Aug 31, · Setoff is recognized in the Bankruptcy Code to offset the claims of creditors and the debtor in a bankruptcy proceeding. Recoupment is a common law doctrine of similar effect. Sometimes overlooked by debtors and creditors alike, these doctrines can be of critical consequence in the settling of accounts between a creditor and the bankrupt debtor. Oct 18, · But the Bankruptcy Code (“Code”) limits “a creditor’s right of setoff during the ninety-day period prior to the” date of bankruptcy, said the court. Id. “In plain English — a commodity rarely found in the Code — this means that a debtor may recover from a creditor an amount set off by the creditor in the ninety days. Section of the Bankruptcy Code states that bankruptcy "does not affect any right of a creditor to offset a mutual debt " Although § has certain limitations and must be carefully applied to the facts of each particular situation, the general rule is that the creditor and debtor may setoff competing pre-petition claims or may setoff.
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Andriana Georgallas. Background The debtor, Orexigen Therapeutics, Inc. The Debtor and the Noteholders asserted that McKesson was not a creditor of the Debtor because McKesson paid off its debt to the Debtor, extinguishing its claim. Accordingly, the Court found that McKesson likely would not have paid off its entire prepetition debt but for such reservation of rights. The court, citing persuasive precedent, held that McKesson did not have a mutual debt under section a. Although the Distribution Agreement may provide for mutuality between a parent and a subsidiary, there is no contractual exception to mutuality under section a of the Bankruptcy Code, the unambiguous language of which requires mutuality.
Moreover, the requirement of mutuality aligns with the fundamental bankruptcy policy of ensuring similarly situated creditors receive an equal distribution from the estate. Conclusion Orexigen reminds practitioners, who often test the boundaries of the Code, that when the Code is clear, the Code is clear — at least section a of the Bankruptcy Code, according to Judge Gross.
Contributor s. Georgallas weil. Bio on Weil. More from the Bankruptcy Blog. Jan May Glenn West. Gabriel A. Apr One exception to the right is the automatic stay, discussed in connection with proposed 11 U. Another is the right of the trustee to use property under section that is subject to a right of setoff.
Only the last exception is an addition to current law. As under section f , the debtor is presumed to have been insolvent during the 90 days before the case. Amendment by Pub. Please help us improve our site! No thank you. LII U. Code Title