Opinion ID: 612629
Heading Depth: 1
Heading Rank: 5

Heading: Particular Allegations

Text: In its complaint, Interpharm charges Wells Fargo with three violations of its obligations in 2008:(1) the January 10, 2008 decision to assess charges and increase interest rates in response to Interpharm's default under the October Forbearance Agreement; (2) the late January 2008 decision to exclude the receivables of four wholesale customers from the calculation of funds available under the revolving line of credit; and (3) the March 6, 2008 decision to reduce the multiplier applicable to Interpharm's eligible inventory from 50% to 39.6%. Like the district court, we conclude that these allegations cannot, as a matter of law, plausibly support a wrongful threat. The claims effectively reduce to an argument that, even after Interpharm defaulted under the Credit Agreement and the October Forbearance Agreement, Wells Fargo was obliged to continue extending credit without availing itself of any of the enhanced protections provided in the parties' agreements. We hereby conclude that invocation of these legal rights cannot demonstrate a wrongful threat for purposes of claiming economic duress. (a) The January 10, 2008 Decision with Respect to Interest Rates and Costs Interpharm alleges that, after its default under the October Forbearance Agreement, Wells Fargo's January 10, 2008 demand for higher interest rates and charges was unreasonable and inconsistent with the intentions of the parties when entering into the October agreement. Compl. ¶ 34. In support, Interpharm asserts that, when the October agreement was signed, it had told Wells Fargo that the agreement's 2007 financial targets were unrealistic. Id. In response, Wells Fargo had vaguely proposed to negotiate new financial covenants for the first half of 2008 that would provide Interpharm with the relief it needed to succeed. Id. ¶ 32; see id. ¶ 34. Accepting these allegations as true, Interpharm nevertheless fails to plead plausibly that Wells Fargo acted wrongfully. After Interpharm's default under the Credit Agreement, Wells Fargo was under no legal obligation to extend further credit. Rather, the Credit Agreement gave Wells Fargo the legal right to terminate the revolving line of credit and to demand forthwith repayment of all monies loaned. It is in this context that a court must consider Interpharm's pleading that, notwithstanding its view, communicated to Wells Fargo, that the financial covenants in the October Forbearance Agreement were highly uncertain and unreasonable, id. ¶ 30, it had little choice but to sign the agreement in order to secure further financing, id. ¶ 32. If Interpharm had little choice but to agree to the covenants of the October Forbearance Agreement, it was not because Wells Fargo was threatening to withhold performance under its contract with Interpharm, but because Wells Fargo was otherwise unwilling to forbear from its contract right to terminate the line of credit. The former circumstance might evidence a wrongful threat, see 805 Third Ave. Co. v. M.W. Realty Assocs., 58 N.Y.2d at 451, 461 N.Y.S.2d at 780, 448 N.E.2d 445; the latter illustrates only permissible hard bargaining, see Boshes v. Williamson, Picket, Gross, Inc., 276 A.D.2d at 258, 714 N.Y.S.2d at 199; Edison Stone Corp. v. 42nd St. Dev. Corp., 145 A.D.2d at 256, 538 N.Y.S.2d at 253. Moreover, the same conclusion obtains with respect to Wells Fargo's application of contractually authorized higher interest rates and charges after Interpharm's default on the October Forbearance Agreement. Whatever expectations Interpharm may have had from its conversations with Wells Fargo, the October Forbearance Agreement contained a merger clause that precludes Interpharm from maintaining that Wells Fargo had any legal obligation to extend it further credit after default. See Jarecki v. Shung Moo Louie, 95 N.Y.2d 665, 669, 722 N.Y.S.2d 784, 786, 745 N.E.2d 1006 (2001) (The purpose of a merger clause is to require the full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to alter, vary or contradict the terms of the writing.). In short, because Wells Fargo's response to Interpharm's default under the October Forbearance Agreement did not exceed its contract rights, its decision to apply higher interest rates and charges cannot constitute a wrongful threat. See, e.g., Madey v. Carman, 51 A.D.3d at 987, 858 N.Y.S.2d at 786. (b) The Late January 2008 Decision with Respect to Accounts Receivable With respect to Wells Fargo's late January 2008 decision to exclude receivables from four of Interpharm's wholesale customers from the calculation of available credit, Interpharm alleges that these customers' receivables were sound collateral, that there was absolutely no commercially reasonable justification for excluding them, and that such exclusion was neither permitted by the contract nor reasonable. Compl. ¶ 39; see id. ¶ 48 (characterizing exclusion of fourth customer's receivables as capricious). Insofar as Wells Fargo justified its actions by reference to the standard industry practice of allowing wholesale customers to claim charge-backs, id. ¶ 37, Interpharm argues that Wells Fargo's purported justification was a pretext, id. ¶ 38, and that its real purpose was to increase the pressure on Interpharm in the parties' ongoing negotiations as to the conditions for further forbearance and extensions of credit, id. ¶ 48. The Credit Agreement belies Interpharm's allegation that the exclusion of wholesale customers' receivables was not permitted by the parties' contract. That Agreement plainly afforded Wells Fargo reasonable discretion to exclude any accounts receivable from the calculation of the revolving line of credit. Credit Agreement § 1.1 (definition of Eligible Accounts). Insofar as Interpharm challenges the reasonableness of Wells Fargo's action, we note that the Credit Agreement does not itself define the phrase reasonable discretion. The parties have not pointed us to any published decision by a New York court construing this language in the context of a commercial contract, nor have they suggested that extrinsic evidence should guide its construction. Cf. Johnson v. Lebanese Am. Univ., 84 A.D.3d 427, 434, 922 N.Y.S.2d 57, 63 (1st Dep't 2011) (holding that extrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous (internal quotation marks omitted)). Indeed, Interpharm asserts on appeal that the phrase should be given no special meaning beyond the commonly understood definition of the words. In any number of contexts, reasonable discretion is commonly understood to allow a decision maker to choose from a broad range of choices not conflicting with law or reason. See, e.g., United States v. Perez-Frias, 636 F.3d 39, 42 (2d Cir.2011) (reviewing criminal sentence for reasonableness under abuse-of-discretion standard, such that sentence will be set aside only in exceptional case[ ] where it cannot be located within the range of permissible decisions (internal quotation marks omitted)); Vaughn v. Air Line Pilots Ass'n, Int'l, 604 F.3d 703, 709 (2d Cir.2010) (A union's actions are arbitrary only if ... the union's behavior is so far outside a wide range of reasonableness as to be irrational. (internal quotation marks omitted)); Brown v. Greene, 577 F.3d 107, 110 (2d Cir.2009) (In assessing whether counsel's performance was objectively reasonable, we must indulge a strong presumption that counsel's conduct falls within the wide range of reasonable professional assistance.... (internal quotation marks omitted)). We need not here delineate the precise outer boundaries of reasonable discretion in the context of the Credit Agreement at issue in this case. Cf. United States v. Cavera, 550 F.3d 180, 191 (2d Cir.2008) ( en banc ) (discussing obligation to patrol the boundaries of reasonableness in sentencing context). We conclude that, as a matter of law, the complaint fails to allege facts sufficient to show that Wells Fargo exceeded the bounds of reasonable discretion when, in late January 2008, it excluded the accounts receivable of four wholesale customers from the calculation of credit it would make available to Interpharm. Even assuming that charge-backs are a customary pharmaceutical industry practice, it would hardly be unreasonable for a lender to view receivables subject to such reductions as a less reliable indicator of anticipated borrower income than receivables not subject to such reductions. The same conclusion obtains with additional force where, as here, the borrower has defaulted, and the lender, which would have been within its legal rights to terminate a line of credit entirely, is considering whether to continue extending credit instead. As the district court aptly observed, faced with a borrower in continued default of its financial covenants, there appears to nothing `wrongful' in a lender exercising its right to increase its level of security as its borrower becomes less creditworthy. Interpharm, Inc. v. Wells Fargo Bank, N.A., 2010 WL 1257300, at . That includes narrowing the borrowing base to exclude receivables subject to charge-backs. The conclusion is further reinforced by the fact that when the parties entered into the February Interim Forbearance Agreement within two weeks of Wells Fargo's unilateral exclusion of wholesale customers, Interpharm agreed that all wholesale customer accounts would henceforth be excluded from the calculation of its borrowing base. In sum, we can conceive of no plausible interpretation of reasonable discretion under which Wells Fargo's decision to limit the credit it would henceforth make available to a twice-defaulting borrower, while forbearing from invoking more drastic default remedies, would be beyond the scope of such discretion. (c) The March 6, 2008 Multiplier Reduction Interpharm alleges that Wells Fargo's March 6, 2008 reduction of the multiplier applied to Interpharm's eligible inventory to determine available credit had no commercially reasonable basis in law or fact, Compl. ¶ 61, was not an exercise of reasonable discretion available to Wells Fargo under the Credit Agreement, id. ¶ 62, and was a material breach of the February Forbearance Agreement, id. ¶ 64. In support, Interpharm asserts that it was a critical premise of the February Forbearance Agreement and the budget incorporated therein that Wells Fargo would continue to calculate available credit by reference to 50% of Eligible Inventory. Id. ¶ 60. Interpharm submits that the reduction of the multiplier to 39.6% was the result of a third-party vendor's evaluation of the liquidation value of its inventory undertaken without the input of Interpharm... at a time when Wells Fargo had no commercial basis on which to suggest liquidation to any prospective buyer of inventory. Id. ¶ 61. These allegations cannot demonstrate a wrongful threat for a number of reasons. First, to the extent Interpharm alleges that maintenance of the 50% multiplier was a critical premise of the February Forbearance Agreement, no such condition is included in the Agreement itself, which includes a merger clause stating that it represents the entire agreement between the parties. Feb. Forbearance Agreement ¶ 29; see Jarecki v. Shung Moo Louie, 95 N.Y.2d at 669, 722 N.Y.S.2d at 786, 745 N.E.2d 1006. Thus, any unwritten understanding between the parties would have no bearing on Wells Fargo's express contractual right to reduce the 50% multiplier in its reasonable discretion. Interpharm therefore pleads no plausible breach of the February Forbearance Agreement, much less a wrongful threat indicating economic duress. Second, just as the Credit Agreement gave Wells Fargo reasonable discretion to exclude certain inventory from the Eligible Inventory that would be used to calculate available credit, see Credit Agreement § 1.1 (definition of Eligible Inventory), it also gave Wells Fargo reasonable discretion to determine the size of the eligible inventory multiplier, see id. (definition of Borrowing Base). Interpharm may disagree both with the valuation that informed the reduced multiplier and with Wells Fargo's basis for considering liquidation, but the facts alleged do not show that the application of a reduced multiplier fell outside the broad range of discretion conferred by the Credit Agreement. Indeed, that Agreement specifically provided Wells Fargo with the power to liquidate collateral as a default remedy, see id. § 7.2(d), and, by March 2008, Interpharm had defaulted on both the Credit Agreement and the October Forbearance Agreement. To be sure, in March 2008, Interpharm was not in default of the February Forbearance Agreement, but Wells Fargo is not charged with wrongful liquidation. It is alleged only to have considered the liquidation value of Interpharm's assets as one factor in deciding the multiplier it would apply to calculate what further credit it would extend this financially troubled debtor. Such conduct  expressly authorized under the Credit Agreement  cannot be the wrongful threat required for economic duress. Finally, Interpharm fails to allege facts indicating that the threat of a reduced multiplier was used to compel Interpharm's agreement to the May Forbearance Agreement, the release provision of which supports the dismissal in this case. As Interpharm acknowledges, in the March Forbearance Agreement, Wells Fargo agreed provisionally to increase the inventory multiplier to 49%. See Compl. at ¶ 79. Interpharm's allegations pertaining to the May Forbearance Agreement make no further mention of a reduced multiplier. Accordingly, not only is there no factual basis for a plausible claim that the March 6, 2008 multiplier reduction constituted a wrongful threat, but also there is no factual basis for connecting that multiplier reduction to the release provision of the May Forbearance Agreement.