Setoff finds its historical roots in the Roman doctrine of compensation: the canceling of cross debts. When employed by solvent parties, setoff is efficient and logical: Setoff disposes of “the absurdity of making A pay B when B owes A.” But when setoff is used by a creditor against an insolvent debtor in bankruptcy, the priority scheme embodied in the Bankruptcy Code is disturbed if that creditor is afforded a greater payout than it otherwise would have received. Section 553 permits setoff in bankruptcy under certain circumstances: A creditor invoking setoff must be entitled to a right of setoff under applicable nonbankruptcy law, and the debts being offset must be mutual, prepetition debts. Recognizing that in the context of bankruptcy, setoff effectively creates a preference, courts have long defined mutuality such that setoff is available only when the applicable debts “are due to and from the same person in the same capacity.”

Following this logic, courts also have held that triangular setoff is impermissible and that setoff among a company’s related subsidiaries constitutes triangular setoff. Nevertheless, companies with related subsidiaries often contract around the statutory triangular setoff ban, hoping courts will uphold their contracts. In In re SemCrude LP, the Bankruptcy Court for the District of Delaware was presented with a series of these contracts and, in holding that a prepetition contract providing for triangular setoff does not fulfill §553’s mutuality requirement and that there is no “contractual exception” to the mutuality requirement, definitively disallowed triangular setoff.