Lehman Brothers Holdings Inc.

1
UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------:
: 	Chapter 11
In re 	:
: 	Case No. 08-13555 (JMP)
LEHMAN BROTHERS HOLDINGS INC., et al., 	:
: 	(Jointly Administered)
Debtors. 	:
---------------------------------------------------------------:
MEMORANDUM DECISION GRANTING DEBTORS' MOTION PURSUANT
TO SECTIONS 105(a) AND 362 OF THE BANKRUPTCY CODE FOR AN
ORDER ENFORCING THE AUTOMATIC STAY AGAINST AND
COMPELLING PAYMENT OF POST-PETITION FUNDS BY SWEDBANK AB
WEIL, GOTSHAL & MANGES, LLP
Attorneys for Debtors
767 Fifth Avenue
New York, New York 10153
Richard P. Krasnow, Esq.
SALANS
Attorneys for Swedbank AB
Rockefeller Center
620 Fifth Avenue
New York, New York 10020
Claude D. Montgomery, Esq.
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JAMES M. PECK
UNITED STATES BANKRUPTCY JUDGE
Introduction
Before the Court is a motion (the "Motion")1 by Lehman Brothers Holdings Inc.
("LBHI") and its affiliated debtors (together, the "Debtors") for entry of an order
enforcing the automatic stay and compelling the payment of certain funds held by
Swedbank AB ("Swedbank") in a general deposit account. This contested matter focuses
attention on the continued viability of one of the Bankruptcy Code's most fundamental
precepts -- the familiar requirement of section 553(a) of the Bankruptcy Code that a
creditor may only exercise "setoff" against a debt owed to a debtor when "mutuality"
exists between that debt and an obligation running to the creditor from the debtor.
Without any relevant case support, Swedbank advances the argument that certain
amendments made to the Bankruptcy Code in 2005, i.e., the amendment to section 560
and the enactment of section 561, somehow override section 553 and its bedrock
principle of mutuality. 	A contractual right to setoff under derivative contracts does not
change well established law that conditions such a right on the existence of mutual
obligations. 	As stated below, Swedbank's argument fails, and the Debtors' Motion is
granted.
Relevant Facts and Procedural History
The 	facts 	underlying 	the 	present 	dispute 	are 	undisputed. 	Before 	the
commencement 	of 	the 	Debtors' 	chapter 	11 	cases 	on 	September 	15, 	2008 	(the
"Commencment Date"), the Debtors had a longstanding relationship with Swedbank.
1 Docket No. 6734.
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LBHI maintained a general deposit account with Swedbank in Stockholm, Sweden (the
"Swedbank Account").2 LBHI functioned as guarantor with respect to certain ISDA
Master Agreements between Swedbank and LBHI affiliates,3 and LBHI itself, though its
UK Branch, was a party to an ISDA Master Agreement with Swedbank dated November
29, 2004 (together, the "ISDA Master Agreements"). Id.
Each of the ISDA Master Agreements defines an Event of Default to include
bankruptcy, whereby a "Party [or] any Credit Support Provider of such party … institutes
or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy
or any other relief under any bankruptcy or insolvency law or other similar law affecting
creditors' rights." See Stenberg Decl. at p.4 (¶¶11-13); Stenberg Decl. at Ex. A-E (ISDA
Master Agreements) at ¶5(a)(vii). The ISDA Master Agreements further provide that the
occurrence of such an Event of Default triggers the early termination of the ISDA Master
Agreements. Objection at pp.3-4 (¶¶ 10-13). Early Termination, in turn, gives rise to a
right to payment in favor of the party to the agreement that is then "in the money." See
id. at p. 4(¶13); Stenberg Decl. at Ex. A-E (ISDA Master Agreements) at ¶6(e). One of
2 The account is identified as No. 17608 and is denominated in Swedish Krona. 	See
Declaration of Johan Stenberg In Support Of Swedbank's Objection To Debtors' Motion,
Docket No.6978 (the "Stenberg Decl.") at p. 4(¶16).
3 Specifically: (i) ISDA Master Agreement dated December 17, 1996 between Swedbank
and Lehman Brothers Commercial Corp; (ii) ISDA Master Agreement dated December
30, 1997 between Swedbank and Lehman Brothers International (Europe), Inc.; (iii)
ISDA Master Agreement dated October 8, 2003 between Swedbank and Lehman
Brothers Finance, S.A.; and (iv) ISDA Master Agreement dated November 29, 2004
between Swedbank and Lehman Brothers Special Financing, Inc. 	See Stenberg Decl. at
pp. 2-3 (¶¶6-10).
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the ISDA Master Agreements at issue in this proceeding contains a provision that grants
Swedbank a right of setoff upon the occurrence of such an Event of Default.4
On the Commencement Date, the balance in the Swedbank Account was SEK
2,140,897.40 Swedish Krona. 	See Declaration of Adrian Teng In Support Of Debtors'
Motion, Docket No. 6736 (the "Teng Decl.") at p. 2(¶5). Shortly after LBHI commenced
its chapter 11 case, Swedbank placed an administrative freeze on the Swedbank Account,
blocking the Debtors from withdrawing any amounts, but still allowing additional monies
to be deposited and/or wired into the account. By November 12, 2009, the balance of the
Swedbank 	Account 	had 	increased 	to 	SEK 	84,906,363.85 	Swedish 	Krona. 	As 	a
consequence of post-petition deposits and/or wire transfers, the Swedbank Account held
SEK 82,765,466.45 Swedish Krona (approximately $11.7 million) in funds credited to
the Swedbank Account after the Commencement Date. See Teng Decl., at pp. 2-3 (¶¶5-6,
9).5
4 See Stenberg Decl. Ex. E (ISDA Master Agreement with LBHI) at Schedule Part 5(b)
("In addition to any rights of set-off a party may have as a matter of law or otherwise,
upon the occurrence of an Event of Default or an Additional Termination Event and the
designation of an Early Termination Date pursuant to section 6 of this Agreement with
respect to a party ('X'), the other party ('Y') will have the right (but not be obliged)
without prior notice to X or any other person to setoff or apply any obligation of X owed
to Y (and to any affiliate of Y) (whether or not matured or contingent and whether or not
arising under this Agreement, and regardless of the currency, place of payment or
booking office of the obligation) against any obligation of Y (and of any affiliate of Y)
owed to X (whether or not matured or contingent and whether or not arising under this
Agreement, and regardless of the currency, place of payment or booking office of the
obligation").
5 Swedbank and the Debtors disagree as to the amount of the pre-petition balance in the
Swedbank Account, as well as the precise amount of funds deposited post-petition.
Swedbank contends that the balance in the Swedbank Account on the Commencement
Date totaled SEK 2,640,124.06, and that the funds deposited post-petition total SEK
82,266,239.79, a figure that is SEK 499,226.66 (approximately $71,000) smaller than the
figure alleged by the Debtors. 	See Stenberg Decl. at p. 4(¶16). 	The Debtors have
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On November 27, 2008, Swedbank informed LBHI that it intended to setoff
indebtedness allegedly owed by LBHI to Swedbank against amounts on deposit in the
Swedbank Account. 	See Sternberg Decl. at p. 4 (¶14). 	In response, LBHI contested
Swedbank's asserted right to setoff and, by letter dated December 4, 2008, requested that
Swedbank confirm that it would refrain from offsetting any alleged indebtedness against
the funds held in the Swedbank Account. See Teng Decl. at p. 3 (¶7). Swedbank, in turn,
responded by letter dated January 30, 2009, informing LBHI that it had placed an
administrative freeze on the Swedbank Account because "the bank is owed additional
amounts for which it may request the court to lift the automatic stay to permit setoffs
against transactions which are not [otherwise] protected by the safe harbor provisions of
the US Bankruptcy Code." 	See Teng Decl. at Exh. D. 	In its January 30th letter,
Swedbank further "reserve[d] and retain[ed] the right to setoff against the account any
claims in relation to qualified financial transactions under the safe harbor provisions or
otherwise." Id.
Swedbank intends to exercise setoff and apply the approximately $11.7 million in
funds held in the Swedbank Account against approximately $32 million6 in claims
against LBHI. 	Of this $32 million amount, approximately $13.9 million (in Swedish
reserved their rights to contest Swedbank's calculation of post-petition deposits at a later
date. For purposes of the Motion, the Debtors have agreed to limit the relief sought to the
SEK 82,266,239.79 amount offered by Swedbank. See Reply at p. 3n.2.
6 Although Swedbank claims to be owed approximately $32 million from LBHI,
Swedbank only filed proofs of claim in LBHI's chapter 11 case for a combined total face
amount of approximately $18 million. 	See Debtors' Motion at n.1. 	The correct and
appropriate value of Swedbank's claims, if any, against LBHI is not before the Court at
this time. 	The Debtors dispute the merits of Swedbank's purported right of setoff and
have reserved the right to object to or otherwise contest the amount or validity of
Swedbank's claims at a later date.
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Krona, approximately SEK 97.5 million) is an obligation of LBHI as either counterparty
or guarantor under the ISDA Master Agreements, and the remaining $18,098,000
allegedly arises under a senior promissory note held by Swedbank. See Motion at pp. 4-
5(¶¶13-14).
On January 22, 2010, the Debtors filed the Motion. 	On February 3, 2010,
Swedbank objected to the Debtors' Motion (the "Objection").7 On April 9, 2010, the
Debtors filed a reply to the Objection.8 Thereafter, on April 14, 2010, oral argument was
presented on the Motion at a regularly scheduled omnibus hearing (the "Hearing"). 	At
the Hearing, the Court granted Debtors' Motion and reserved the right to issue a
memorandum decision. 	On April 21, 2010, Swedbank filed a motion and supporting
memorandum of law for a stay pending appeal (the "Motion for Stay"). 9 On April 30,
2010, the Debtors filed an objection to the Motion for Stay.10 On May 4, 2010,
Swedbank filed a reply in support of its Motion for Stay.11
7 Docket No. 6976.
8 Docket No. 8196.
9 Docket No. 8564; 8567 (Declaration of Johan Stenberg In Support Of Motion For Stay)
("Second Stenberg Declaration"). 	To the extent that the Second Stenberg Declaration
contains facts not previously included in the Stenberg Declaration filed in support of its
Objection, such new facts should not be included in the record on appeal. See In re Bear
Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 339
(Bankr. S.D.N.Y. 2008) (holding post-hearing evidence inadmissible because "if an item
was not considered by the court, it should be stricken from the record on appeal"). The
Court notes that the Motion for Stay includes legal arguments that were not made at the
time of the Hearing and that should not be part of the record on appeal.
10 Docket No. 8740.
11 Docket No. 8782. A hearing on the Motion for Stay is scheduled for May 6, 2010.
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Discussion
In the Motion, Debtors argue that Swedbank should not be permitted to offset the
funds in the Swedbank Account, and that Swedbank's administrative freeze of funds in
the Swedbank Account violates the automatic stay, because the funds are comprised of
post-petition deposits that lack the requisite mutuality with LBHI's alleged pre-petition
indebtedness. See Motion at p. 2 (¶2). Swedbank insists that the automatic stay does not
prohibit it from setting off against LBHI's funds in the Swedbank Account because
Swedbank has a contractual right of setoff under the ISDA Master Agreements that
qualifies under the Bankruptcy Code safe harbors of sections 560 and 561. 12
A. 	No mutuality exists to permit the setoff of funds in the Swedbank
Account
The Bankruptcy Code does not establish an independent right of setoff, but
section 553 does preserve any right of setoff that may exist under applicable non-
bankruptcy law. 	Official Comm. of Unsecured Creditors v. Manufacturers & Traders
Trust Co. (In re Bennett Funding Group), 146 F.3d 136, 138-39 (2d Cir. 1998). Section
553(a) of the Bankruptcy Code states, in relevant part:
12 At the outset, it must be noted that the parties' briefs present an additional and
conceptually distinct legal argument not dealt with in this ruling -- specifically, whether
the "safe harbors" of sections 560 and 561 of the Bankruptcy Code permit Swedbank to
exercise a right of setoff with respect to funds in a general deposit account that was not
identified as arising under a swap agreement. As stated on the record at the conclusion of
the Hearing, it is unnecessary to rule on this issue at this time. The parties elected not to
emphasize this aspect of their dispute at the Hearing, and the Court's decision does not
require consideration of this discrete legal issue. 	Notably, this issue has been fully
briefed in another matter currently before the Court involving setoff disputes between
Lehman and Bank of America, and the Court will address that issue at the time of
adjudication of this other litigation. See Bank of America, N.A. v. Lehman Bros. Holdings
Inc. et al., Adv. Pr. No. 08-01753.
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Except as otherwise provided in this section and in sections
362 and 363 of this title, this title does not affect any right
of a creditor to offset a mutual debt owing by such creditor
to the debtor that arose before the commencement of the
case under this title against a claim of such creditor against
the debtor that arose before the commencement of the
case…
11 U.S.C. 553(a). Therefore, the following prerequisites must be satisfied to be eligible
for setoff under section 553 of the Bankruptcy Code: "(1) the amount owed by the debtor
must be a prepetition debt; (2) the debtor's claim against the creditor must also be
prepetition; and (3) the debtor's claim against the creditor and the debt owed the creditor
must be mutual." 	In re Lehman Bros. Holdings, Inc., 404 B.R. 752, 757 (Bankr.
S.D.N.Y. 2009) (quoting In re Bousa Inc., 2006 WL 2864964, *3 (Bankr. S.D.N.Y. Sept.
29, 2006)). 	Mutuality, in turn, exists when "the debts and credits are in the same right
and are between the same parties, standing in the same capacity." Scherling v. Hellman
Elec. Corp. (In re Westchester Structures), 181 B.R. 730, 739 (Bankr. S.D.N.Y. 1995).
Here, mutuality is lacking because the funds in the Swedbank Account were
deposited post-petition, while LBHI's indebtedness to Swedbank arose pre-petition under
the ISDA Master Agreements. The Court's decision in another setoff dispute is on point
and deals with the essential element of mutuality. See In re Lehman Bros. Holdings, Inc.,
404 B.R. 752, 757 (Bankr. S.D.N.Y. 2009) (finding no mutuality between LBHI's alleged
pre-petition debts to DnB Nor Bank ("DnB Nor") and the funds credited to LBHI's DnB
account post-petition). 	That opinion explicitly dealt with setoff as it applies to post-
petition funds deposited in a bank account and concerned the timing of receipt and
posting of a wire transfer. When compared with the situation presented in DnB Nor, the
mutuality issue presented by Swedbank is not even a close question of fact or law. 	See
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id. 	Here, all parties agree that the funds in the Swedbank Account were deposited after
the Commencement Date. As such, mutuality does not exist because "mutuality requires
that funds must be held in [the debtor's] account prior to commencement of [the debtor's]
bankruptcy in order for a [creditor] to be able to exercise the right of setoff." Id. at 761.
Plainly, the mutuality requirement of section 553 precludes a creditor-bank from
offsetting a debtor's pre-petition obligations against funds deposited with the creditor-
bank post-petition. See id. at 758-61; In re Orr, 234 B.R. 249, 254-55 (Bankr. N.D.N.Y.
1999) (held, wages deposited in bank account post-petition not subject to setoff).
B. 	Bankruptcy Code sections 560 and 561 do not nullify the mutuality
requirement of section 553(a)
Swedbank itself acknowledges, as it must, that mutuality does not exist between
LBHI's alleged pre-petition indebtedness and the funds deposited in the Swedbank
account 	after 	the 	Commencement 	Date. 	Hearing 	Tr. 	at 	p.49:22-24 	("It 	is 	also
unquestioned that we are dealing with both pre- and post- petition deposits in connection
with this setoff dispute"). 	However, it is Swedbank's position that this seemingly fatal
flaw does not matter. Swedbank contends that the mutuality requirement of section 553
is rendered inapplicable by the safe harbor provisions of sections 560 and 561 of the
Bankruptcy Code. 	See Objection at p. 10(¶31). 	According to Swedbank, the reference
in 	section 	560 	that 	permits 	a 	derivative-contract 	counterparty 	to 	exercise 	"any"
contractual right notwithstanding the automatic stay should permit Swedbank to exercise
its contractual right to setoff arising from the ISDA Master Agreement, notwithstanding
the undisputed lack of mutuality under section 553. 	See Objection at p. 7(¶23).
Swedbank's self-interested interpretation of the relevant provisions of the Bankruptcy
Code is without precedent and unsupported by a fair reading of the textual language.
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The automatic stay is one of the fundamental protections afforded to debtors
under the Bankruptcy Code. 	Midatlantic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474
U.S. 494, 503 (1986). 	It "is intended to allow the bankruptcy court to centralize all
disputes concerning property of the debtor's estate so that reorganization can proceed
efficiently, unimpeded by uncoordinated proceedings in other arenas." SEC v. Brennan,
230 F.3d 65, 70 (2d Cir. 2000). 	A creditor's refusal to pay amounts owed to a debtor
constitutes a violation of the automatic stay.
Nonetheless, certain limited statutory exceptions are available. The so-called safe
harbor exceptions are among them, and they were amended by Congress in 2005.
Section 560 of the Bankruptcy Code was amended to provide that:
The 	exercise 	of 	any 	contractual 	right 	of 	any 	swap
participant … to offset or net out any termination values or
payment amounts arising under or in connection with the
termination, liquidation, or acceleration of one or more
swap agreements shall not be stayed, avoided, or otherwise
limited by operation of any provision of this title or by
order of a court or administrative agency in any proceeding
under this title.
11 U.S.C. § 560(a) (emphasis added). 	In addition, Congress added section 561, which
provides that:
The exercise of any contractual right … to cause the
termination, liquidation, or acceleration of or to offset or
net termination values, payment amounts, or other transfer
obligations arising under or in connection with one or more
... (5) swap agreements … shall not be stayed, avoided, or
otherwise limited by operation of any provision of this title
or by any order of a court or administrative agency in any
proceeding under this title.
11 U.S.C. § 561(a) (emphasis added).
By their plain terms, these safe harbor provisions do not alter the axiomatic
principle of bankruptcy law, codified in section 553, requiring mutuality in order to
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exercise a right of setoff. These safe harbor provisions simply do not directly address the
requirement of mutuality under section 553(a). 	Instead, these exceptions permit the
exercise 	of 	a 	contractual 	right 	of 	offset 	in 	connection 	with 	swap 	agreements,
notwithstanding the operation of any provision of the Bankruptcy Code that could operate
to stay, avoid or otherwise limit that right, but that right must exist in the first place.
Given the silence of the safe harbor provisions with respect to the mutuality requirement
of section 553(a), the Court declines to read an exception into the statute. See U.S. v. Ron
Pair Enters., Inc., 489 U.S. 235, 242 (1989) ("the plain meaning of legislation should be
conclusive, except in the rare cases in which the literal application of a statute will
produce a result demonstrably at odds with the intention of its drafters").
Recognizing that the safe harbor provisions do not directly address section 553(a),
Swedbank argues that these provisions implicitly override the mutuality requirement. See
Hearing Tr. at p.56:1- 57:13. 	According to Swedbank, the theoretical underpinning
behind the requirement of pre-petition mutuality, which Swedbank characterizes as the
"well-established fiction that the debtor changes on the petition date," is irrelevant when
dealing with setoff under safe harbored derivative contracts in light of the language
dealing with the application of the automatic stay. See 11 U.S.C. § 560 ("… shall not be
stayed … or otherwise limited by operation of any provision of this title"); Hearing Tr. at
p.53:12-18; 56:23-57:13.
In its proposed interpretation, Swedbank disregards the plain language of section
553(a), which expressly memorializes the pre- and post-petition distinction, independent
of the so-called "fiction" regarding the newly created debtor-in-possession. 	See 11
U.S.C. § 553(a) ("…any right of a creditor to offset a mutual debt owing by such creditor
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to the debtor that arose before the commencement of the case … against a claim of such
creditor against the debtor that arose before the commencement of the case… ").
Swedbank's argument also ignores the fact that section 553 itself delineates a number of
specific exceptions to section 553(a)(1) -- and setoff under safe harbored derivative
contracts is not one of them. See 11 U.S.C. §§ 553(a)(2)(B)(ii), 553(a)(3)(C), 553(b)(1).
Accordingly, the Court disagrees with Swedbank's strained reading of the Bankruptcy
Code and is unable to find an implicit exception when the statute already lists a number
of specific ones. 	See U.S. v. LaPorta, 46 F.3d 152, 156 (2d Cir. 1994) (it is a "long-
standing principle[s] of statutory construction" that "a general section of a statute must
give way to a specific one").
Moreover, the case law on which Swedbank relies in support of its reading of an
implicit exception to the mutuality requirement does not apply to a fair reading of the
requirements of section 553. 	Contrary to Swedbank's contentions, the statements of the
United States Supreme Court in N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984) do
not relate directly or indirectly to the interpretation of the plain meaning of section 553.
For purposes of any right to setoff permitted under section 553, mutuality is baked into
the very definition of setoff. 	As such, the right arising under the ISDA Master
Agreements necessarily must be congruent with the concept of netting pre-petition
claims. 	To require that the offsetting balances are mutual does not stay, avoid, or limit
the right to offset because the right only exists in bankruptcy when there is mutuality.
Swedbank's reliance on In re Weisberg, 136 F.3d 655 (9th Cir. 1998) does not
alter this analysis. 	See Motion For Stay at pp.11-12. 	The court in Weisberg expressly
found that mutuality did in fact exist to permit setoff of two pre-petition debts. Weisberg,
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136 F.3d at 658 ("At the time the bankruptcy petition was filed, any such claim against
Shearson was unmatured … however, it would appear that such an unmatured claim
could form the basis of a 'debt' for setoff purposes… it does not appear the BAP erred in
concluding mutual, pre-existing debts existed …"). Moreover, even if Weisberg stood for
the proposition cited by Swedbank, which it does not, the authority is neither binding nor
persuasive precedent.
Swedbank's reading of sections 560 and 561 also improperly conflates the "shall
not be stayed… by operation of any provision of this title" language with the commonly-
used phrase "notwithstanding any other provision of law." See Motion For Stay at p. 10.
It is true, as Swedbank points out, that the phrase "notwithstanding any other provision of
law" has consistently been interpreted as written by courts. See Cisneros v. Alpine Ridge
Group, 	508 	U.S. 	10, 	18 	(1993) 	(noting 	that 	courts 	"have 	interpreted 	similar
'notwithstanding' language … to supercede all other laws") (internal quotes omitted). But
the Court must honor the plain language of the safe harbor provisions, which, by their
terms, do not contain such a blanket "notwithstanding" clause. 	See U.S. v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 242 (1989) ("the plain meaning of legislation should be
conclusive…"). 	Instead, the language in the safe harbor provisions relied on by
Swedbank renders the automatic stay inapplicable in the context of safe harbored
contracts -- the central purpose of the safe harbor provisions -- and does not eliminate the
mutuality requirement of section 553(a).
Congress enacted sections 560 and 561 well after section 553 had become
established as the statutory basis for permitting setoff in bankruptcy and with full
knowledge of that section's mutuality requirement. If Congress had intended to establish
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a plainly worded exception to the rule limiting setoff to mutual pre-petition claims, it
would have done so explicitly. See FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d
125, 132-33 (2d Cir. 1992) (stating that Congress will "expressly designate the provisions
whose application it wishes to suspend, rather than leave that consequence to the
uncertainties of implication compounded by the vagaries of judicial construction").
C. 	Legislative history confirms that sections 560 and 561 do not override
the mutuality requirement of section 553(a)
An examination of the legislative history surrounding the enactment of the safe
harbor provisions, while unnecessary due to their plain language, nonetheless confirms
that the enactment of sections 560 and 561 has done nothing to alter the mutuality
requirement found in section 553(a). 	Indeed, by means of the safe harbor provisions,
Congress sought to allay concerns that "the termination and setoff of a swap agreement
would be automatically stayed when one of the parties files a bankruptcy petition," and
that a trustee, "after indefinitely postponing termination of the swap agreement, could
refuse setoff and unfairly 'cherry pick' only the portions of the agreement advantageous to
the debtor, while rejecting the portions unfavorable to the debtor." Act of June 25, 1990,
H.R. Rep. 101-484, 3, as reprinted in 1990 U.S.C.C.A.N. at 225 (also available at 1990
WL 92539 (1990)). 	The safe harbor provisions are thus intended to permit parties to
swap agreements to exercise the right to "offset or net termination values" despite the
automatic stay and without having to seek relief from the stay. These exceptions do not
repeal or nullify the basic legal precepts that govern the right to setoff in bankruptcy
cases, nor do they authorize a party to a swap agreement to effectuate a setoff without
satisfying the underlying requirements for such a setoff (i.e., mutuality).
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Swedbank argues that the 2005 amendments to section 553 "explicitly exclude"
from the mutuality requirement "transactions or setoff subject to the provisions of
Sections 555, 556, 559, 560, and 561…" 	See Objection at p.7 (¶23). 	Swedbank's
argument is unpersuasive. 	The language of section 553(a) begins with the concept of
mutuality. 	See 11 U.S.C. 553(a) ("Except as otherwise provided in this section …, this
title does not affect any right of a creditor to offset a mutual debt … ") (emphasis added).
Congress in 2005 simply amended three discrete subsections of section 553 -- subsections
553(a)(2)(B)(ii), (a)(3)(C), and (b)(1) -- to ensure that a creditor's acquisition of or
exercise of setoff rights in connection with a safe harbored contract during the preference
period could not be avoided as a preference. See H. Rpt. No. 109-31, Pt. 1, 109th Cong.,
1st Sess. 134 (2005) ("… amends section 553 of the Bankruptcy Code to clarify that the
acquisition by a creditor of setoff rights in connection with swap agreements, repurchase
agreements, securities contracts, forward contracts, commodity contracts and master
netting agreements cannot be avoided as a preference").
For example, section 553(a)(2)(B) disallows the setoff of a claim, even if such
setoff would otherwise be valid, when the claim was transferred to the creditor during the
preference period. 	As amended, this disallowance no longer applies with respect to a
creditor's claim arising under a safe harbored contract. See 11 U.S.C. § 553(a)(2)(B)(ii)
("…this title does not affect any right of a creditor to offset a mutual debt … except to the
extent that – … (2) such claim was transferred, by an entity other than the debtor, to such
creditor (A) after the commencement date; or (B) (i) after 90 days before the date of the
filing of the petition; and (ii) while the debtor was insolvent …except for a setoff of a
kind described in section … 560 or 561…") (as amended)(emphasis added). 	Plainly,
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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). 	Such 	an
interpretation dovetails with common sense. 	If Congress had intended to eliminate the
mutuality requirement of section 553(a), it would have done so directly and with clarity.
Similarly, Swedbank bestows unwarranted significance on the fact that the
amendments to section 560 and 561 do not distinguish between pre- and post-petition
obligations. Swedbank argues that the reference in the amended safe harbor provisions to
a contractual right of setoff, without any differentiation between pre- and post-petition
obligations, somehow signifies an intention to exempt safe harbored contracts from the
mutuality requirement of section 553(a). See Objection at p. 7(¶23) ("First, sections 560
and 561 do not contain any language which limits netting or setoff of obligations relating
to safe harbor transactions between pre- and post-petition obligations … by way of
contrast, where the Bankruptcy Code contemplates differentiating between pre- and post-
petition obligations, it does so specifically"). This reading of sections 560 and 561 fails
to take into account the plain meaning of section 553(a).
Finally, the legislative history surrounding the enactment by Congress of the
Financial Netting Improvement Act of 2006, Pub. L. No. 109-360 (2006) ("FNIA") does
not support Swedbank's argument that the amendments removed the requirement of
mutuality from the automatic stay exceptions found in section 362(d) of the Bankruptcy
Code. 	Swedbank submits that the amendments to FNIA, which replaced the phrase
"mutual debt and claim" in sections 362(b)(6), (b)(17), and (b)(27) with "any contractual
right," effectively removed the mutuality requirement from the safe-harbored exceptions
to the automatic stay. 	Motion for Stay at pp. 13-15. 	The legislative history of FNIA
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reveals that Congress intended merely to make "technical changes to the netting and
financial provisions" of the Bankruptcy Code to "update the language to reflect current
market and regulatory practices." 	See H.R. Rep. No. 109-648, available at 2006 WL
6165926, at *1587 (2006). These technical amendments cannot be read as authority for
so fundamental a change in creditor rights.
D. 	Swedbank's administrative freeze violates the automatic stay
The Debtors request an order directing Swedbank to immediately comply with the
automatic stay by releasing its administrative freeze and compelling Swedbank to pay to
LBHI 	all 	funds 	deposited 	and/or 	wired 	into 	the 	Swedbank 	Account 	after 	the
Commencement Date. See Debtors' Motion at p. 11 (¶27).
Nothing is more basic to bankruptcy law than the automatic stay and nothing is
more important to fair case administration than enforcing stay violations. 	The fact that
this violation is predicated on a previously untested reading of the safe harbor provisions
does not excuse conduct that amounts to a taking of property of the estate.
This Court has the power to protect a debtor's estate, and thereby ensure the
equitable treatment of creditors, by enforcing the automatic stay. 	Indeed, even where a
valid right of setoff may exist, a creditor-bank must immediately move for relief from the
automatic stay rather than to freeze the account indefinitely. See In re Adomah, 340 B.R.
453, 458-59 (Bankr. S.D.N.Y. 2006) (finding violation of automatic stay where bank
imposed indefinite administrative freeze over debtor's bank account, including post-
petition deposits, and failed to move for relief from the automatic stay). 	Swedbank has
not moved for relief from the stay, despite having implemented its administrative freeze
shortly after the Commencement Date. Swedbank's failure to comply with section 362 of
the Bankruptcy Code is particularly troublesome in light of the fact that it is well aware
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that mutuality does not exist here. The indefinite administrative freeze is unjustified and
constitutes a continuing violation of the automatic stay. 	Accordingly, Swedbank shall
immediately release its administrative freeze and return to LBHI all funds held in the
Swedbank Account that were deposited after the Commencement Date.
Conclusion
Notwithstanding Swedbank's arguments to the contrary, section 553 and the safe
harbor provisions are entirely consistent provisions of the Bankruptcy Code. 	Sections
560 and 561 preserve contractual rights of setoff for mutual pre-petition obligations --
essentially assuring the nondebtor swap counterparty that the advent of bankruptcy will
not frustrate pre-petition commercial expectations relating to setoff and netting. 	But
these sections do not improve the position of a nondebtor counterparty beyond its pre-
petition commercial expectations. 	The contractual rights of parties are to be respected
and enforced, but that does not justify overriding applicable bankruptcy jurisprudence.
This is especially true in the case of mutuality, which is such an essential and well
understood aspect of bankruptcy practice.
For this reason, the Court rejects Swedbank's self-serving attempt to hold itself
out as a representative of the swap industry. Its position in this contested matter is highly
unusual. Rather than seeking to protect rights in existing collateral, Swedbank is seeking
to take advantage of its good fortune as recipient of post-petition funds. 	Such an
incremental recovery is more than any swap counterparty reasonably should expect.
Instead of upholding the legitimate commercial expectations of derivative contract
counterparties, a finding for Swedbank on this issue would result in a windfall to
Swedbank to the detriment of other creditors.
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For the reasons stated, the Debtors' Motion is granted. 	The Court will enter the
Debtors' proposed order concurrently herewith.
Dated: New York, New York
May 5, 2010
s/ James M. Peck
UNITED STATES BANKRUPTCY JUDGE
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