In Brief: Another Blow To Triangular Setoff In Bankruptcy

Section 553 of the Bankruptcy Code provides, subject to certain exceptions, that the Bankruptcy Code "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." Debts are considered "mutual" when they are due to and from the same persons or entities in the same capacity.

An exception to this strict mutuality requirement has sometimes been perceived to exist in cases involving "triangular setoff," the provenance of which is commonly traced (rightly or wrongly) to a 1964 ruling by the Seventh Circuit Court of Appeals in Inland Steel Co. v. Berger Steel Co. (In re Berger Steel Co.), 327 F.2d 401 (7th Cir. 1964). In this situation, "A" might have a commercial relationship with "B" and "C," where B and C are related parties. Triangular setoff occurs when A owes B, C