458 B.R. 134
Bankr. S.D.N.Y.2011Background
- UBS and Lehman Brothers Inc. (LBI) entered into a swap with a NY-law governed Credit Support Annex that required collateral posting.
- UBS designated September 16, 2008 as Early Termination Date following cross-defaults and LBI downgrade; UBS held about $170 million in collateral at that time.
- SIPA Liquidation Order granted the SIPA Trustee immediate possession of LBI assets and imposed Stay provisions prohibiting setoffs against LBI assets.
- UBS issued a Valuation Notice alleging a setoff under section 8(a)(iii) of the Credit Support Annex, reducing collateral to approximately $76 million (Remaining Collateral).
- UBS further claimed a setoff under section 5(a) against amounts owed by LBI to UBS affiliates, with remaining collateral allegedly insufficient to cover claims.
- Trustee seeks to enforce the automatic stay and compel turnover of approximately $23 million of excess collateral; UBS cross-moves to enforce the triangular setoff.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Mutuality requirement for triangular setoff | Trustee: no mutuality; affiliates cannot be aggregated for setoff in bankruptcy. | UBS: section 5(a) creates a contractual right to triangular setoff independent of mutuality. | Triangular setoff not permitted; mutuality required remains indispensable. |
| Effect of 553(a) on contract-based setoffs | Trustee: section 553(a) preserves only prepetition mutual setoffs, forbidding cross-affiliate netting. | UBS: contract-based setoff rights fall outside 553(a) mutuality concerns. | 553(a) governs; triangular setoff is not allowed under mutuality requirement. |
| Safe harbor provisions’ impact on mutuality | Trustee: safe harbors do not validate non-mutual setoff. | UBS: 561 safe harbors should permit offset notwithstanding lack of mutuality. | Safe harbors do not salvage non-mutual triangular setoff where mutuality is absent. |
| Automatic stay violation by retention of Remaining Collateral | Trustee: staying assets should be turnover; setoff against estate assets violates 362. | UBS: seeks to exercise contractual rights notwithstanding stay. | UBS violated the automatic stay; must return Remaining Collateral to the SIPA Trustee; stay relief not granted. |
Key Cases Cited
- SemCrude, L.P. v., 399 B.R. 388 (Bankr. D. Del. 2009) (triangular setoffs lack mutuality under 553)
- In re Bennett Funding Grp., Inc., 445 B.R. 130 (S.D.N.Y. 2011) (mutuality and setoff rights in bankruptcy)
- Swedbank v. Lehman Bros. Holdings, 433 B.R. 101 (Bankr. S.D.N.Y. 2010) (553(a) preservation of rights; safe harbor discussion)
- Lines v. Bank of Am. Nat'l Trust & Sav. Ass'n, 743 F. Supp. 176 (S.D.N.Y. 1990) (mutuality defined: same right, same parties, same capacity)
- Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995) (fundamental limitations of overlapping bankruptcy rights; mutuality)