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> DERIVATIVES
Derivative Agreements - financial instruments whose characteristics and value depend on an underlying security, index or other reference.
- The Bankruptcy Code’s broad definitions of “swap agreement”, “repurchase agreement”, “commodity contract”, “forward contract”, and “securities contract” collectively cover existing derivatives and similar arrangements that may be created in the future.
- Derivatives, and “master netting agreements” providing for netting, setoff, liquidation, termination, acceleration, or close out of multiple derivative agreements, are subject to favorable treatment under the Bankruptcy Code.
Treatment of Derivatives
- Exempt from application of automatic stay under section 362 with regard to the taking of a setoff or netting arrangement provided for in a derivative agreement. See 11 U.S.C. § 362(b), 553.
- “Ipso facto” clauses given effect as an exemption from the provisions of section 365, and netting by the non-debtor party permitted upon such termination. See 11 U.S.C. § 555, 556, 559, 560 and 561.
- Damages for the rejection, liquidation, termination or acceleration of derivative agreements are measured as of the date of such rejection, liquidation, termination or acceleration. See 11 U.S.C. § 562.
- Certain transfers made pursuant to derivative contracts are exempted from the avoidance powers of a trustee or debtor. See 11 U.S.C. 546(e), (f), (g) and (j); 548(d)(2).
> SET-OFFS AND RECOUPMENT
Automatic Stay prohibits most instances for set-offs without leave of court. See 11 U.S.C. § 362(a)(7). Requirements for set-offs and recoupment:
- Mutual pre-petition debts between the same entities - a creditor may, with leave of court, set-off pre- petition debts owed to the debtor against the pre-petition debts owed to such creditor by the debtor, regardless of whether those debts arose from the same transaction. See 11 U.S.C. § 553; see, e.g., Ross- Viking Merchandise Corp. v. American Cyanamid Co. (In re Ross-Viking Merchandise Corp.), 151 B.R. 71,73 (Bankr. S.D.N.Y. 1993).
- Recoupment - set-offs of pre-petition & post-petition debts: a creditor may only exercise recoupment rights, with leave of court, if the mutual debts arose out of the same transaction. See, e.g., Ashland Petroleum Co. v. Appel, 782 F.2d 155 (10th Cir. 1986).
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