## Facts

- Orexigen Therapeutics, Inc., a biopharmaceutical company, entered a 2016 distribution agreement with McKesson Corporation for distribution of Orexigen’s drug; the agreement contained a broad setoff clause referencing Orexigen and McKesson “affiliates.”
- Orexigen separately entered a 2016 services agreement with McKesson Patient Relationship Solutions (MPRS), a McKesson subsidiary, under which MPRS advanced patient discount funds and was to be reimbursed by Orexigen.
- Orexigen filed for Chapter 11 protection in March 2018.
- As of the petition date, McKesson owed Orexigen about $6.93 million under the distribution agreement, and Orexigen owed MPRS about $9.1 million under the services agreement.
- McKesson and MPRS moved for an order allowing McKesson to retain the $6.93 million and apply it against Orexigen’s debt to MPRS (a triangular setoff), or alternatively to net the amounts via recoupment.

## Issues

1. Whether 11 U.S.C. § 553 permits a creditor to effect a triangular setoff among the creditor, its affiliate, and the debtor based on a contractual setoff provision and state law.
2. Whether the doctrine of recoupment permits netting obligations arising from separate contracts involving different counterparties when the contracts are commercially related.

## Decision

- The court denied the motion and ruled that McKesson had to turn over the disputed $6.93 million to the estate.
- The court held triangular setoff was not allowed because the debts lacked mutuality under § 553 and contractual language could not supply mutuality in bankruptcy.
- The court rejected recoupment because the distribution agreement and services agreement were separate transactions with different parties and distinct obligations.
- MPRS’s approximately $9.1 million claim remained a general unsecured claim subject to ordinary bankruptcy distribution.

## Legal Principles

- Section 553 preserves setoff rights only to the extent the debts are “mutual,” meaning between the same parties in the same capacity; affiliate cross-netting fails this requirement.
- Parties cannot contract around § 553’s mutuality limitation by drafting provisions that attempt to convert a three-party arrangement into a two-party setoff.
- State law may recognize setoff rights, but federal bankruptcy law limits enforceability of those rights against the estate.
- Recoupment is construed narrowly in bankruptcy and applies only when both obligations arise from the same transaction or a single integrated transaction; mere commercial relatedness is insufficient.
- Courts consider the effect on the bankruptcy distribution scheme; setoff or recoupment doctrines are not applied to grant one creditor an effective preference inconsistent with the Code’s structure.

## Conclusion

The court required strict bilateral mutuality for setoff under § 553 and refused to permit triangular setoff across corporate affiliates, and it also denied recoupment because the asserted obligations arose from separate contracts rather than a single integrated transaction.


In re Orexigen Therapeutics, Inc., 596 B.R. 9 (Bankr. D. Del. 2018)