Bankruptcy blog

The Deep Rock doctrine is a rule of bankruptcy and corporate law in the United States, developed by the U.S. Supreme Court in the case of Taylor v. Standard Gas Co., 306 U.S. 307 (1939). The rule requires that, where a subsidiary corporation declares bankruptcy and an insider or controlling shareholder of that subsidiary corporation asserts claims as a creditor against the subsidiary, loans made by the insider to the subsidiary corporation may be deemed to receive the same treatment as shares of stock owned by the insider. Therefore, the insider’s claims will be subordinated to the claims of all other creditors, i.e. other creditors will be paid first, and if there is nothing left after other creditors are paid then the insider gets nothing. This also applies (and indeed the doctrine was first established) where a parent company asserts such claims against its own subsidiary.

The doctrine will be applied where equity requires, particularly where the subsidiary was undercapitalized at the time that it was established, and can thereby be shown to have been mismanaged for the parent corporation’s benefit. This was the circumstance in the original Supreme Court case, where the Deep Rock Oil Corporation was an undercapitalized subsidiary of the defendant Standard Gas Company.