Triangular Setoff: Yea or Nay?
A right of set-off is simply a remedy existing under state law which allows parties mutually obligated to one another to apply their mutual debts against each other. If I owe you $100, but you owe me $80, we are square if I pay you $20.
The Bankruptcy Code does not provide a right of set-off since it would be preferential on its face, favoring one creditor over others. The Bankruptcy Code does, however, provide in Section 553 that rights of set-off existing under state law are enforceable (and hence not preferential) under certain circumstances.
What about triangular set-offs? This occurs when A, B and C agree that A may set-off amounts owed by A to B against amounts owed to A by C. The case currently "in the news" is In re SemCrude, L.P., a decision handed down by the Delaware bankruptcy court in January 2009. In a carefully reasoned opinion, the court held that triangular set-offs are not permissible under Section 553 and are avoidable.
I write to this particular subject because the decision in the bankruptcy court was appealed in April of 2009. A quick PACER check today reveals that all briefs were filed back in September of 2009, so a ruling from the District Court is probably likely in the very near future. As both a trustee with a triangular set-off case pending in Alabama Middle, and a creditor's attorney with an interest in the issue, the result of the appeal strikes me as very important. I'm not aware of any 11th Circuit authority on point, but have noticed that decisions coming out of the Bankruptcy Court for Delaware seem to be highly regarded. It will be interesting to see if the District Court agrees.
