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Delaware Bankruptcy Court Decision Unsettles Reliance on Triangular Netting or Setoff Against a Chapter 11 Debtor

February 18, 2009

By George D. Fatula, Richard A. Chesley and Mark K. Lewis

In the bankruptcy context, creditors have long relied on Section 553(a) of the Bankruptcy Code (the Code) to preserve pre-petition setoff rights that they have against debtors who file petitions for relief under Chapter 11. While this issue is becoming even more critical in the current economic climate, a recent decision by the United States Bankruptcy Court for the District of Delaware (the Court) indicates that the scope of the setoff rights preserved by Section 553 may prove narrower than previously contemplated.