Meyer Medical Physic v. Health Care Service ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-3356
I N R E:
MEYER MEDICAL PHYSICIANS GROUP, LTD.,
Debtor-Appellant,
v.
HEALTH CARE SERVICE CORPORATION
d/b/a HMO ILLINOIS,
Creditor-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 1479—Harry D. Leinenweber, Judge.
____________
ARGUED FEBRUARY 12, 2004—DECIDED SEPTEMBER 23, 2004
____________
Before CUDAHY, COFFEY, and ROVNER, Circuit Judges.
ROVNER, Circuit Judge. After Meyer Medical Physicians
Group, Ltd. (“Meyer”) filed a voluntary petition for relief
under Chapter 11, the bankruptcy court granted a motion
by a creditor, Health Care Service Corporation d/b/a HMO
Illinois (“HCSC”), to effectuate a setoff of approximately
$1.3 million against amounts owed by Meyer. The district
court affirmed the bankruptcy court’s discretionary deci-
sion, and Meyer appeals. We affirm.
2 No. 03-3356
In November 2000 Meyer and HCSC entered into a
Medical Services Agreement (“MSA”), under which Meyer
would provide physician services to HCSC enrollees for a
set monthly prepayment, and Meyer would pay for services
provided by third-party specialists. When Meyer fell behind
in those payments, HCSC agreed in January 2001 to amend
(“January Amendment”) the MSA to loan Meyer up to $2
million for Meyer to pay outstanding claims. In return,
Meyer agreed to repay the loan in monthly installments of
$100,000 beginning in March.
In December 2001, the parties again amended the MSA
(“December Amendment”). In the December Amendment,
Meyer acknowledged that it owed HCSC over $4.5 million,
including debts from previous MSAs, and agreed to repay
this amount in monthly installments of $200,000. Five
months later, Meyer filed its Chapter 11 petition. By this
time, Meyer had repaid HCSC at least $1.5 million.
In June 2002, HCSC moved to modify the automatic stay
under 11 U.S.C. § 553(a) of the Bankruptcy Code to setoff
the $1.3 million it owed Meyer for services rendered in 2001
under the MSA against Meyer’s total debt. Section 553(a)
states that, subject to several exceptions, a creditor may
offset a mutual debt—owed by the creditor to the debtor,
and the debtor to the creditor—that arose before the
commencement of the case. See 11 U.S.C. § 553(a). In
February 2003, the bankruptcy court granted the stay,
finding that the obligations between the parties were mu-
tual and that principles of equity did not foreclose a setoff.
The district court affirmed the bankruptcy court’s decision.
The allowance of a setoff is a decision that lies within the
sound discretion of the bankruptcy court. In re Gordon Sel-
Way, Inc., 270 F.3d 280, 289 (6th Cir. 2001); In re The
Bennett Funding Group, Inc., 146 F.3d 136, 140 (2d Cir.
1998). The decision to grant relief from the automatic stay
and allow a setoff under § 553(a) of the Bankruptcy Code is
No. 03-3356 3
reviewed for abuse of discretion. See Colon v. Option One
Mortg. Corp., 319 F.3d 912, 916 (7th Cir. 2003); The Bennett
Funding Group, Inc., 146 F.3d at 138; In re Williams, 144
F.3d 544, 546 (7th Cir. 1998); In re The Sec. Group 1980, 74
F.3d 1103, 1114 (11th Cir. 1996).
On appeal, Meyer asserts that any setoff is impermissible
because the obligations owed by the parties are not mutual
for purposes of § 553(a). In order for debts to be mutual,
Meyer notes, they must be held by the same parties in the
same capacity. Meyer contends that mutuality does not
exist here, however, because the obligations are owed in
different capacities: with respect to HCSC’s debt to Meyer,
the parties were acting as reimburser and provider, re-
spectively, whereas with respect to Meyer’s debt to HCSC,
the parties were borrower and lender.
“Mutuality is satisfied when the offsetting obligations are
held by the same parties in the same capacity (that is, as
obligor and obligee) and are valid and enforceable, and . . .
both offsetting obligations arise either prepetition or post-
petition, even if they arose at different times out of different
transactions.” In re Doctors Hosp. of Hyde Park, Inc., 337
F.3d 951, 955 (7th Cir. 2003). Mutuality requires that the
debt in question be owed in the same right and between the
same parties standing in the same capacity, see id.; In re
Stall, 125 B.R. 754, 757 (Bankr. S.D. Ohio 1991); moreover,
the character of the debt does not affect mutuality, Stall,
125 B.R. at 757 (mutuality satisfied and bankruptcy court
allowed a setoff of repayment of student loans due to the
federal government against income tax refunds due to the
debtor); see In re Marshall, 240 B.R. 302, 304 (Bankr. S.D.
Ill. 1999).
Meyer and HCSC held mutual obligations in the same
capacity, as obligor and obligee. Meyer determined that it
owed HCSC $4.5 million for previous MSAs, and HCSC
determined that it owed Meyer approximately $1.3 million
4 No. 03-3356
for services rendered in 2001 under the MSA. Whether or
not the debt arose from different transactions does not
affect HCSC’s right to a setoff because the debt was in the
same right and same capacity. See Doctors Hosp. of Hyde
Park, Inc., 337 F.3d at 955; Stall, 125 B.R. at 757. The bank-
ruptcy court correctly concluded that even though HCSC
acted as a provider for one obligation and a lender for the
other, mutuality was still present because both parties were
an obligor and obligee. See Doctors Hosp. of Hyde Park, Inc.,
337 F.3d at 955; Stall, 125 B.R. at 757, see Marshall, 240
B.R. at 304. Furthermore, the character of the debt did not
affect the mutuality. Stall, 125 B.R. at 757.
Meyer further asserts that the January Amendment cre-
ated a tripartite relationship between HCSC, Meyer, and
pre-2001 claims (“Specialists’ Claims”) by HCSC advancing
funds to Meyer so it could pay the Specialists’ Claims. If
this were a tripartite relationship, the debt would be owed
between the three different parties, and HCSC would not be
allowed to setoff its debt because tripartite relationships do
not meet the mutuality requirement of § 553(a). See In re
Lakeside Cmty. Hosp., Inc., 151 B.R. 887, 892-93 (Bankr.
N.D. Ill. 1993). But we agree with the district court that the
January Amendment did not contain any language restrict-
ing Meyer’s use of the loan to pay its Specialists’ Claims,
and furthermore, the record does not support Meyer’s
characterization of its obligation to HCSC as part of a
tripartite relationship—Meyer and HCSC are the only two
parties involved in this case.
As a last effort, Meyer asserts that equitable principles
should prevent HCSC from receiving the setoff, because
HCSC intentionally agreed to loan Meyer millions of dollars
once it learned that Meyer was going to file for bankruptcy
in order to protect itself by creating a setoff right under
§ 553(a). But there is no factual basis for this whatsoever in
the record. As the district court properly noted, “courts
generally frown on denying setoff when a bank or other cre-
No. 03-3356 5
ditor injects funds into a struggling entity, as this ‘would
precipitate bankruptcy,’ ” In re Meyer Med. Physician’s Group,
Ltd. v. Health Care Serv. Corp., No. 03 C 1479, 2003 WL
21960350, at *3 (N.D. Ill. Aug. 15, 2003) (quoting Studley v.
Boylston Nat’l Bank of Boston, 229 U.S. 523, 529 (1913)),
and inferred that HCSC was merely injecting cash into the
situation to attempt to keep the venture afloat. Further-
more, a setoff will not be denied simply because creditors
will not be treated equally. United States v. Maxwell, 157
F.3d 1099, 1102 (7th Cir. 1998). Therefore, equitable
considerations do not preclude a setoff.
Because we conclude that the district court properly af-
firmed the bankruptcy court’s decision to allow HCSC to
exercise its right of setoff under § 553(a) of the Bankruptcy
Code, we decline to reach the issue of recoupment.
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-23-04