damages arising out of a breach of the duty of loyalty when a portfolio company makes payments or transfers value to a sponsor while in the zone of insolvency.
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