No Safe Harbor in a Bankruptcy Storm: Mutuality 'Baked Into the Very Definition of Setoff'
Mondaq Business Briefing › United States Law Articles in English (2010)
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No Safe Harbor in a Bankruptcy Storm: Mutuality 'Baked Into the Very Definition of Setoff'
"Safe harbors" in the Bankruptcy Code designed to insulate nondebtor parties to financial contracts from the consequences that normally ensue when a counterparty files for bankruptcy have been the focus of a considerable amount of scrutiny as part of evolving developments in the Great Recession. One of the most recent developments concerning this issue in the courts was the subject of a ruling handed down by the New York bankruptcy court presiding over the Lehman Brothers chapter 11 cases. In In re Lehman Bros. Holdings, Inc., Judge James M. Peck ruled that, absent mutuality of obligation, funds on deposit with a bank are not protected by the Bankruptcy Code's safe-harbor provisions and cannot be used to set off an obligation allegedly owed by the debtor under a master swap agreement. "A contractual right to setoff under derivative contracts," Judge Peck wrote, "does not change well established law that conditions such a right on...
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