Orexigen Therapeutics, Inc. v. ( 2021 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 20-1136
_____________
IN RE: OREXIGEN THERAPEUTICS, INC.,
Debtor
MCKESSON CORPORATION; RXC ACQUISITION
COMPANY,
Appellants
_______________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No.1-18-cv-01873)
District Judge: Hon. Colm F. Connolly
_____________
Argued
November 17, 2020
Before: JORDAN, KRAUSE, and RESTREPO, Circuit
Judges
(Filed: March 19, 2021)
_______________
Jeffrey K. Garfinkle [ARGUED]
Daniel H. Slate
BUCHALTER
3131 Princeton Pike
18400 Von Karman Avenue, Suite 800
Irvine, CA 92612-0514
Kurt F. Gwynne
Jason D. Angelo
REED SMITH LLP
1201 North Market Street, Suite 1500
Wilmington, DE 19801
Counsel for Appellants
Eric Winston
Bennett Murphy [ARGUED]
Razmig Izakelian
QUINN EMANUEL URQUHART & SULLIVAN LLP
865 S. Figueroa Street, 10th Floor
Los Angeles, CA, 90017
Christopher M. Samis
L. Katherine Good
POTTER ANDERSON & CORROON LLP
Christopher M. Samis
The Renaissance Centre
405 North King Street, Suite 500
Wilmington, DE 19801
Counsel for Appellees
_______________
OPINION OF THE COURT
_______________
2
JORDAN, Circuit Judge.
This dispute turns on the meaning of the word “mutual”
in the provision of the Bankruptcy Code that allows parties to
invoke setoff rights when the debts they owe one another are
mutual. See 11 U.S.C. § 553.
McKesson Corporation, Inc. (“McKesson”) and
Orexigen Therapeutics, Inc. (“Orexigen”) agreed to a
pharmaceutical distribution deal and included a provision in
their contract whereby McKesson, as distributor of the drug,
could reduce what it owed to Orexigen, the drug manufacturer,
by any amount that Orexigen owed to McKesson or any
McKesson subsidiary. Shortly thereafter, one of those
subsidiaries, McKesson Patient Relationship Solutions
(“MPRS”),1 separately agreed to help Orexigen with a
consumer discount program by advancing cash to pharmacies,
with Orexigen then obligated to reimburse MPRS. Later, when
Orexigen filed for bankruptcy, it owed MPRS approximately
$9 million, and McKesson owed Orexigen approximately $7
million. The Bankruptcy Court and the District Court rejected
McKesson’s request to set off its debt by the amount Orexigen
owed MPRS, which would have reduced MPRS’s claim to
approximately $2 million and McKesson’s debt to zero. Both
courts held that what McKesson wanted was a triangular setoff,
not a mutual one, and thus was not the kind allowable under
§ 553 of the Bankruptcy Code. We agree and will affirm.
1
MPRS later merged into RxC Acquisition Company,
a named Appellant, which is also a subsidiary of McKesson.
3
I. BACKGROUND
Orexigen was a publicly traded pharmaceutical
company whose only commercial product was a weight
management drug called Contrave. On June 9, 2016, Orexigen
entered into a “Distribution Agreement” with McKesson,
whereby Orexigen sold Contrave to McKesson, and McKesson
in turn provided the drug to pharmacies. Included in the
Distribution Agreement was a “Setoff Provision” that
permitted “each of [McKesson] and its affiliates … to set-off,
recoup and apply any amounts owed by it to [Orexigen’s]
affiliates against any [and] all amounts owed by [Orexigen] or
its affiliates to any of [McKesson] or its affiliates.” (App. at
13.)
Separate from the Distribution Agreement, MPRS and
Orexigen entered into a “Services Agreement” on July 5, 2016.
Under the Services Agreement, MPRS managed a customer
loyalty program for Orexigen, pursuant to which patients
would receive price discounts from pharmacies. MPRS would
advance funds to pharmacies selling Contrave, with
reimbursement arriving later from Orexigen. The Distribution
Agreement and Services Agreement did not reference,
incorporate, or integrate one another, and the parties agree that
McKesson and MPRS were distinct legal entities.
By the time Orexigen filed its petition for Chapter 11
relief on March 12, 2018 (the “Petition Date”), it owed MPRS
approximately $9.1 million under the Services Agreement, and
McKesson owed Orexigen some $6.9 million under the
4
Distribution Agreement.2 Had there been a setoff of those
obligations pursuant to the Setoff Provision, Orexigen would
have owed MPRS $2.2 million and McKesson would have
owed Orexigen nothing.
On March 16, 2018, four days after the Petition Date,
Orexigen filed a motion to sell substantially all of its assets for
$75 million in cash. McKesson objected to the asset sale, and,
following that objection, the parties negotiated for McKesson
to pay the approximately $6.9 million receivable it owed to
Orexigen, while Orexigen agreed to keep that sum segregated
pending resolution of the setoff dispute.3
McKesson and MPRS then asked the Bankruptcy Court
to decide their rights to the segregated funds under the Setoff
Provision in the Distribution Agreement and § 553 of the
Code.4 The Court rejected McKesson’s argument for a setoff
2
Orexigen says there is a dispute over the amount
Orexigen owes MPRS, claiming the proof of claim only
establishes $8,564,075.68 due. The Bankruptcy Court held,
and we agree, that the precise amount is not material to the
legal questions presented.
3
The segregated $6.9 million is currently held by
Province, Inc., which, as the administrator of the bankruptcy
estate, has taken control of Orexigen’s remaining assets
pursuant to the confirmed liquidation plan.
4
Section 553 reads: “Except as otherwise provided in
this section and in sections 362 and 363 of this title, this title
does not affect any right of a creditor to offset a mutual debt
owing by such creditor to the debtor that arose before the
5
because, while the Setoff Provision constituted an “enforceable
contractual right allowing a parent and its subsidiary
corporation to [e]ffect a prepetition triangular setoff under state
law[,]” that relationship “does not supply the strict mutuality
required in bankruptcy.” In re Orexigen Therapeutics, Inc.,
596 B.R. 9, 12 (Bankr. D. Del. 2018).5
The Bankruptcy Court went on to discuss the meaning
of mutuality, relying on its own precedent in a case called In re
SemCrude to conclude that § 553 “is strictly construed against
the party seeking setoff.” Id. at 17 (citing In re SemCrude,
L.P., 399 B.R. 388, 396 (Bankr. D. Del. 2009) (citation
omitted)). It held, as it had in SemCrude, that contracts cannot
commencement of the case under this title against a claim of
such creditor against the debtor that arose before the
commencement of the case[.]” 11 U.S.C. § 553(a). Three
enumerated exceptions follow. Section 553 uses the terms
“offset” and “setoff,” while the parties often use the term
“setoff.” Viewing these as synonyms, we generally use the
latter herein, as that is the language used in documents at issue
in the case.
5
The Bankruptcy Court assumed without deciding that
the parties had an enforceable prepetition right to setoff under
California law. See In re Orexigen Therapeutics, Inc., 596
B.R. at 15. It noted that, although the parties disputed whether
McKesson was a creditor within the meaning of § 553, they did
not substantially brief the issue, so it deemed McKesson a
creditor such that it could pursue its setoff claim, particularly
in light of the parties’ stipulation to preserve the disputed
assets. See id. at 16.
6
turn nonmutual debts into debts subject to setoff under the
Code, as if they had been mutual. See id. at 18. The Court
rejected McKesson’s argument that mutuality merely
“identifies the state-law right that is thereby preserved
unaffected in bankruptcy.” (Opening Br. at 14.) It further
rejected the notion that MPRS’s alleged status as a third-party
beneficiary of the Distribution Agreement created mutuality.
See In re Orexigen Therapeutics, Inc., 596 B.R. at 22–23. The
Court saw those arguments as attempts to “contract around
section 553(a)’s mutuality requirement.” Id. at 21.
As was its right under § 365 of the Code, Orexigen
rejected the Distribution Agreement and the Services
Agreement, and the Bankruptcy Court then confirmed
Orexigen’s plan for liquidation.6 McKesson appealed the
Bankruptcy Court’s mutuality decision to the District Court,
which affirmed. This timely appeal followed.
II. DISCUSSION7
Section 553 of the Bankruptcy Code says that, “[e]xcept
as otherwise provided …, this title does not affect any right of
6
Section 365 states: “Except as provided in sections 765
and 766 of this title and in subsections (b), (c), and (d) of this
section, the trustee, subject to the court’s approval, may
assume or reject any executory contract or unexpired lease of
the debtor.” 11 U.S.C. § 365(a).
7
The Bankruptcy Court had jurisdiction under 28
U.S.C. §§ 1334(b), 157(a) and 157(b)(1). We have jurisdiction
over this appeal pursuant to 28 U.S.C. § 158(d)(1). We “‘stand
in the shoes’ of the District Court and … review the
7
a creditor to offset a mutual debt owing by such creditor to the
debtor … against a claim of such creditor against the debtor[.]”
11 U.S.C. § 553(a) (emphasis added). The meaning of
mutuality in that provision is a matter of first impression for
us. And while our sister circuits have opined on the importance
of mutuality as a distinct limitation of § 553, they have not
ruled on whether a contract can create an exception to the
requirement of direct mutuality. Our task is to understand what
Congress meant in using the term “mutual” in that Code
section.
Orexigen asks us to adopt the reasoning of a unanimous
line of authority from bankruptcy courts, beginning with
SemCrude, that requires strict bilateral mutuality for § 553 to
apply. McKesson, on the other hand, argues that SemCrude
and the cases that follow it should be upended because the
word “mutual” in § 553 is merely a non-limiting adjective
meant to invoke an understanding of how state law setoff rights
generally operate. We conclude that the analysis set forth in
SemCrude is sound and the Bankruptcy Court and District
Court here rightly treated mutuality as a distinct statutory
requirement under § 553.
Bankruptcy Court’s legal conclusions de novo and its factual
findings for clear error.” In re Global Indus. Techs., Inc., 645
F.3d 201, 209 (3d Cir. 2011) (en banc) (citations omitted).
Elements of the Bankruptcy Court’s setoff decision are within
its discretion, although the legal standards it applies are not.
See In re Garden Ridge Corp., 399 B.R. 135, 139 (D. Del.
2008) (citing In re United Healthcare Sys., Inc., 396 F.3d 247,
249 (3d Cir. 2005)); In re Gould, 401 B.R. 415, 429 (B.A.P.
9th Cir. 2009).
8
A. The Term “Mutual” in § 553 Imposes a
Distinct Limitation
The parties agree, as an initial matter, that to assert a
setoff exception under § 553, a right to setoff must exist under
applicable state law.8 Their disagreement begins with
McKesson’s contention that both the general right to enforce a
setoff and the requisite mutuality are defined by state law, with
§ 553 imposing no independent mutuality limitation. In other
words, McKesson contends that the term “mutual” is nothing
more than a “definitional scope provision that identifies the
state-law right that is thereby preserved unaffected in
bankruptcy[.]” (Opening Br. at 14.) Orexigen argues in
response that the modifier “mutual,” as used in § 553, imposes
a distinct limitation strictly construed to prohibit enforcement
of a setoff agreement involving three or more parties and
indirect debt obligations.
As the SemCrude court noted, a compelling body of
precedent, including from this Court, treats mutuality in § 553
as a limiting term, not a redundancy. See In re SemCrude, L.P.,
8
They are correct. See United States ex rel. IRS v.
Norton, 717 F.2d 767, 772 (3d Cir. 1983) (“[Section 553] is
not an independent source of law governing setoff; it is
generally understood as a legislative attempt to preserve the
common-law right of setoff arising out of non-bankruptcy law”
and “the courts below were correct in looking to state law to
determine when a setoff has occurred.”); see also Citizens
Bank of Md. v. Strumpf, 516 U.S. 16, 18 (1995).
9
399 B.R. at 393 (collecting cases).9 McKesson tries to rebut
the import of those cases by pointing out that § 553 includes
three expressly enumerated federal exceptions to the right to
enforce a setoff, and an exception focused on non-mutual debts
is not among them.10 It argues that Congress would have
9
See In re Univ. Med. Ctr., 973 F.2d 1065, 1079 (3d
Cir. 1992) (“The doctrine of setoff … gives a creditor the right
‘to offset a mutual debt owing by such creditor to the debtor,’
provided that both debts arose before commencement of the
bankruptcy action and are in fact mutual.”) (citation omitted);
see also PACA Tr. Creditors of Lenny Perry’s Produce, Inc. v.
Genecco Produce Inc., 913 F.3d 268, 277 n.4 (2d Cir. 2019)
(“[T]he U.S. Bankruptcy Code … makes offsets available only
for ‘mutual’ debts.”); In re Meyer Med. Physicians Grp., Ltd.,
385 F.3d 1039, 1041 (7th Cir. 2004) (“Mutuality requires that
the debt in question be owed in the same right and between the
same parties standing in the same capacity[.]”); In re Myers,
362 F.3d 667, 672 (10th Cir. 2004) (“Under § 553, a creditor
with an independent right of setoff may setoff a debtor’s
obligations only if the creditor satisfies three elements….
Third, the creditor’s and debtor’s obligations must be
mutual.”); In re Verco Indus., 704 F.2d 1134, 1139 (9th Cir.
1983) (“The timing and mutuality elements must both be
satisfied to establish a set-off under [§ 553].”).
10
Those enumerated exceptions are: “(1) the claim of
such creditor against the debtor is disallowed; (2) such claim
was transferred, by an entity other than the debtor, to such
creditor … after the commencement of the case; or … after 90
days before the date of the filing of the petition; and … while
the debtor was insolvent … or (3) the debt owed to the debtor
by such creditor was incurred by such creditor – after 90 days
10
included an enumerated exception bearing on mutuality if it
had intended that concept to serve as a limitation under federal
law rather than a term simply descriptive of state law.
Orexigen has the better of the argument, however,
because McKesson’s reading of the statute would render the
term “mutual” redundant, as the phrase “any right … to offset”
provides adequate definitional scope to § 553. To reiterate, the
operative language reads “this title does not affect any right of
a creditor to offset a mutual debt.” 11 U.S.C. § 553(a)
(emphasis added). Moreover, the text immediately following
that language, although not enumerated, provides a limiting
effect on the enforceability of § 553 by stating that both the
debtor’s claim against the creditor and the creditor’s claim
against the debtor must “ar[i]se before the commencement of
the case.” Id. That requirement is consistently viewed as a
distinct limitation on the ability to assert a setoff right, and
there is no persuasive reason to treat the requirement of
mutuality any differently.11
before the date of the filing of the petition; while the debtor
was insolvent; and for the purpose of obtaining a right of setoff
against the debtor[.]” 11 U.S.C. § 553(a)(1)–(3).
11
See In re Garden Ridge Corp., 338 B.R. 627, 633
(Bankr. D. Del. 2006); In re James River Coal Co., 534 B.R.
666, 669–70 (Bankr. E.D. Va. 2015); In re Am. Home Mortg.
Holdings, Inc., 501 B.R. 44, 56 (Bankr. D. Del. 2013); In re
Sentinel Prod. Corp., 192 B.R. 41, 45 (N.D.N.Y. 1996); In re
Westchester Structures, Inc., 181 B.R. 730, 739 (Bankr.
S.D.N.Y. 1995); In re Woodside Grp., LLC, No. 6:08-bk-
20682, 2009 WL 6340015, at *4 (Bankr. C.D. Cal. Dec. 30,
2009).
11
B. Mutuality Under § 553 Excludes Triangular
Setoffs, Including the Setoff Provision in the
Distribution Agreement
Having determined that mutuality is a distinct and
limiting requirement of federal bankruptcy law, we next
consider the effect of that limitation. We again agree with and
adopt the SemCrude court’s well-reasoned conclusion that
Congress intended for mutuality to mean only debts owing
between two parties, specifically those owing from a creditor
directly to the debtor and, in turn, owing from the debtor
directly to that creditor. Congress did not intend to include
within the concept of mutuality any contractual elaboration on
that kind of simple, bilateral relationship.
Given basic premises of the Bankruptcy Code, that is
not surprising. “[S]etoff is at odds with a fundamental policy
of bankruptcy, equality among creditors, because it permits a
creditor to obtain full satisfaction of a claim by extinguishing
an equal amount of the creditor’s obligation to the debtor, i.e.,
in effect, the creditor receives a preference.” In re Bevill,
Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d
Cir. 1990) (internal quotation marks and citation omitted).
Thus, we and our sister circuits have indicated that triangular
setoffs – in which party A owes party B who next owes party
C who then owes party A – are definitionally not mutual. See
id. at 59 (“To be mutual, the debts must be in the same right
and between the same parties, standing in the same capacity.”)
(citation omitted); In re United Sciences of Am., Inc., 893 F.2d
720, 723 (5th Cir. 1990) (“The requirement of mutuality is
‘that each party ... own his claim in his own right severally,
with the right to collect in his own name [and] in his own right
and severally.’”) (citation omitted); MNC Commercial Corp.
12
v. Joseph T. Ryerson & Son, Inc., 882 F.2d 615, 618 n.2 (2d
Cir. 1989) (“[A] subsidiary’s debt may not be set off against
the credit of a parent.”); In re Elcona Homes Corp., 863 F.2d
483, 486 (7th Cir. 1988) (“[T]he statute itself speaks of ‘a
mutual debt[.]’”).
That should end the matter, but McKesson insists that
its Setoff Provision in the Distribution Agreement turns the
debts between Orexigen and MPRS and between McKesson
and Orexigen from a triangular debt arrangement into a mutual
debt. The error of that assertion is described in SemCrude.12
12
SemCrude traced the history of attempts to create a
contractual exception to strict mutuality, through dicta in
various decisions, back to a single case, In re Berger Steel Co.,
327 F.2d 401 (7th Cir. 1964), now almost 60 years old. But
even Berger had not actually authorized such an exception. In
Berger, a creditor sought a priority interest in a sum of money
which the debtor owed to a subsidiary of that creditor, pursuant
to an alleged setoff agreement between the three parties. See
id. at 401–04. The Court did not reach whether such a
“tripartite agreement” could be enforced under the predecessor
to § 553, instead merely affirming the District Court’s ruling
that no such contract even existed. See id. at 405–06. As
explained in SemCrude, it “avoided addressing the … question
of whether a triangular setoff was permissible under the
Bankruptcy Act if a contract signed by the parties to the
proposed setoff contemplated such a remedy.” 399 B.R. at
395. Thus, there is no authority supporting a contractual
exception to the mutuality requirement of § 553. See id. at
396–99.
13
 There, a contract like the Distribution Agreement at
issue here created the right to set off debts owed by the creditor
or its affiliates against debts owed by the debtor or its affiliates.
SemCrude, 399 B.R. at 391. The court gave that agreement
careful consideration but rightly recognized that contractual
arrangements cannot transform a triangular set of obligations
into bilateral mutuality. The mutuality requirement set a limit,
and “[t]he effect of [mutuality’s] narrow construction is that
‘each party must own his claim in his own right severally, with
the right to collect in his own name against the debtor in his
own right and severally.’” Id. at 396 (quoting In re Garden
Ridge Corp., 338 B.R. 627, 633–34 (Bankr. D. Del. 2006),
aff’d, 399 B.R. 135 (D. Del. 2008), aff’d, 386 F. App’x 41 (3d
Cir. 2010)). In the end, “mutuality cannot be supplied by a
multi-party agreement contemplating a triangular setoff.” Id.
at 397. The court noted in its statutory interpretation that, “[i]n
articulating exactly who must owe whom a debt to effect a
setoff under [§] 553(a), Congress used a greater detail of
precision than is seen in many other parts of the Code.” Id.
Moreover, the policies of the Code disfavor a contractual
exception to mutuality. In particular, “[o]ne of the primary
goals—if not the primary goal—of the Code is to ensure that
similarly-situated creditors are treated fairly and enjoy an
equality of distribution from a debtor absent a compelling
reason to depart from this principle.” Id. at 399. Triangular
setoffs undermine that goal.
The reasoning of SemCrude has been frequently relied
on in other bankruptcy cases, including this one.13 In
13
See In re Orexigen Therapeutics, Inc., 596 B.R. at 16–
22; In re Pursuit Capital Mgmt., LLC, 595 B.R. 631, 659 n.124
(Bankr. D. Del. 2018); Carn v. Heesung PMTech Corp., 579
14
embracing the SemCrude analysis, the Bankruptcy Court for
the Southern District of New York succinctly explained that
“mutuality quite literally is tied to the identity of a particular
creditor that owes an offsetting debt. The right is personal, and
there simply is no ability to get around this language [of § 553].
Parties may freely contract for triangular setoff rights, but not
in derogation of these mandates of the Bankruptcy Code.” In
re Lehman Bros. Inc., 458 B.R. 134, 141 (Bankr. S.D.N.Y.
2011). We agree.14
B.R. 282, 294–95 (M.D. Ala. 2017); In re TSAWD Holdings,
Inc., 565 B.R. 292, 301 (Bankr. D. Del. 2017); In re: All Phase
Steel Works, LLC, No. 3:16-cv-00844, 2016 WL 6208252, at
*5 (D. Conn. Oct. 24, 2016); In re Arcapita Bank B.S.C.(c),
No. 12-11076, 2014 WL 2109931, at *3 (Bankr. S.D.N.Y. May
20, 2014); In re Am. Home Mortg. Holdings, Inc., 501 B.R. at
55; In re Direct Response Media, Inc., 466 B.R. 626, 658
(Bankr. D. Del. 2012).
14
This view of § 553 is completely consistent with the
cases cited by McKesson where courts have found mutuality
despite one end of the mutual debts being joint and several,
such as a chargeback right held by a bank against all its
customers. In all of those cases the debts are still directly
owing between the debtor and creditor. See, e.g., In re United
Sciences of Am., Inc., 893 F.2d at 723 (“[W]hen First City
exercised its contractual right to debit USA’s account for
chargebacks paid to the issuing banks, it asserted this claim …
in its own name and in its own right, regardless of whether it
was in fact a surety or an indemnitee of USA.”); In re Diplomat
Elec., Inc., 499 F.2d 342, 348 (5th Cir. 1974) (“The courts have
uniformly interpreted Section 68[, the predecessor to § 553,] of
the Bankruptcy Act as did the court below whenever joint and
15
If McKesson wanted mutuality for the debts in question,
it should have taken on the customer loyalty support that it
instead had its subsidiary MPRS handle for Orexigen.
Alternatively, if McKesson wanted MPRS to have a perfected
security interest in Orexigen’s account receivable due from
McKesson, it should have taken steps to arrange that. By
perfecting a security interest, MPRS may have obtained a
priority right to the same amount McKesson now seeks via
setoff, which would have had the added benefit of placing
Orexigen’s other creditors on advance notice of that priority
claim. See U.C.C. § 9-301 (to perfect a lien on property, the
owner must file a disclosure according to the rules of the local
jurisdiction); 11 U.S.C. § 507 (prioritizing claims secured by a
lien over unsecured claims); In re Elcona Homes Corp., 863
F.2d at 486 (noting that “the recognition by state law of a right
of set off makes the set off a form of secured financing”);
Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d
414, 416 (3d Cir. 1988) (“A long-standing tenet of bankruptcy
law requires one seeking benefits under its terms to satisfy a
several obligations have been urged as a bar to mutuality.”
(citation omitted)); In re Sherman Plastering Corp., 346 F.2d
492, 493 (2d Cir. 1965) (“The sureties were explicitly held
jointly liable (a point much stressed by appellant although we
can perceive no difference here relevant between a joint and
several liability).”); In re Calstar, Inc., 159 B.R. 247, 256
(Bankr. D. Minn. 1993) (explaining that chargebacks between
a debtor’s debit account and a bank are “a series of classic
setoffs”); In re Classic Roadsters, Ltd., No. 92-30914, 1993
WL 1623209, at *7–9 (Bankr. D.N.D. Apr. 13, 1993) (finding
mutuality satisfied by a chargeback agreement between
consumers and a bank).
16
companion duty to schedule, for the benefit of creditors, all his
interests and property rights.” (citation omitted)). McKesson’s
desired outcome, wherein contractual setoff agreements can
shoehorn multiparty debts into § 553, would disincentivize
public disclosure of prioritized claims, weakening a
fundamental purpose of the Code.
In contrast, a rule that excludes nonmutual debts from
the setoff privilege of § 553 promotes predictability in credit
transactions. See Megan McDermott, Justice Scalia’s
Bankruptcy Jurisprudence: The Right Judicial Philosophy for
the Modern Bankruptcy Code?, 2017 UTAH L. REV. 939, 953
(2017) (arguing that “rule-based textualism is particularly
advantageous for the bankruptcy field” because of “the
inefficient nature of bankruptcy litigation” and “the central role
bankruptcy law plays in commercial markets”). An
unambiguous rule regarding the scope of § 553 maximizes the
payout for all parties by avoiding litigation expenses. See The
Honorable Thomas F. Waldron & Neil M. Berman, Principled
Principles of Statutory Interpretation: A Judicial Perspective
After Two Years of BAPCPA, 81 AM. BANKR. L.J. 195, 213
(2007) (“In a bankruptcy proceeding where assets seldom
exceed liabilities, and every dollar applied to costs and fees –
attorneys, trustees, committees, and others – is a dollar not
available for distribution to creditors, consistency in statutory
interpretation takes on additional significance[.] … Consistent
application of the principles of statutory interpretation is a
necessary element in a court’s attempt to provide
predictability.”).
17
C. McKesson’s Attempt to Creatively Define the
Term “Claim” Does Not Avoid the
Requirements of Mutuality Under § 553
In the alternative, McKesson argues that it actually
holds a direct claim against Orexigen under the Setoff
Provision of the Distribution Agreement. It tries to frame its
requested setoff as effectively being two-sided: on one side, it
argues, is the account receivable owed by McKesson to
Orexigen, and on the other side is the Setoff Provision of the
Distribution Agreement. Again, the SemCrude court faced just
such an argument and persuasively rejected the attempt to
escape triangularity by redefining what constitutes a “claim”
under § 553. See In re SemCrude, L.P., 399 B.R. at 397 (“An
agreement to setoff funds, such as the one claimed by Chevron
in this case, does not give rise to a debt that is ‘due to’ Chevron
and ‘due from’ SemCrude. … Likewise, Chevron does not
have a ‘right to collect’ against SemCrude under the agreement
in this case.”). We follow suit.
McKesson’s position is nothing but a recasting of its
failed effort to defeat the purpose and meaning of § 553. It
focuses on the definition of the term “claim” in isolation and
ignores the rest of § 553, which necessarily refines the term’s
meaning. If McKesson’s definition of claim were to be
inserted in this context, § 553 would state that “this title does
not affect any right of a creditor to offset a mutual debt …
against [a setoff right] of such creditor.” Trying to offset a debt
against a setoff right strikes us as nonsense.15 Accordingly, we
15
The word “setoff” means to subtract, so the term
“claim,” at least in the context of § 553, must be limited to the
types of claims that connote a positive rather than negative
18
reject McKesson’s interpretation of the term “claim” in the
context of § 553. “At bottom, [McKesson] may enjoy privity
of contract with [Orexigen], but it lacks the mutuality required
by the plain language of [§] 553.”16 In re SemCrude, L.P., 399
B.R. at 397.
III. CONCLUSION
For the foregoing reasons, we will affirm the order of
the District Court that affirmed the Bankruptcy Court’s ruling.
value, because when one subtracts a negative one is performing
addition.
16
Having held in favor of Orexigen on the meaning and
application of mutuality in § 553, we do not reach its remaining
arguments.
19