In re Orexigen Therapeutics, Inc.

• Decision Date: 19 March 2021
• Docket Number: No. 20-1136,20-1136
• Parties: IN RE: OREXIGEN THERAPEUTICS, INC., Debtor McKesson Corporation; RxC Acquisition Company, Appellants
• Court: U.S. Court of Appeals — Third Circuit

990 F.3d 748

IN RE: OREXIGEN THERAPEUTICS, INC., Debtor

McKesson Corporation; RxC Acquisition Company, Appellants

No. 20-1136

United States Court of Appeals, Third Circuit.

Argued November 17, 2020

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

Before: JORDAN, KRAUSE, and RESTREPO, Circuit Judges

OPINION OF THE COURT

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.

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 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 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 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 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.

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. , 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 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

B. Mutuality Under § 553 Excludes Triangular Setoffs, Including the Setoff Provision in the...