Third Circuit Confirms Triangular Setoffs are Unenforceable in Bankruptcy

In a recent decision, the U.S. Court of Appeals for the Third Circuit ruled that contractual triangular setoff arrangements are unenforceable in bankruptcy. The recent decision by the U.S. Court of Appeals for the Third Circuit in In re Orexigen Therapeutics Inc. held that Section 553 of the Bankruptcy Code, which governs creditor setoffs, requires “strict bilateral mutuality.” As a result, notwithstanding the parties’ contract, a creditor cannot set off an obligation it owes to a debtor in bankruptcy against an obligation that the debtor owes to the creditor’s affiliate (a so-called “triangular setoff”).