Delaware District Court Affirms Bankruptcy Court’s Rejection of Triangular Setoff as Impermissible in Bankruptcy

Trade creditors are constantly seeking to mitigate risk in the event that a financially distressed customer files for bankruptcy. One way a creditor can do so is by setting off its claim against the customer, dollar-for-dollar, against any indebtedness owed by the creditor to the customer.

State and bankruptcy law each condition a creditor’s exercise of “setoff” rights upon the existence of mutual obligations owing between the creditor and debtor. Creditors have sought to satisfy this mutuality requirement by negotiating “triangular” setoff arrangements where their contracts permit affiliated entities to setoff the claims of one of the affiliates against indebtedness owed by another affiliate to the debtor.