A “setoff,” in the bankruptcy context, refers to the ability of entities that owe each other money to apply their debts against one another.  According to the United States Supreme Court, this avoids “the absurdity of making A pay B when B owes A.”  Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  Although the Bankruptcy Code does not create any setoff rights per se, it recognizes setoff rights if they otherwise exist under applicable non-bankruptcy law and satisfy the conditions set forth in section 553 of the Code. Section 553 limits setoffs to mutual obligations between a debtor and creditor.  It has four conditions; most significantly, it requires “mutuality,” meaning that the offsetting claim and debt must be owed between the same parties acting in the same capacity.  On January 9, 2009, in In re SemCrude, L.P., the United States Bankruptcy Court for the District of Delaware held that a creditor in bankruptcy cannot effect a “triangular” setoff of the amounts owed between it and three affiliated debtors, despite pre-petition contracts that expressly contemplated multiparty setoff.  We explain the facts and holding of a case that can have profound implications for hedge funds’ rights vis-à-vis bankrupt counterparties.