Exercising Setoff and Recoupment Rights in Bankruptcy

Setoff and recoupment are important tools in a Chapter 11 because they can fundamentally alter a creditor’s potential liability to the bankruptcy estate. Sometimes overlooked by debtors and creditors alike, these doctrines are critical in settling accounts between a creditor and the bankrupt debtor.

To effect a setoff, a creditor must file a motion to lift the automatic stay. If a creditor seeks to offset its debt to the estate against its claim against the estate, both the claim and the debt must arise before the petition. Debts subject to setoff must be owed by and between the same two parties in the same capacity.

Recoupment, not addressed by the Bankruptcy Code, is a common law equitable principle which allows for netting of obligations between parties to the same transaction. Attempts to apply recoupment are often part of a disputed transaction where some payment is owed by a party who is not satisfied with the other party’s performance.

Listen as our authoritative panelist analyzes setoff and recoupment in the context of Chapter 11 bankruptcy proceedings. The panelist will discuss the underlying tenets of each, and how certain fact scenarios have been treated by the courts.

1. Setoff rights and the doctrine of mutuality
2. Recoupment between parties to the same transaction
3. Exercising setoff and recoupment rights in Chapter 11
4. Significant case law

The panelist will review these and other key issues:

• What is the significance of the doctrine of mutuality in setoff claims and how strictly is it applied?
• How does recoupment differ from setoff?
• Can a creditor seek setoff or recoupment in connection with a contract in dispute?
• What is required for a creditor to bring a recoupment or offset claim and lift the automatic stay in Chapter 11 proceeding?
• Why would a creditor not want to offset mutual debts prepetition and wait until after a bankruptcy filing? Why would a creditor want to offset mutual debts prepetition?