UBS terminated its ISDA Master and FX transactions with Lehman
Brothers Inc., was obligated to return about $23 million in
collateral, wanted to set-off against that $23 million amounts
owing by LBI to UBS affiliates as contemplated by the
cross-affiliates set-off provision. Judge Peck said no.
These types of clauses are enforceable pre-bankruptcy, but not once
a proceeding is commenced. Mutuality is a requirement for
post-petition set-off. He said, "Contractual provisions that
purport to create synthetic mutuality are not a substitute for the
Section 553(a) of the
U.S. Bankruptcy Code requires mutuality as a condition of
preserving a right of set-off. UBS argued that contractual set-off
was an exception to the mutuality requirement. Judge Peck disagreed
simply on the basis that the statute did not provide for that
UBS's argument that the swap agreement safe-harbour could be
relied on to permit the set-off also failed for the reasons he gave
in the Swedbank case.
As I pointed out in my brief on the Swedbank case, the
result could be the same in Canada. The protection for the
"law of set-off" that applies under the Bankruptcy and Insolvency
Act and other insolvency statutes, while it
contemplates contractual set-off, does not necessarily go so far as
to include non-mutual set-off (unless it fits the bill for an
equitable set-off). Also, the eligible financial contract
safe-harbours by their terms require the set-off to be mutual.
However, perhaps it's not correct to analyze the issue as
one of set-off. Under Canadian bankruptcy law, a trustee in
bankruptcy has no higher right under a contract than had the
bankrupt (subject to exceptions such as being able to challenge
preferential transfers). If the right to the payment of a sum of
money under a contract is subject to a right to deduct amounts
owing to affiliates, then why is that not enforceable? There may be
stay risk that delays exercise of the right, but on what basis is
it not binding on the insolvency representative simply as a matter
of contract law? That is an interesting question that the court did
not consider in the judgment and which has not received much
judicial treatment in Canada either.
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The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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