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