## Facts

- Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 protection in September 2008.
- Before the filing, LBHI and Swedbank AB (publ) were parties to an ISDA Master Agreement and related swap transactions; LBHI also guaranteed certain affiliate swap obligations to Swedbank.
- LBHI maintained a general deposit account at Swedbank.
- The swap documentation treated LBHI’s bankruptcy filing as an event of default and referenced termination and setoff rights.
- After the petition date, Swedbank froze the account (blocking withdrawals while allowing deposits).
- Approximately $11.7 million in deposits were made to the account after the petition date.
- Swedbank asserted a right to set off LBHI’s prepetition swap obligations against the account balance, including the postpetition deposits.
- LBHI sought relief in bankruptcy court, arguing the attempted setoff violated the automatic stay and improperly reached postpetition estate property.

## Issues

1. Whether a bank may set off postpetition deposits in a debtor’s account against the debtor’s prepetition obligations under swap agreements.
2. Whether the swap safe-harbor provisions (11 U.S.C. §§ 560, 561) allow a swap participant to bypass the limits of the automatic stay (11 U.S.C. § 362) and setoff statute (11 U.S.C. § 553) to apply postpetition deposits to prepetition swap claims.

## Decision

- The district court affirmed the bankruptcy court’s order.
- Swedbank could not set off postpetition deposits against prepetition swap obligations because § 553’s temporal and mutuality requirements were not satisfied.
- The swap safe harbors in §§ 560 and 561 did not override § 553’s requirement that setoff involve mutual, prepetition obligations.
- Swedbank was required to turn over the approximately $11.7 million in postpetition deposits to the bankruptcy estate.

## Legal Principles

- Setoff in bankruptcy is governed by 11 U.S.C. § 553, which preserves setoff only if statutory conditions are met, including mutuality and (as relevant here) a prepetition-to-prepetition alignment of obligations.
- Postpetition deposits in a debtor’s bank account create a postpetition obligation of the bank to the debtor; such obligations generally cannot be used to satisfy the debtor’s prepetition debts through setoff.
- The automatic stay (11 U.S.C. § 362) bars collection efforts on prepetition claims and bars setoff unless permitted under the Bankruptcy Code.
- The swap safe-harbor provisions (11 U.S.C. §§ 560, 561) protect the exercise of certain contractual and nonbankruptcy rights (including close-out and related enforcement actions) from specified bankruptcy restraints, but they do not create new substantive setoff rights or eliminate § 553’s mutuality and timing requirements.

## Conclusion

The court held that a swap counterparty could not use Bankruptcy Code safe harbors to set off a debtor’s postpetition account deposits against the debtor’s prepetition swap liabilities; because the proposed setoff lacked the required prepetition mutuality under § 553 and would contravene the automatic stay, the postpetition deposits had to be returned to the estate.


Swedbank AB (publ) v. Lehman Bros. Holdings Inc., 445 B.R. 130 (S.D.N.Y. 2011)