Additional set-off rights against cash collateral accounts - better be clear
Bank of America N.A. v. Lehman Brothers Holdings Inc. and Lehman Brothers Special Financing Inc. 439 B.R. 811 (2010) (U.S. Bankr. Ct., S.D.N.Y.)
I do love the food for thought these Lehman Brothers bankruptcy cases provide. While they often turn (as this one does) on specific provisions of U.S. bankruptcy or state law, they do remind us of the importance of stating very clearly what is or is not permitted, especially when it comes to set-off. Although the case considers the Bankruptcy Code netting safe-harbour and security interests in cash collateral accounts, it is in essence a case about the availability of common law set-off in the context of cash collateral arrangements.
As you may know by now, BOA was found by Judge Peck to have breached the bankruptcy stay by setting-off an amount LBHI owed to it as guarantor of terminated swap contracts entered into between BOA and LBSFI against cash collateral credited to an LBHI account at BOA. The main question was whether BOA was entitled to exercise that right of set-off under state law against this particular account. In Canada we do not have any stay on the exercise of set-off rights in a bankruptcy proceeding, so the issue relating to the stay would not arise here. However, the main issue of whether a right of set-off was available might.
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As described in a number of previous posts (see my posts of 