445 B.R. 130
S.D.N.Y.2011Background
- LBHI and affiliates filed Chapter 11 on September 15, 2008; Swedbank had pre-petition ISDA Master Agreements with LBHI and affiliates, and LBHI maintained a SEK account with Swedbank.
- Master Agreements defined an Event of Default triggering early termination and a right of setoff for non-defaulting parties.
- Post-petition, Swedbank froze the Swedbank Account; LBHI could not withdraw but deposits continued (approximately $11.7 million) were made post-petition.
- Swedbank later sought to set off LBHI’s pre-petition debts against post-petition funds in the Swedbank Account, including the post-petition deposits.
- LBHI moved to enforce automatic stay and return funds; Bankruptcy Court granted, ordering release of the freeze and return of funds; Swedbank appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Right to set off against post-petition assets | Swedbank: §560/§561 allow offset against post-petition deposits. | LBHI/Committee: mutuality limits setoff to pre-petition amounts. | Offset against post-petition assets not permitted; mutuality remains controlling. |
| Safe Harbor Provisions and setoff | Swedbank: Safe Harbor authorizes offset of pre-petition swap obligations against post-petition funds. | LBHI/Committee: Safe Harbor does not permit such setoff against post-petition assets. | Legislative history does not support broad setoff; Safe Harbor does not override mutuality. |
| Violation of the automatic stay by freezing funds | Swedbank: no stay violation because funds were frozen administratively; liquidity concerns. | LBHI/Committee: freezing funds violated the automatic stay. | Bankruptcy Court’s ruling affirmed; Swedbank violated the automatic stay by freezing LBHI’s post-petition funds. |
Key Cases Cited
- DG Creditor Corp. v. Dabah (In re DG Acquisition Corp.), 151 F.3d 75 (2d Cir. 1998) (standard for reviewing bankruptcy court findings; de novo for law)
- Olin Corp. v. Riverwood Int'l Corp. (In re Manville Forest Prods.), 209 F.3d 125 (2d Cir. 2000) (de novo review of legal conclusions; clear-error standard for facts)
- Gray v. Rollo, 85 U.S. 629 (1873) (mutuality requirement in early bankruptcy practice)
- McCollum v. Hamilton Nat'l Bank, 303 U.S. 245 (1938) (mutuality requirement under the Bankruptcy Act of 1898)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (context for interpreting legislative history and changes to bankruptcy law)