Defensive Setoff Is Not a Bankruptcy “Claim”: No Proof of Claim Required to Preserve Purely Defensive Setoff Rights

1. Introduction

Case: In Re: SVB Fin. Grp. (2d Cir. Sept. 9, 2026).
Parties: SVB Financial Trust (formerly SVB Financial Group) as Debtor-Appellant; Federal Deposit Insurance Corporation (“FDIC”), as receiver for Silicon Valley Bank and Silicon Valley Bridge Bank, N.A., as Appellee; Official Committee of Unsecured Creditors as creditor participant.
Context: Following the March 2023 collapse of Silicon Valley Bank (“SVB”), the FDIC was appointed receiver. SVB’s parent (SVB Financial) entered Chapter 11 in the Southern District of New York while separately suing the FDIC in the Northern District of California to recover deposit funds.

The bankruptcy plan proposed to extinguish the FDIC’s ability to invoke defensive setoff in the California litigation unless the FDIC had filed a bankruptcy proof of claim and obtained a bankruptcy-court order authorizing setoff. The FDIC objected, arguing its defensive setoff was not a Bankruptcy Code “claim” requiring a proof of claim.

Core issue: Whether a creditor’s purely defensive setoff right—asserted only to reduce or defeat the debtor’s recovery in another lawsuit, and not to obtain affirmative recovery from the estate—constitutes a “claim” (a “right to payment”) under 11 U.S.C. § 101(5)(A), such that failure to file a proof of claim forfeits that defense.

2. Summary of the Opinion

The Court expressly limited its decision: it did not decide whether the FDIC was excused from filing a proof of claim because 11 U.S.C. § 553 overrides proof-of-claim requirements, nor whether requiring a proof of claim would conflict with FIRREA’s jurisdiction/channeling provisions. It also did not decide questions surrounding potential automatic-stay implications.

3. Analysis

3.1 Precedents Cited (and How They Shaped the Holding)

• Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995)
  Use in opinion: Supplies the canonical bankruptcy description of setoff: it avoids the “absurdity” of A paying B while B owes A, and clarifies that the Bankruptcy Code does not create setoff rights but generally preserves those arising under non-bankruptcy law. The Second Circuit invoked Strumpf to anchor the idea that the existence and nature of setoff depends on non-bankruptcy law, while bankruptcy law determines how it is treated procedurally and in estate administration.
• Arch Ins. Co. v. Precision Stone, Inc., 584 F.3d 33 (2d Cir. 2009)
  Use in opinion: Distinguishes setoff as either (i) an affirmative defense that reduces liability or (ii) a counterclaim-like mechanism permitting affirmative recovery. This distinction is pivotal because only the latter resembles a “right to payment” and thus more readily fits the Bankruptcy Code’s “claim” concept.
• In re Hooker Invs., Inc., 937 F.2d 833 (2d Cir. 1991)
  Use in opinion: Establishes that not every creditor in Chapter 11 must file a proof of claim; the proof-of-claim regime applies to “claims” and participation in distributions. The decision supports the Court’s framing: the threshold question is whether the asserted right is a Code “claim” at all.
• Pension Benefit Guar. Corp. v. Oneida Ltd., 562 F.3d 154 (2d Cir. 2009)
  Use in opinion: Provides the Court’s two-part “valid bankruptcy claim” inquiry: (1) whether the claimant possessed a “right to payment,” and (2) whether it arose prepetition. The Second Circuit used this to keep the analysis centered on whether the FDIC’s defensive setoff is a “right to payment” in the first instance.
• In re Mazzeo, 131 F.3d 295 (2d Cir. 1997) and Johnson v. Home State Bank, 501 U.S. 78 (1991)
  Use in opinion: Both underscore the breadth of “claim.” The Court acknowledged Congress intended the “broadest available definition,” but emphasized the definition’s reach “is not infinite.” These cases set the stage for a careful boundary-drawing exercise: even a broad definition still requires a “right to payment” (or equivalent enforceable obligation).
• Midland Funding, LLC v. Johnson, 581 U.S. 224 (2017)
  Use in opinion: Demonstrates that even unenforceable claims (e.g., time-barred) can qualify as “claims” for bankruptcy purposes—again, reinforcing breadth. The Court nevertheless distinguished defensive setoff: the problem is not enforceability, but the absence of any affirmative “right to payment” under the governing law.
• Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007)
  Use in opinion: Reinforces that state (non-bankruptcy) law generally determines whether a creditor has a right to payment. The Court leveraged this to focus on California law’s characterization of setoff as a defense without affirmative recovery.
• Constr. Protective Servs., Inc. v. TIG Specialty Ins. Co., 29 Cal. 4th 189 (2002); City of Stockton v. Superior Court, 42 Cal. 4th 730 (2007); Morris Cerullo World Evangelism v. Newport Harbor Off. & Marina, LLC, 67 Cal. App. 5th 1149 (2021)
  Use in opinion: These California authorities do the key definitional work: under Cal. Civ. Proc. Code § 431.70, setoff operates as a defense of “payment/compensation,” allowing reduction/defeat of plaintiff’s claim but not affirmative relief. The Second Circuit treated this as dispositive of the “right to payment” question.
• In re Villarie, 648 F.2d 810 (2d Cir. 1981) and In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991)
  Use in opinion: These are the doctrinal hinge. In re Villarie held that where state law grants only an offset against what the creditor must pay (and no “right to sue” for recovery), there is no “right to payment” and thus no bankruptcy “claim.” In re Chateaugay Corp. supplied the general principle that if a creditor “could never sue” under governing non-bankruptcy law, it has no “right to payment” under the Code’s definition of “claim.”
• Pa. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552 (1990) (quoted in Johnson v. Home State Bank)
  Use in opinion: Helps articulate that a “claim” corresponds to an “enforceable obligation” of the debtor—supporting the Court’s view that a purely defensive setoff, lacking any enforceable payment entitlement against the debtor, is outside the “claim” category.
• Durham v. SMI Indus. Corp., 882 F.2d 881 (4th Cir. 1989)
  Use in opinion: Supports the proposition that asserting setoff as a defense is not asserting a “claim” against the bankruptcy estate—consistent with the Second Circuit’s conclusion and providing cross-circuit reinforcement.
• In re Bogdanovich, 292 F.3d 104 (2d Cir. 2002)
  Use in opinion: Invoked for the “fresh start” principle; the Court used it to address policy concerns and to explain why allowing defensive setoff to persist does not undermine discharge/fresh start in the way an undisclosed affirmative claim might.

3.2 Legal Reasoning

The Court’s reasoning proceeds in a structured sequence:

1. Identify what triggers proof-of-claim obligations.
   Proof-of-claim requirements attach to “claims.” The bar date order—tracking Fed. R. Bankr. P. 3003(c)(2)—required governmental units “assert[ing] a claim, as defined in [§] 101(5)” to file proofs of claim, with forfeiture consequences for “claims” not filed.
2. Define “claim” under the Bankruptcy Code.
   A “claim” is a “right to payment.” The Court acknowledged the breadth of the definition (In re Mazzeo; Johnson v. Home State Bank; Midland Funding, LLC v. Johnson) but emphasized it still requires an enforceable payment entitlement or equivalent obligation.
3. Look to non-bankruptcy law to characterize the asserted setoff right.
   The FDIC’s setoff was asserted under California law, specifically Cal. Civ. Proc. Code § 431.70. Under the California cases, setoff in this posture is a defense only—capable of reducing/defeating the plaintiff’s recovery but not permitting affirmative recovery by the defendant.
4. Apply Second Circuit “right to payment” precedent to defensive setoff.
   Under In re Villarie and In re Chateaugay Corp., if the governing law does not permit the creditor to sue for affirmative recovery, the creditor lacks a “right to payment” and therefore lacks a bankruptcy “claim.” Because California defensive setoff provides no affirmative relief mechanism, the FDIC’s setoff defense is not a “claim.”
5. Reject statutory-structure arguments that setoff necessarily implies a “claim.”
   SVB Financial relied on 11 U.S.C. §§ 362(a)(7), 553(a), 553(a)(1), 506(a)(1) to argue that “setoff” presupposes a creditor “claim.” The Court treated these provisions as describing bankruptcy’s treatment of setoff when a claim exists, not as converting every defensive offset into a Code “claim,” and emphasized that state law still defines the nature of the right being asserted.
6. Address policy (“fresh start”) and procedural incentives.
   The Court reasoned that allowing a purely defensive setoff does not undermine “fresh start” because it does not seek recovery from the estate; it merely limits what the debtor can recover from the defendant in separate litigation. The Court also noted the FDIC’s statutory posture under FIRREA: SVB Financial’s claim against the FDIC was channeled to specified federal courts, making the California action the natural forum for the FDIC’s defensive setoff.

3.3 Impact

The decision meaningfully clarifies the boundary between (a) bankruptcy “claims” that must be asserted through the proof-of-claim/allowance process to preserve distribution rights and (b) defensive litigation positions that do not seek estate recovery.

• Plan drafting constraint: Chapter 11 plans (and bar date orders) cannot automatically extinguish a non-creditor defendant’s purely defensive setoff rights merely because the defendant did not file a proof of claim—at least where the governing non-bankruptcy law treats setoff as a defense without affirmative recovery.
• Forum-specific consequences: The holding is especially salient where the debtor’s affirmative claims are litigated outside the bankruptcy court (here, due to FIRREA channeling). Defendants in those non-bankruptcy actions may preserve certain defensive setoffs without becoming “creditors” seeking estate distributions.
• Doctrinal clarity on “right to payment”: The Second Circuit reinforces that the Code’s “claim” definition, though broad, is tethered to whether the right—under applicable law—supports affirmative recovery or enforceable payment obligations. A defense that only reduces liability may fall outside.
• Practical litigation leverage: Debtors cannot use Chapter 11 bar dates as a universal mechanism to preclude defensive setoff in later litigation; defendants retain the ability to reduce exposure even if they never sought estate distributions.
• Open questions preserved: By not reaching § 553-override and FIRREA-conflict theories, the Court leaves room for future litigants to argue broader immunity from proof-of-claim requirements for setoff, or preemption-based arguments where federal receiverships are involved.

4. Complex Concepts Simplified

• Proof of claim: A formal filing in bankruptcy that asserts a creditor’s entitlement to receive money (or other value) from the bankruptcy estate. It is primarily about participating in distributions and the claim-allowance process.
• “Claim” under 11 U.S.C. § 101(5)(A): A “right to payment.” The term is broad, but it still requires some legal entitlement to receive payment or to enforce an obligation.
• Setoff: A mechanism for netting mutual debts—if A owes B and B owes A, the obligations can be offset so only the net amount is payable.
  • Defensive setoff (as here): Used only to reduce or defeat what the plaintiff can recover; it does not allow the defendant to win money from the plaintiff.
  • Affirmative setoff/counterclaim-like setoff: Permits the defendant to obtain an affirmative judgment for an excess amount (depending on governing law). This looks more like a bankruptcy “claim.”
• Automatic stay and setoff (11 U.S.C. § 362(a)(7)): Bankruptcy typically pauses acts of setoff. The Court noted but did not decide whether the FDIC’s conduct implicated the stay, referencing Citizens Bank of Md. v. Strumpf.
• 11 U.S.C. § 553: A preservation provision—bankruptcy does not create setoff rights but often respects those that exist under non-bankruptcy law, subject to bankruptcy limitations.
• FIRREA channeling: The Financial Institutions Reform, Recovery, and Enforcement Act routes certain claims against the FDIC as receiver into a specific administrative process and then into designated federal courts. This can force the debtor’s payment lawsuit into a forum outside the bankruptcy court, affecting where defenses like setoff are litigated.

5. Conclusion

In Re: SVB Fin. Grp. establishes a clear Second Circuit rule: where applicable non-bankruptcy law characterizes setoff as a purely defensive mechanism that cannot produce affirmative recovery, that defensive setoff is not a Bankruptcy Code “claim” and thus does not require a proof of claim to preserve it.

The decision tightens the analytical link between the Code’s “right to payment” definition and the underlying state-law content of the asserted right, while limiting a debtor’s ability to use plan provisions and bar dates to strip defendants of defenses in separate litigation. At the same time, the Court’s careful narrowing—leaving § 553 and FIRREA-conflict issues undecided—signals that broader questions about setoff’s treatment in bankruptcy, especially in federal receivership contexts, remain fertile ground for future disputes.