The Mutuality Doctrine, particularly in legal contexts such as bankruptcy, stipulates that for a party to offset debts against credits, both obligations must exist between the identical two parties, acting in the same capacities, and arise from the same underlying transaction or relationship. Its primary purpose is to prevent unfair advantage by either a creditor or a debtor during insolvency proceedings.
Mechanism
This principle ensures that a creditor cannot unilaterally claim a set-off against a debtor’s assets if their respective claims do not perfectly align in terms of the involved parties and their roles. For example, if a crypto exchange owes a client funds, but the client also owes the exchange funds from a separate, unrelated transaction, the mutuality doctrine dictates whether these distinct debts can be legally netted against each other in a bankruptcy scenario.
Methodology
Applying the mutuality doctrine involves a meticulous analysis of contractual agreements, the specific nature of claims, and the precise capacities in which parties hold their obligations. In the crypto investing space, this methodology is critical for institutional participants when structuring prime brokerage agreements, derivatives contracts, or collateral arrangements, as it directly impacts their ability to exercise set-off rights and mitigate counterparty risk during a default or insolvency event.
Setoff nets mutual prepetition debts from separate transactions post-stay relief; recoupment adjusts debts within a single transaction, bypassing the stay.
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