“Multilateral Netting Under Safe Harbor Contracts: The Arguments for Enforceability in Bankruptcy (And for Mandatory Withdrawal of the Issue to District Court)”
It has become a widely recognized best practice for swap and derivative counterparties to include very broad netting and setoff provisions in their contracts. These broad netting and setoff provisions enable a non-defaulting party to react to an imminent default situation by swiftly exercising termination rights, calculating a net amount due under the terminated transactions, and offsetting an amount owed between it and the defaulting counterparty against any amount owed between the defaulting counterparty and the non-defaulting party’s affiliates. This form of contractual netting is referred to herein as “Multilateral Netting.”
This article analyzes the enforceability of Multilateral Netting in bankruptcy, and provides helpful practice and drafting points for both in-house and outside counsel. It also focuses on the applicability of the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended (“FDICIA”) , which may override contrary provisions of the United States Bankruptcy Code (the “Code”) and provide additional protections to Multilateral Netting in bankruptcy. In addition, the interplay between FDICIA and the relevant Code provisions raises arguments in favor of mandatory withdrawal of the reference of a dispute regarding Multilateral Netting to the United States District Court. Thus, for qualifying parties, invocation of FDICIA may provide both a more favorable forum than the Bankruptcy Court, as well as an additional argument in support of Multilateral Netting.