Seventh Circuit Review


The Seventh Circuit has recently decided a trilogy of cases in which stockholders or creditors attempted to hold a business’s professionals—such as financial advisors and investment bankers—liable for the losses they suffered as a result of the business’s bankruptcy or financial demise. In all three of the cases, Fehribach v. Ernst & Young LLP, The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, and Joyce v. Morgan Stanley & Co., the Seventh Circuit declined to hold the professionals liable, thereby eliminating a potential “deep pocket” for the creditors or stockholders. The outcomes of these cases were consistent despite the fact that the cases were brought under varying causes of action, including negligence, constructive fraud, breach of contract, and using the ever-controversial damages theory of deepening insolvency. This Note explores the various causes of action brought against these professionals in other circuits and lower federal courts—specifically highlighting deepening insolvency and standard tort theories—before considering the Seventh Circuit’s treatment of these claims in Fehribach, The HA2003 Liquidating Trust, and Joyce. This Note concludes that the Seventh Circuit’s unwillingness to hold a business’s professional liable on a third-party claim could be more easily applied through the use of a general analytical framework in which to evaluate these claims and proposes that the framework applied should look something similar to the three-prong test as applied to lenders in the context of equitable subordination.

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