## Facts

- Orexigen Therapeutics, Inc., a biopharmaceutical company, sold the drug Contrave and entered a 2016 Distribution Agreement with McKesson Corporation for purchase and distribution to pharmacies.
- The Distribution Agreement included a broad setoff clause allowing McKesson and its affiliates to set off amounts owed to Orexigen or its affiliates against amounts Orexigen or its affiliates owed to McKesson or its affiliates.
- Weeks later, Orexigen separately entered a Services Agreement with McKesson’s wholly owned subsidiary, McKesson Patient Relationship Solutions (MPRS), under which MPRS administered a discount program by advancing funds to pharmacies, and Orexigen later reimbursed MPRS.
- The Distribution Agreement and Services Agreement did not reference or incorporate one another and were executed by different legal entities (McKesson versus MPRS).
- Orexigen filed Chapter 11 in March 2018; as of the petition date, McKesson owed Orexigen about $6.9 million (Distribution Agreement) and Orexigen owed MPRS about $9.1 million (Services Agreement).
- McKesson sought to offset its debt to Orexigen against Orexigen’s debt to MPRS (a “triangular” setoff), relying on the contract language and state-law enforceability.
- The bankruptcy court denied setoff for lack of mutuality under 11 U.S.C. § 553(a); the district court affirmed.

## Issues

1. Whether 11 U.S.C. § 553(a) permits a contractual triangular setoff among a creditor, its affiliate, and the debtor.
2. Whether debts can be “mutual” under § 553(a) when the debtor’s obligation is owed to the creditor’s separate affiliate rather than to the creditor itself.

## Decision

- The Third Circuit affirmed.
- Section 553(a) requires strict bilateral mutuality: the same two parties must owe debts to each other in the same capacities.
- Because McKesson sought to offset its debt to Orexigen against Orexigen’s separate debt to MPRS, the obligations lacked mutuality and setoff was disallowed.
- Contract provisions and state law recognizing affiliate setoff cannot expand § 553(a)’s federal mutuality requirement.

## Legal Principles

- Section 553(a) preserves setoff rights only to the extent the creditor seeks to offset a prepetition debt it owes the debtor against a prepetition claim it holds against the debtor, and only when the obligations are “mutual.”
- “Mutuality” under § 553(a) is a federal requirement and is satisfied only by a bilateral debtor–creditor relationship; triangular (affiliate-based) setoff fails mutuality.
- Parties cannot create mutuality by contract (including broad affiliate setoff clauses) if the underlying debts are owed between different legal entities.

## Conclusion

The Third Circuit held that § 553(a) bars triangular setoff in bankruptcy because mutuality is strictly bilateral; a creditor cannot offset what it owes the debtor with what the debtor owes the creditor’s affiliate, even if contract terms and nonbankruptcy law would otherwise allow it.


In re Orexigen Therapeutics, Inc., 990 F.3d 748 (3d Cir. 2021)