Deep Rock doctrine
Encyclopedia
Taylor v. Standard Gas Co. 306 U.S. 307 (1939) is an important case decided by the U.S. Supreme Court, which laid down the "Deep Rock doctrine" as a rule of bankruptcy
and corporate law
.
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.
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
and corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
.
The rule requires that, where a subsidiary corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
declares bankruptcy and an insider or controlling shareholder of that subsidiary corporation asserts claims as a creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
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
Parent company
A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company...
asserts such claims against its own subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
.
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
Defendant
A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute...
Standard Gas Company.