Vol 18 (2021) - Issue 3

Article preview

Third Circuit Affirms Rule Against Triangular Setoff In Bankruptcy: In re Orexigen Therapeutics, Inc., 2021 WL 1046485 (3d Cir)

Synopsis
In a recent ruling, the US Court of Appeals for the Third Circuit (the 'Third Circuit' or 'Court') clarified the scope of setoff rights under section 553 of title 11, United States Code (the 'Bankruptcy Code'). The Court held that an attempt to create triangular setoff rights by contract was not sufficient to create a 'mutual' debt required for setoff under the Bankruptcy Code.

Adopting the reasoning of In re SemCrude, L.P., the Court explained that in bankruptcy, a valid right of setoff requires (i) a right to setoff under applicable state law, and (ii) mutuality (i.e., a direct debt owing from a debtor to a creditor, and a reciprocal direct obligation).
Although the matter at bar involved setoff rights enforceable under state law, the Court concluded that the absence of mutuality precluded setoff by the creditor in bankruptcy. The Court rejected the proposition that parties could circumvent the mutuality requirement of Bankruptcy Code section 553 by contracting for a triangular setoff.