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Seventh Circuit Says Debt Could Be Offset In Bankruptcy Proceeding Because Parties' Obligations Were Mutual

 
 

HLD, v. 32, n. 11 (November 2004)

Seventh Circuit Says Debt Could Be Offset In Bankruptcy Proceeding Because Parties' Obligations Were Mutual

In 2000, Meyer Medical Physicians Group, Ltd. (debtor) entered into an agreement to provide physician services to enrollees of Health Care Service Corporation (creditor) under a Medical Services Agreement (MSA). Under the MSA, debtor would provide services for a set monthly prepayment, and debtor would pay for services provided by third-party specialists. Debtor fell behind in making the specialist payments, and in January 2001 debtor and creditor agreed to amend the MSA for creditor to loan debtor $2 million. Debtor agreed to repay the loan in $100,000 monthly installments. The parties again amended the MSA in December 2001 to reflect that debtor owed creditor over $4.5 million and the monthly installment amount was increased to $200,000. A few months later, debtor filed for Chapter 11 bankruptcy and had only repaid creditor $1.5 million. In June 2002, creditor filed a motion to modify the automatic stay provision of the Bankruptcy Code, 11 U.S.C. � 553(a) to setoff $1.3 million in payments it owed debtor for services against the amount debtor owed creditor. Section 553(a) provides for a setoff of mutual debt that was incurred before the bankruptcy proceedings. The bankruptcy court granted the stay and allowed the setoff, and the district court affirmed the judgment. Debtor appealed.

The Seventh Circuit affirmed the district court's judgment that the bankruptcy court did not abuse its discretion in granting the stay and allowing the setoff. Debtor argued the setoff was improper because there were no mutual obligations owed by the parties because the obligations were owed in different capacities. The appeals court concluded the obligations the parties owed each other were mutual because they were that of obligor and obligee, and the fact the obligations arose out of different transactions was irrelevant.

Debtor also argued that principles of equity should bar creditor from receiving the setoff, because creditor loaned debtor the money intentionally to create a right of setoff once it learned debtor was in financial trouble. Debtor failed to produce any evidence that creditor intentionally created the setoff, and the appeals court held principles of equity did not preclude a setoff.

 In re Meyer Med. Physicians Group, Ltd. v. Health Care Serv. Corp., No. 03-3356 (7th Cir. Sept. 23, 2004). To read the case, go to http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=03-3356.PDF

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