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Triangular Setoff Impermissible Under Section 553: No Contracting or Theorizing Around It, Section 553 Requires Mutuality

By Ronit J. Berkovich, Andriana Georgallas and Aarti Gupta (Weil, Gotshal & Manges LLP).

In a recent decision, In re Orexigen Therapeutics, Inc., No. 18-10518 (KG) (Bankr. D. Del. Nov. 13, 2018), Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware analyzed setoff under section 553 of the Bankruptcy Code.  Setoff is a contractual or equitable right that allows entities that owe each other money to apply their mutual debts against each other.  Whether a party has a setoff right is a twofold inquiry.  First, the party seeking setoff must acquire such right prepetition under applicable nonbankruptcy law.  Second, once the party establishes its setoff right, the party must meet the requirements of section 553(a) of the Bankruptcy Code, namely: (1) the party seeking setoff must be a “creditor” and (2) that party must have a “mutual debt” where that party’s debt to the debtor arose prepetition and that party’s claim against the same debtor arose prepetition.

In In re Orexigen Therapeutics, Inc., Judge Gross held that the mutuality requirement must be strictly construed, declining to find mutuality in a triangular setoff between the debtor, a parent entity that owed the debtor money, and that entity’s subsidiary, which was a creditor.  Specifically, Judge Gross held that there is no contractual exception to the mutuality requirement and that mutuality may not be satisfied under a third-party beneficiary theory.

The full article is available here.

Written by:
Editor
Published on:
April 23, 2019

Categories: Bankruptcy Roundtable Updates, PriorityTags: Aarti Gupta, Andriana Georgallas, In re Orexigen Therapeutics Inc., mutuality, Ronit J. Berkovich, Section 553, setoffs, Weil Gotshal

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