Outer Bounds of Safe Harbors: Lehman-Swedbank Decision Limits Setoff Rights Under Swap Agreements

Outer Bounds of Safe Harbors: Lehman-Swedbank Decision Limits Setoff Rights Under Swap Agreements

Publication

Related Solutions

Sophisticated knowledge of the bankruptcy process, combined with top-notch appellate and trial experience and the perspective and insight required to address a wide range of bankruptcy litigation and regulation issues.
WilmerHale has been at the forefront of complex financial restructuring and bankruptcy litigation and policy matters for decades.
Parties to swap agreements enjoy the protections of "safe harbors" under Sections 560 and 561 of the Bankruptcy Code, which generally permit the setoff of swap obligations even after a counterparty has entered bankruptcy, and even where the setoff of non-swap obligations would be prohibited by the Bankruptcy Code's automatic stay.

However, a recent decision in the Lehman bankruptcy, involving the setoff rights of a foreign bank, limits the right of setoff under the swap agreement safe harbors by enforcing a timing requirement for setoff found in Bankruptcy Code Section 553(a). Under this decision, a swap participant may continue to net its pre-bankruptcy swap claims against pre-bankruptcy collateral of a counterparty in bankruptcy, but a swap counterparty may not net such claims against post-bankruptcy collateral of the debtor in bankruptcy.

This decision, which the bank has appealed, is notable because of its effect on the bank—prohibiting it from applying millions of dollars in post-bankruptcy deposits by Lehman against Lehman's pre-bankruptcy swap obligations. It is also notable because it establishes an outer boundary on the swap agreement safe harbors, which might otherwise, taken literally, seem to be virtually boundless in scope.

Read the full text of this alert: Outer Bounds of Safe Harbors: Lehman-Swedbank Decision Limits Setoff Rights Under Swap Agreements.

Authors

Notice

We appreciate your interest in WilmerHale. While we are pleased to have you contact us, please keep in mind that merely contacting WilmerHale does not create an attorney-client relationship. Such a relationship will not arise until the Firm agrees in writing to represent you in connection with a particular matter. Importantly, unless and until this has occurred, you should not provide us with any confidential information, and we have no duty to keep confidential any information that we may receive from you. Thank you for your understanding.

I Accept Cancel