AHMHAmerican Home Mortgage Holdings, Inc.
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The AHMH court also relied upon a third Lehman decision involving UBS (Lehman/UBS).
Finally, the AHMH court observed that the mutuality requirement precluding triangular setoff is also supported by one of the Bankruptcy Code's primary goals, ensuring that that similarly situated creditors are treated fairly and enjoy an equality of distribution from a debtor.
Accordingly, the AHMH court held that: (i) parties cannot contract around the mutuality requirement for setoff contained in Bankruptcy Code Section 553; (ii) the safe harbor provisions, that allow for the netting of obligations among affiliated entities under multiple qualified agreements, such as the swap agreement and repurchase agreement, cannot be interpreted as eliminating the mutuality requirement for setoff; and, as a result (iii) the non-debtor counterparties to the swap and repurchase agreements had no enforceable triangular setoff rights with respect to affiliate obligations.
While the AHMH court's decision involved complicated financial contracts governed by the safe harbor provisions, it is equally applicable to trade creditors' agreements that permit triangular setoff of obligations owing by and to affiliated entities.
(4.) As the AHMH court held that triangular setoff was not allowable under the Bankruptcy Code, the court did not reach the independent issue of whether triangular setoff was allowed under the swap agreement.
(6.) Quoting from the Lehman/Swedbank decision, the AHMH court observed: "Plainly, then, the 2005 amendments to Section 553 with respect to Sections 560 and 561 are narrow and leave intact the mutuality requirement of Section 553(a).