No Setoff Here: Third Circuit Resolves Triangular Setoff Debate Once and for All | Weil, Gotshal & Manges LLP

Introduction
In a recent decision,
In re Orexigen Therapeutics, Inc., No. 20-1136, 2021 U.S. App. LEXIS 8075 (3d Cir. Mar. 19, 2021), the Third Circuit held that triangular setoff arrangements are unenforceable under section 553 of the Bankruptcy Code. A triangular setoff arrangement arises when one party to a contract attempts to not only set off debts owed to another (debtor), but also debts owed by nonparty affiliates of such counterparty. For instance, if A and B are parties to a contract, under a triangular setoff arrangement A may be able to reduce its outstanding liabilities owed to B by setting off–or canceling–amounts owed to A by C, who is an affiliate of B but not a party to the contract between A and B. Once a party to a contract files for bankruptcy protection, section 553 of the Bankruptcy Code governs and places, among others, a “mutuality” requirement on the parties to a contract, which in turn limits nonbankruptcy setoff rights, even in instances where parties expressly contract for such protections.

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