St. John’s Law Student
Recently, the United States Bankruptcy Court for the District of Delaware held that the Bankruptcy Code does not permit triangular setoff of debts, notwithstanding pre-petition contracts among parties that contemplate such an exchange.
In In re Semcrude, L.P.
, Chevron Products Company (“Chevron”), the creditor, had entered into separate petroleum-related contracts with three affiliated debtors: Semcrude, L.P., SemFuel, L.P., and SemStream, L.P.
Each contract expressly allowed the parties to setoff debts related to the contract or to any other contract between the parties and their affiliates.
At the time of the debtors’ bankruptcy filings, Chevron owed a debt to Semcrude, L.P., and was owed a debt from each of SemFuel, L.P. and SemStream, L.P.
Chevron moved for relief from the automatic stay to effect a triangular setoff of the debts among itself and the debtors, arguing that the terms of the contracts permitted such a setoff.
The court denied Chevron’s motion and held that, regardless of the contract language at issue, section 553 plainly does not allow triangular setoff.
The court determined that the contract arrangement did not satisfy the section 553 requirement that debts be mutual in order to be setoff, and that no exception existed that would allow parties to contract around the mutuality requirement.