Mid-Atlantic Update - In re Orexigen Therapeutics, Inc

In re Orexigen Therapeutics, Inc., 596 B.R. 9 (2018), United States Bankruptcy Court, D. Delaware

Overview:

The Bankruptcy Court for the District of Delaware denied a motion by an alleged creditor seeking an order determining that it was entitled to disputed funds based on its right of setoff under state law.  The Court held that, even if the alleged creditor were a “creditor” under the Bankruptcy Code, it did not have a setoff right under section 553 of the Bankruptcy Code because it failed to satisfy section 553’s requirement that the debt to be set off be a “mutual debt”.

Full Summary:

In June 2016, Orexigen Therapeutics, Inc., a biopharmaceutical company that manufactured Contrave, a drug that treats obesity (“Orexigen”), entered into a distribution agreement with McKesson Corporation (“McKesson”) under which McKesson would purchase and distribute Contrave to certain pharmacies in the U.S.  The distribution agreement, which was governed by California law, provided that McKesson had a right to set off amounts owed by Orexigen and its affiliates against amounts owed by McKesson and its affiliates.

In July 2016, Orexigen entered into a services agreement with a wholly-owned subsidiary of McKesson, McKesson Patient Relationship Solutions (“MPRS”), pursuant to which MPRS was to manage a program of Orexigen under which patients could receive price discounts on Contrave from retail pharmacies.  MPRS was to pay the pharmacies and patients for the Contrave price discounts and other services under the program, and Orexigen was to reimburse MPRS.

In March 2018, Orexigen filed a voluntary petition under chapter 11 of the Bankruptcy Code.  McKesson, MPRS and Orexigen subsequently entered into various stipulations that Orexigen would pay to MPRS a portion of the amount owing to MPRS under the services agreement, and McKesson would pay to Orexigen a portion of the amount owing to Orexigen under the distribution agreement.  Pursuant to a stipulation entered into in May 2018, McKesson agreed to pay to Orexigen the remaining amount satisfying McKesson’s entire prepetition obligation to Orexigen under the distribution agreement subject to the preservation of McKesson’s right to set off against its debt to Orexigen the remaining amount owed by Orexigen to MPRS.  McKesson then filed a motion for an order determining that it was entitled to certain disputed funds under its right of setoff.

The Bankruptcy Court found that, although it was undisputed that McKesson had a prepetition setoff right under California law pursuant to the distribution agreement, McKesson did not have a setoff right under section 553 of the Bankruptcy Code because it failed to satisfy section 553’s requirements that the party seeking setoff (1) must be a “creditor” and (2) must have a “mutual debt” where both the party’s debt to, and its claim against, the debtor in bankruptcy arose pre-petition.  With respect to the first requirement, the Court found that McKesson may have been a “creditor”.  Under section 101(10)(A) of the Bankruptcy Code, a “creditor” is an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.  Although McKesson paid off (and thereby extinguished) its claim against Orexigen pursuant to the May 2018 stipulation, its payment was subject to preservation of its setoff right.  The Court found that, given the stipulations, McKesson could possibly be considered a “creditor”.

The Court held further that, even assuming that McKesson was a “creditor”, it failed to satisfy section 553’s requirement that the debt be a “mutual debt”.  The Court noted that, while the Bankruptcy Code does not include a definition of “mutuality” or “mutual debt”, state and federal courts have found that debts are “mutual” only when they are owing to and from the same person in the same capacity.  The setoff sought by McKesson was a triangular setoff (i.e., a setoff of a debt owed to a subsidiary against a debt owed by its parent company) rather than the setoff of a mutual debt and was therefore impermissible under section 553(a) of the Bankruptcy Code.  The Court rejected an argument put forth by McKesson that there is a contractual exception to the mutuality requirement of section 553 under California law allowing triangular setoff, citing precedent, the plain language of section 553 and the Bankruptcy Code’s policy.

Summary courtesy of Margaret G. Parker-Yavuz of Akin Gump.