Issue link: https://mbozikis.ufcontent.com/i/1422521
80 Setoffs are prohibited, however, in the following circumstances: first, where the creditor's claim against the debtor is disallowed; second, where the creditor acquired the claim from another creditor either after the bankruptcy filing or within the ninety days preceding the petition date while the debtor was insolvent; and finally, where the creditor incurred the debt owed to the debtor for the purpose of obtaining a setoff against the debtor within the ninety days preceding the petition date while the debtor was insolvent. 11 U.S.C. § 553(a)(1)–(3). In addition, setoffs where the creditor has "improved its position" in the ninety days preceding the petition date are prohibited. Section 553(b)(1) provides that, except with respect to setoffs that are protected by the Bankruptcy Code's safe harbor provisions, if a creditor exercises its right of setoff against the debtor within the ninety days preceding the petition date, the trustee is entitled to recover from such creditor the amount offset to the extent that any insufficiency on the date of the setoff is less than the insufficiency on the later of (i) ninety days before the petition date or (ii) the first date during the ninety days preceding the petition date on which there is an insufficiency. In this context, the Bankruptcy Code defines "insufficiency" as the "amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim." 11 U.S.C. § 553(b)(2). Of the four requirements of Section 553 discussed above, mutuality creates the most confusion. Although courts agree that mutuality should be strictly construed, see, e.g., Kitaeff v. Vappi & Co. (In re Bay State York Co.), 140 B.R. 608 (Bankr. D. Mass. 1992), the term "mutual" is not defined by the Bankruptcy Code. The confusion surrounding mutuality is hardly alleviated by the fact that courts have interpreted the word to encompass a variety of concepts, including whether the claim and debt were owed by the same parties, whether such parties were acting in the same capacity, and whether the obligations were owed in the same right. See Von Gunten v. Neilson (In re Slatkin), 243 F. App'x 255 (9th Cir. 2007). Courts have also held that mutuality does not exist where one of the debts was incurred prepetition and the other debt