In re Elcona Homes Corporation

Elcona Homes Corporation (Elcona) (debtor) was a manufacturer of mobile homes. Monro Homes Inc. (Monro) was a dealer for Elcona. Linda Markle ordered an Elcona mobile home from Monro and paid a $14,000 deposit to Monro. The balance on the mobile home was $22,700. Markle financed the purchase with Green Tree Acceptance, Inc. (Green Tree) (creditor). Green Tree had financed previous Monro sales of Elcona homes. The parties had developed a practice by which the buyer would sign a financing contract with Monro, and Monro would then assign the contract to Green Tree. Green Tree would then pay the purchase price to Elcona directly, rather than paying Monro for remittance to Elcona. The customer then made monthly payments to Green Tree. This type of payment arrangement was the general practice throughout the mobile-home industry. Elcona filed for bankruptcy after Monro made the sale to Markle, but before Green Tree paid the balance to Elcona. Separately, Elcona owed Green Tree $16,000 from a previous transaction involving a different buyer. After the bankruptcy filing, Green Tree subtracted the $16,000 debt owed by Elcona on the previous transaction from the $22,700 that Green Tree owed to Elcona on the Markle transaction. Green Tree paid Elcona only the balance between the two debts. The bankruptcy court ruled that this was not a proper setoff because the $22,700 debt was between Green Tree and Monro, and the $16,000 debt was between Green Tree and Elcona. Therefore, they were separate obligations and not subject to setoff. The district court reversed the bankruptcy court’s ruling, holding that Green Tree was entitled to a setoff of the $16,000 debt because the evidence established a mutual obligation between Green Tree and Elcona, due to the established practice of the parties and the industry. Elcona appealed.