Issue link: https://mbozikis.ufcontent.com/i/1422521
79 In re SubMicron Sys. Corp., 432 F.3d at 455, fn.8. 3. Setoff and Recoupment a. Setoff Setoff is a doctrine based as much on practical considerations as on equitable ones. As numerous courts have observed, setoff "is grounded on the absurdity of making A pay B when B owes A." Studley v. Boylston Nat'l Bank, 229 U.S. 523, 528 (1913). The Bankruptcy Code does not create any rights of setoff, but instead merely preserves such rights to the extent that they both exist under applicable nonbankruptcy law and either satisfy the various conditions set forth in Section 553 of the Bankruptcy Code or are protected by the so-called "safe harbor" provisions of the Bankruptcy Code applicable to securities contracts, swap agreements, commodity contracts, forward contracts and repurchase contracts. See U.S. v. Maxwell, 157 F.3d 1099, 1102 (7th Cir. 1998); In re Delta Airlines, Inc., 341 B.R. 439, 443 (Bankr. S.D.N.Y. 2006). 38 Generally speaking, Section 553 protects a creditor's setoff rights where four requirements are satisfied: (i) the creditor holds a claim against the debtor that arose prepetition; (ii) the creditor owes a debt to the debtor that also arose prepetition; (iii) such claim and debt are "mutual"; and (iv) such claim and debt are each valid and enforceable. 11 U.S.C. ยง 553(a). Even if a right of setoff exists, however, Section 362(a)(7) stays setoff, requiring a party to seek court permission before exercising such right. Setoffs taken in violation of the automatic stay are void and without legal effect. Notwithstanding the foregoing, a creditor may protect its right of setoff by temporarily withholding payment of a debt owed to the debtor without violating the automatic stay. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995). 38 For a discussion of the safe harbor provisions of the Bankruptcy Code, see Chapter V.G.1.b. below.