Document Type
Research Memorandum
Publication Date
2025
Abstract
(Excerpt)
Setoff is generally recognized as an equitable right through which party A can offset its debt to party B against party B's debt to party A, resulting in simultaneous cancellation. "The right of setoff . . . allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding 'the absurdity of making A pay B when B owes A.'" In bankruptcy cases filed under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), creditors commonly use the right to setoff to affirmatively implicate and recover from the bankruptcy estate as a functional equivalent of a secured claim. Nonetheless, courts have also allowed creditors to use setoff defensively to shield assets from recovery attempts by the bankruptcy estate in adversary proceedings.
The S.D.N.Y. Bankruptcy Court held in In re SVB Financial Groupthat a creditor may assert its setoff right defensively, post-petition, without having filed a proof of claim as long as the right is preserved under the Bankruptcy Code, and this right to defensive setoff cannot be discharged post-confirmation. Under this ruling, creditors seeking to assert defensive setoff in adversary proceedings would face less procedural constraints, such as proof of claim and discharge, that would otherwise bound affirmative setoff.
The next section of this memorandum presents key concepts and facts surrounding unsettled legal issues in In re SVB Financial Group. The memorandum then analyzes issues surrounding defensive setoff, proof of claim, and discharge. The memorandum concludes by exploring the effects of the current ruling of In re SVB Financial Group.