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Delaware Bankruptcy Court Denies Multi-Party Setoff

By James S. Carr and Eric R. Wilson

On Jan. 9, 2009, the United States Bankruptcy Court for the District of Delaware, in the SemCrude, L.P., et al. bankruptcy cases, refused to enforce the terms of a valid, pre-bankruptcy agreement that provided for cross-affiliate, multi-party setoff ' a setoff by a creditor holding funds belonging to one or more debtors ' based on a lack of “mutuality” under ' 553 of the Bankruptcy Code (the “SemCrude decision”). The decision, In re SemCrude, L.P., Case No. 08-11525 (BLS), 2009 WL 68873 (Bankr. D. Del. Jan. 9, 2009), is a departure from the long-standing assumption that a multi-party netting agreement among affiliates would be upheld in bankruptcy if enforceable under applicable non-bankruptcy law. This article provides an analysis of the decision, the procedural status and its potential impact, and recommendations for minimizing the potential negative implications.

The Semcrude Decision

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