A recent decision by an appeals court of the State of New York highlights the deceptive complexity of bringing non-contractual claims by or on behalf of noteholders under the seemingly boilerplate remedies provisions in trust indentures. At issue was the standard indenture language that defines the authority of a trustee to bring claims under the indenture, and in particular whether the trustee has the power to bring non-contractual claims under its own volition (not directed by a majority in principal amount of bondholders) against persons not party to the indenture.

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In In re CEC Entertainment, Inc., et al., 20-33163, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020), the Bankruptcy Court for the Southern District of Texas held that the Bankruptcy Code does not permit the court to alter a debtor’s rent obligations beyond the 60-day post-petition period enumerated in Section 365(d)(3) of the code. However, the court declined to address the remedy for a violation of Section 365(d)(3).

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Background

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Introduction

This article provides a brief overview of the somewhat related doctrines of setoff and recoupment in the Chapter 11 context. Setoff is recognized in the Bankruptcy Code to offset the claims of creditors and the debtor in a bankruptcy proceeding. Recoupment is a common law doctrine of similar effect. Sometimes overlooked by debtors and creditors alike, these doctrines can be of critical consequence in the settling of accounts between a creditor and the bankrupt debtor.

Setoff