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.

Insider Status and U.S. Bank v. Village at Lakeridge

By Ronit J. Berkovich and David Li (Weil, Gotshal & Manges LLP).

The U.S. Supreme Court, in U.S. Bank Nat’l Ass’n v. Village at Lakeridge, LLC, 583 U.S. ___ (2018), offered plenty of hints on an important topic while simultaneously ruling very little about it.  In chapter 11, whether a creditor qualifies as an “insider” can have enormous implications on a range of issues, including plan confirmation, fraudulent transfer and preference analyses, and severance payment and employee incentive/retention plan (KEIP/KERP) approvals.  Lakeridge involved a dispute as to whether the bankruptcy court properly determined in confirming a plan that the sole impaired accepting creditor (the romantic partner of one of the debtor’s officers) was not a “non-statutory” insider.  If the creditor actually were such an insider, then the chapter 11 plan should not have been confirmed.

In granting cert to hear the case, the Supreme Court expressly declined the opportunity to address whether the Ninth Circuit articulated the correct legal test to determine if a person qualifies as a non-statutory insider.  Instead, the Supreme Court granted cert only to answer the narrow question of whether the Ninth Circuit applied the correct standard of review to the lower court’s determination.  Justice Kagan, writing for the Court, kept to that script by simply affirming the Ninth Circuit’s decision to apply a clear error standard of review.  Concurrences by Justices Kennedy and Sotomayor, however, each acknowledged shortcomings in the legal test the Ninth Circuit applied and each appeared to invite lower courts to consider alternative approaches.  As a whole, Lakeridge provides little binding guidance, and practitioners can expect further development in non-statutory insider law by the Courts of Appeals.

The article is available here.