In re Orexigen Therapeutics, Inc.

• Citation: 596 B.R. 9
• Decision Date: 13 November 2018
• Docket Number: Case No. 18-10518 (KG)
• Parties: IN RE: OREXIGEN THERAPEUTICS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

596 B.R. 9

IN RE: OREXIGEN THERAPEUTICS, INC., Debtor.

Case No. 18-10518 (KG)

United States Bankruptcy Court, D. Delaware.

Signed November 13, 2018

John Douglas Beck, Christopher R. Bryant, Christopher R. Donoho, III, Hogan Lovells US LLP, New York City, NY, Richard Scott Cobb, Jennifer L. Cree, Kerri K. Mumford, Landis Rath & Cobb LLP, Tamara K. Mann, Andrew R. Remming, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, for Debtor.

Kerri A. Lyman, Jeffrey W. Reisner, Michael H. Strub, Jr., Irell & Manella LLP, Newport Beach, CA, Eric Michael Sutty, Elliott Greenleaf, Wilmington, DE, for Creditor Committee.

OPINION

Re: D.I. 654

KEVIN GROSS, U.S.B.J.

The Court is ruling on McKesson Corporation's ("McKesson") and its wholly owned subsidiary McKesson Patient Relationship Solutions' ("MPRS") Motion for an Order Determining that McKesson is Entitled to the Disputed Funds (the "Motion") (D.I. 654). McKesson seeks to affect a setoff under section 553 of the Bankruptcy Code.¹ Specifically, McKesson asks to offset its $6,932,816.40 debt to the Debtor under the Core Distribution Agreement ("Distribution Agreement") based on the Debtor's approximately $9,100,000² debt to MPRS under the Master Services Agreement ("Services Agreement"). For the reasons that follow, the Court finds that McKesson is seeking a triangular setoff which is prohibited in bankruptcy due to the lack of mutuality. An enforceable contractual right allowing a parent and its subsidiary corporation to affect a prepetition triangular setoff under state law does not supply the strict mutuality required in bankruptcy. The Court will therefore deny the Motion for the reasons that follow.

BACKGROUND

The material facts are relatively undisputed. The Debtor was³ a biopharmaceutical company that manufactured Contrave®, a drug that treats obesity. Declaration of Michael A. Narachi ("Narachi Dec."), D.I. No. 3, ¶¶ 8, 11. The United States Food and Drug Administration approved Contrave® in 2014. Id. ¶ 8. Prepetition, the Debtor entered into two agreements relevant here: one with McKesson, and one with MPRS. Declaration of Erin Beesley ("Beesley Dec."), D.I. No. 655, ¶ A-3-5. McKesson is the parent corporation and MPRS is its subsidiary corporation. Beesley Dec. ¶ 1. It is undisputed that McKesson and MPRS are legally distinct entities.

On June 9, 2016, effective June 1, 2016, the Debtor entered into the Distribution Agreement with McKesson, which contemplated that McKesson would purchase and distribute Contrave® to various pharmacies in the United States. The parties agreed that California law would control the terms of the agreement:

VII. General

...

b. This Agreement will be governed by and construed in accordance with the laws of California, without regard to or application of conflict of law, rules or principles.

Motion, ¶ 23. More pertinently, the parties agreed that McKesson had certain rights, including a right to set off debts owed between the Debtor and its affiliates against debts owed between McKesson and its affiliates:

VII. General

...

i. Notwithstanding anything to the contrary in this Agreement, each of McKesson Corporation and its affiliates is hereby authorized to set-off , recoup and apply any amounts owed by it to Manufacturer's [the Debtor's] affiliates against any all [sic ] amounts owed by Manufacturer or its affiliates to any of McKesson Corporation or its affiliates, without prior written notice[.]

Motion, ¶ 4 (emphasis added) (citation omitted). As of the petition date, McKesson owed the Debtor $6,932,816.40 under the Distribution Agreement. Motion, ¶ 16.

On July 15, 2016, the Debtor entered into the Services Agreement with MPRS, which contemplated that MPRS would manage the Debtor's LoyaltyScript® program. Beesely Dec. ¶ 5. The LoyaltyScript® program enabled patients to receive price discounts on Contrave® from retail pharmacies. MPRS would pay the retail pharmacies and patients for the Contrave® price discounts and other services under the LoyaltyScript® program. Consequently, the Debtor would reimburse MPRS. The Services Agreement does not incorporate or relate to the Distribution Agreement; they are wholly distinct. As of the petition date, the Debtor owed MPRS approximately $9,100,000 (see footnote 2, supra ).

On March 12, 2018, the Debtor voluntarily filed a petition for relief under Chapter 11. Thereafter, the Debtor, McKesson, and MPRS entered into three stipulations that culminated in the Motion at issue here. On April 11, 2018, the Court entered an order approving a stipulation between the Debtor and MPRS (the "April Stipulation") (D.I. 176-1). The April Stipulation provided, inter alia , that: the Debtor would pay MPRS the sum of $6,027,155 on account of the post-petition reimbursements MPRS remitted under the LoyaltyScript® program (Id. , Ex. 1, at ¶ 1); the Debtor would make weekly payments of $1,675,000 to MPRS (Id. , at ¶ 2); but none of the foregoing payments would apply to MPRS's prepetition claim (Id. , at ¶ 1); and MPRS holds a prepetition claim of approximately $9,100,000 against the Debtor under the Services Agreement (Id. , at ¶ G).

On May 18, 2018, the Court entered an order approving a stipulation between the Debtor, McKesson and MPRS (the "May Stipulation") (D.I. 319-1). The May Stipulation provided, inter alia , that as of the petition date, McKesson owed the Debtor $6,932,816.40 under the Distribution Agreement (Id. , at 2). Post-petition, the Debtor paid McKesson $3,266,255.76 on account of such debt but reserved its right to offset the entire $6,932,816.40 amount (Id. ). McKesson agreed to pay the remaining $3,666,560.64 satisfying its entire prepetition obligation under the Distribution Agreement subject to preservation of its setoff right concerning the debt owed to MPRS against McKesson's debt to the Debtor (Id. , ¶¶ 2, 4, and 5).

On July 20, 2018, the Court entered an order approving a stipulation between the Debtor, McKesson, and the Lenders⁴ (the "July Stipulation") (D.I. 592-1). The July Stipulation provided, inter alia , that McKesson would be allowed to file the Motion at issue here (Id. , ¶ 2); and the Debtor would segregate $6,932,816.40 (the "Disputed Funds") pending resolution of McKesson's Motion (Id. , ¶ 3).

On July 30, 2018, pursuant to the terms of the July Stipulation, McKesson filed the Motion at issue along with the Declaration of Erin Beesley in Support of Motion for an Order Determining that McKesson is Entitled to the Disputed Funds (D.I. 655). On August 21, 2018, the Noteholders⁵ filed their opposition to the Motion in which McKesson sought a ruling that McKesson Specialty Arizona ("MPRS") was entitled to the disputed funds (D.I. 697). On the same day, the Debtor filed the Debtor's Objection to the Motion (D.I. 698) along with the Declaration of Thomas P. Lynch in Support of Debtor's Objection to the Motion. (D.I. 699). On August 31, 2018, McKesson filed McKesson's Reply (D.I. 710). On October 24, 2018, the Court heard oral argument from McKesson/MPRS, the Debtor, and the Noteholders on the Motion. The Motion has been fully briefed and was well argued. Thus, the Motion is ripe for the Court's decision.

JURISDICTION

The Court has jurisdiction over this matter and the judicial authority to enter a final order pursuant to 28 U.S.C. §§ 1334(b), 157(a), and (b)(1). Venue is proper in the District of Delaware pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this motion is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O).

DISCUSSION

Setoff is a contractual or equitable right that "allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’ " Citizens Bank of Maryland v. Strumpf , 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (quoting Studley v. Boylston Nat'l Bank , 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913) ). The Bankruptcy Code's Section 553(a) does not create a federal right of setoff but merely recognizes such party's right under state law. Id. Section 553(a) "sets forth a general rule, with certain exceptions , that any right of setoff that a creditor possessed prior to the debtor's filing for bankruptcy is not affected by the Bankruptcy Code." Id. at 20 (emphasis added). Section 553(a) states in relevant part, that:

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 commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case ....

(Emphasis added).

Whether a party has a setoff right under section 553 is a twofold inquiry. First, the party seeking setoff must acquire such right prepetition under applicable nonbankruptcy law. In re Lehman Bros. Inc. , 458 B.R. 134, 139 (Bankr. S.D.N.Y. 2011) (" ‘section 553 ... preserve[s] any right of setoff that may exist under applicable nonbankruptcy law.’ ") (quoting In re Lehman Bros. Holdings, Inc. , 433 B.R. 101, 107 (Bankr. S.D.N.Y. 2010) (citation omitted); accord In re Am. Home Mortgage, Holdings, Inc. , 501 B.R. 44, 55 (Bankr. D. Del. 2013) (citation omitted). Second, once a party establishes its setoff right, that party must then "meet[ ] the further code-imposed requirements and limitations set forth in section 553." In re SemCrude, L.P. , 399 B.R. 388, 393 (Bankr. D. Del. 2009) (citing Packaging Indus. Grp. Inc. v. Dennison Mfg. Co. Inc. (In re Sentinel Prod. Corp. Inc.) , 192 B.R. 41, 45 (N.D.N.Y. 1996) ) (emphasis added).

Setoff Right Under Applicable Nonbankruptcy Law

The parties do not dispute that McKesson had a prepetition setoff right pursuant to section VII.i. of the Distribution Agreement. Because the Debtor and the Noteholders do not dispute McKesson's prepetition setoff right under California law, the Court proceeds with the assumption that McKesson had such right.

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