Certain Rights Survive the Bankruptcy Bar Date: Second Circuit Says Proof of Claim Is Not Necessary To Preserve Defensive Setoff Rights

The U.S. Court of Appeals for the Second Circuit has delivered an important ruling for certain creditors seeking to preserve their setoff rights in bankruptcy without filing a proof of claim. In In re SVB Financial Group, the Court held that the Federal Deposit Insurance Corporation (“FDIC”) was not required to file a proof of claim in SVB Financial Group’s Chapter 11 case to preserve its right to assert a setoff defensively against the debtor in subsequent litigation.

The September 9, 2026, decision draws an important distinction between a creditor seeking an affirmative recovery from a bankruptcy estate and one asserting a setoff solely as an affirmative defense in a separate lawsuit outside the bankruptcy context. The ruling has significant implications for restructuring professionals evaluating litigation strategies related to claims their clients may have against a debtor.

Key Takeaways

• Certain creditors may preserve defensive setoff rights without filing a proof of claim if the applicable non-bankruptcy law allows the assertion of defensive setoffs. The Second Circuit held that the FDIC did not forfeit its right to assert setoff defensively by failing to file a proof of claim because the applicable non-bankruptcy law, California law, explicitly allows a defendant to assert a setoff defensively to defeat a plaintiff’s claim against it.
• Setoff rights do not always come in the form of a “claim” against the debtor’s bankruptcy estate. The Second Circuit, citing a previous decision, commented that setoff rights can exist “as an affirmative defense under state law to extinguish or reduce the creditor’s potential obligation to the debtor” or “as a type of counterclaim under state law that permits affirmative recovery.” Where, as in the FDIC’s case, the party asserting the setoff right is doing so purely as a defense to any potential losses in a separate lawsuit, such assertion can be distinguished from a creditor seeking to take part in the distribution of the debtor’s estate.
• Certain defensive setoff rights can be preserved without filing a proof of claim. Because setoff rights asserted in the specific context of an affirmative defense do not seek to recover from a debtor’s bankruptcy estate, such setoff rights do not constitute a “right to payment” for which a proof of claim is required. To reiterate, this conclusion is highly fact-specific and dependent on what the applicable non-bankruptcy law provides. Where, as here, the applicable state law statute is clear that the defensive setoff right is available (and does not bestow the right to any affirmative relief), a party can preserve its defensive setoff rights notwithstanding its decision to forego the filing of a proof of claim.
• The parameters of a party’s setoff rights depend heavily on the applicable non-bankruptcy law. Section 553 of the Bankruptcy Code reminds us that there is no independent authority for the assertion of setoff rights in the Bankruptcy Code. Such rights are determined solely by looking to the applicable non-bankruptcy law. In this case, California has a statute allowing for the assertion of setoff to defeat a claim by a party with whom the defendant has a mutual debt. Determining the extent of a party’s setoff rights requires extensive investigation into applicable state law.
• Plan confirmation does not necessarily extinguish those rights. A debtor may not be able to use the claims process or plan confirmation to eliminate otherwise valid defensive setoff rights in non-bankruptcy cases—an important consideration for creditors protecting against estate claims.

The SVB Dispute

SVB Financial Group, the former parent of Silicon Valley Bank (“SVB”), filed for Chapter 11 bankruptcy protection in March 2023 in the Southern District of New York following the bank’s highly publicized collapse. After the FDIC was appointed receiver for SVB, and while the bankruptcy case was pending, SVB Financial Group filed a lawsuit in the United States District Court for the Northern District of California[1] against the FDIC to recover approximately $1.7 billion in SVB deposits held by the FDIC as a result of SVB’s collapse.

As a defense to SVB Financial Group’s lawsuit, the FDIC invoked a California statute allowing a defendant to assert setoff as a valid affirmative defense. Critically, California law states that the statute at issue can only be asserted to defeat a plaintiff’s claim, and it cannot be used to obtain an award of affirmative relief against a plaintiff. The FDIC, however, failed to file a proof of claim in SVB Financial Group’s bankruptcy. SVB Financial Group’s proposed Chapter 11 plan included a provision that would have extinguished any setoff rights unless the party had filed a proof of claim preserving that right. The FDIC objected to confirmation of the plan, arguing that it was not seeking a distribution from the estate but instead preserving its ability to assert a setoff defensively if SVB Financial Group recovered against it in the California lawsuit. The bankruptcy court agreed, and the issue proceeded on direct appeal to the Second Circuit.

The Second Circuit’s Decision

A panel of the Second Circuit unanimously affirmed, holding that the FDIC did not need to file a proof of claim to preserve the defensive setoff rights it asserted under California law. The Court focused on the Bankruptcy Code’s definition of a “claim” as a “right to payment.” Because the FDIC’s defensive setoff could reduce or defeat SVB Financial Group’s recovery but could not result in an affirmative recovery for the FDIC, the Court concluded that those rights were not “claims” requiring a proof of claim. The Court characterized its holding as a narrow one. It concluded that the particular defensive setoff rights asserted by the FDIC under California law were not “claims” under the Bankruptcy Code. It did not decide whether the FDIC’s assertion of a setoff in the California proceeding violated the automatic stay. It also did not decide whether Section 553 independently overrides a proof-of-claim requirement or whether such a requirement would conflict with federal banking law. The Court also noted its ruling would not encourage ordinary creditors to forego participation in bankruptcy proceedings in future cases because the FDIC, in its capacity as a receiver, was “statutorily distinct” from other creditors because FIRREA compelled SVB Financial Group to file its lawsuit for recovery of the $1.7 billion in deposits either in the U.S. District Court for the Northen District of California or the District of Columbia rather than in an adversary proceeding in the bankruptcy court.

Why It Matters

Although the case arose from the collapse of Silicon Valley Bank, its implications extend well beyond the banking industry. For creditors, the decision provides an important protection: failing to file a proof of claim does not necessarily preclude asserting setoff defensively against a later demand from the debtor or estate. However, as the Second Circuit noted, this protection is limited based on what applicable non-bankruptcy law provides.

To be clear, the decision does not mean that creditors can disregard the proof-of-claim process. The Second Circuit specifically distinguished a defensive setoff from an affirmative claim seeking recovery from the bankruptcy estate. Filing a proof of claim is a strategic decision, and creditors must evaluate potential setoff rights early, including whether those rights are defensive or affirmative and whether filing a proof of claim or other action is necessary to preserve them.

For debtors, trustees, and other estate fiduciaries, the ruling means that the absence of a proof of claim does not necessarily mean a potential defendant has surrendered its defenses. Potential setoffs should therefore be considered when valuing estate assets and assessing claims.

The bottom line: The failure to file a proof of claim may prevent a creditor from seeking an affirmative recovery from the estate, but it does not necessarily eliminate a creditor’s ability to defend against the estate’s own demand for payment in a separate proceeding.

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[1] The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) required SVB Financial Group to file a lawsuit to recover its deposits either in the district within which [SVB’s] principal place of business is located (Northern District of California) or the United States District Court for the District of Columbia rather than in the bankruptcy court.