Structured Finance Litigation Update

Recent Court Decisions Clarify Enforceability of Setoff Provision in Structured Finance Transactions Following Counterparty Bankruptcy Filing: Contractual setoff and netting rights are among the more common protections bargained for in derivatives and structured finance transactions. In addition to the netting of gains and losses across multiple transactions after early termination under an International Swaps and Derivatives Association (“ISDA”) master agreement, counterparties may also contract for setoff of non-derivative obligations between the same counterparties against derivatives obligations (“cross-product netting”) and setoff of the obligations of one counterparty against obligations of affiliates of the other counterparty (“cross-affiliate netting”).

Of concern to any party is the enforceability of cross-affiliate and cross-product netting following its counterparty’s bankruptcy filing. Section 553 of title 11 of the United States Code (the “Bankruptcy Code”) governs setoff following the commencement of a bankruptcy case. Section 553 provides, in relevant part, that a bankruptcy filing “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.” 11 U.S.C. § 553(a).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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