Does the Bankruptcy Code allow for triangular setoffs in swap and repurchase agreements after commencement of the debtor’s bankruptcy case? In Sass v. Barclays Bank (In re American Home Mortgage Holdings), Adv. Proc. No. 11-51851 (CSS) (Del. Bankr. Nov. 8, 2013), the court held that the Bankruptcy Code does not allow parties to set off non-mutual obligations, regardless of whether the agreements are subject to the safe harbor provisions of 11 U.S.C. §§ 559-661.
Section 553 of the Bankruptcy Code preserves any right of setoff that may exist under applicable non-bankruptcy law. However, to be eligible for setoff under Section 553, the amount owed by the debtor must be a prepetition debt; the debtor’s claim against the creditor must be a prepetition claim; and the debtor’s claim against the creditor and the debt owed the creditor must be mutual. As stated in In re SemCrude, 399 B.R. 388 (Del. Bankr. 2009), aff’d, 428 B.R. 590 (D.Del. 2010), “debts are considered ‘mutual’ only when they are due to and from the same persons in the same capacity.”
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