Third Circuit Reaffirms Viability Of Deepening Insolvency Claim

In Official Committee of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged), 659 F.3d 282 (3d Cir. 2011), the Third Circuit Court of Appeals held, among other things, that the "deepening insolvency" cause of action, which the Third Circuit previously recognized in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), remains an independent cause of action under Pennsylvania law. Background Lemington Home for the Aged, also known as Lemington Center ("Lemington Center" or the "Home"), was a nonprofit corporation founded in 1883 that provided care for elderly members of the African-American community in Pittsburgh. Lemington Center was affiliated with Lemington Elder Care Services ("Elder Care"), with which it had an interlocking board of directors. Beginning in the 1980s, Lemington Center began to experience financial troubles. In 1998, the U.S. Department of Health and Human Services imposed a monthlong ban on the Home's admissions of new patients. Sometime afterward, Lemington Center's administrator began to work on a part-time basis despite a state law requirement that the center employ a full-time, licensed administrator. From November 2003 through January 2005, Lemington Center had no treasurer, nor was there any meaningful oversight of the Home's financial operations. The Home's chief financial officer also failed to maintain a general ledger for several years. In 2004, two residents died at the Home, one under circumstances suggesting neglect. The Pennsylvania Department of Health conducted an investigation and noted that an administrator or a designee had not been on the premises as required by law and that the Home's administrator lacked the necessary qualifications. In March 2005, Lemington Center's board discussed plans to transfer the Home's principal charitable asset, the Lemington Home Fund, to Elder Care. On April 13, 2005, Lemington Center filed for chapter 11 protection in Pennsylvania. The bankruptcy court approved the closure of the Home and the transfer of its residents to other facilities after Lemington Center failed to find either funding or a purchaser. In November 2005, the court authorized the official committee of unsecured creditors appointed in the case to prosecute claims against the Home's officers and directors for breach of fiduciary duty and for deepening insolvency. The adversary proceeding filed by the committee was withdrawn to the district court...