## Facts

- Elcona Homes Corporation manufactured mobile homes and filed a Chapter 11 petition.
- Through dealer Monro Homes, Inc., a customer ordered an Elcona home for $36,700 and paid $14,000 down, leaving $22,700 to be financed.
- Elcona agreed to sell the home to Monro for $22,700; Monro’s expected profit was the $14,000 difference.
- Green Tree Acceptance, Inc. financed dealer sales by taking an assignment of the customer’s installment contract and paying the $22,700 wholesale amount.
- Although the financing documents contemplated payment to Monro, the parties’ repeated practice was that Green Tree paid Elcona directly rather than paying Monro for remittance to Elcona.
- Before Green Tree paid the $22,700 on this transaction, Elcona filed bankruptcy.
- Green Tree held a separate prepetition claim against Elcona of about $16,000 from another transaction.
- After the filing, Green Tree netted its $16,000 claim against the $22,700 it owed on the pending transaction and remitted only the balance to the estate.
- The bankruptcy court disallowed setoff for lack of mutuality; the district court reversed and permitted setoff.

## Issues

1. Whether Green Tree’s obligation associated with the financed sale was a debt owed to Elcona (rather than to Monro) so as to create “mutual” debts required for setoff under 11 U.S.C. § 553(a).
2. Whether course of dealing and industry practice may establish mutuality for § 553(a) despite a transaction’s formal structure involving a third party.

## Decision

- The Seventh Circuit affirmed the district court and allowed Green Tree’s setoff under 11 U.S.C. § 553(a).
- The court held that, in substance, Green Tree owed the $22,700 directly to Elcona based on the parties’ established practice of direct payment.
- Because Green Tree also held a prepetition claim against Elcona for about $16,000, the debts were mutual and eligible for setoff.

## Legal Principles

- Section 553(a) preserves (but does not create) a creditor’s nonbankruptcy right to set off prepetition “mutual” debts and claims.
- Mutuality requires obligations between the same parties in the same capacity and, for § 553(a), both obligations must be prepetition.
- Courts may determine mutuality by examining the actual obligations reflected in course of dealing and commercial practice, not only the paper form of the transaction.
- A creditor is not barred from setoff merely because a transaction is routed through a dealer where consistent practice makes the creditor’s payment obligation run directly to the debtor.

## Conclusion

The Seventh Circuit upheld Green Tree’s netting of its prepetition claim against the amount it owed on the financed sale, concluding that the parties’ consistent practice of direct payment made the obligation a debt to the debtor and therefore “mutual” for setoff under § 553(a).


In re Elcona Homes Corp., 863 F.2d 483 (7th Cir. 1988)