Opinion ID: 612629
Heading Depth: 3
Heading Rank: 3

Heading: The Second Default and the February Forbearance Agreements

Text: Interpharm did not meet the 2007 financial targets set forth in the October Forbearance Agreement and, in early January 2008, advised Wells Fargo of this default. Wells Fargo responded on January 10 by increasing Interpharm's interest obligations to the default rate and assessing other default penalties. That same month, it advised Interpharm that it wanted out of the loan. Compl. ¶ 35. Also in January 2008, Wells Fargo decided to exclude the receivables of four of Interpharm's major wholesale customers from the eligible accounts used to calculate the monies available under the revolving line of credit. According to Interpharm, Wells Fargo explained that the amount of these receivables was imprecise because three of the customers were entitled to charge back to Interpharm any difference between the prices they paid for Interpharm products and the prices negotiated with Interpharm by downstream customers such as pharmacy chains. [2] Id. ¶ 37. Interpharm alleges that such a charge-back policy was standard practice in the pharmaceutical business and that Wells Fargo's justification was a pretext for constricting the credit available to Interpharm. Id. ¶¶ 37-38. By the end of January 2008, Interpharm's financial condition had so deteriorated that it could no longer pay its suppliers or meet its payroll. Interpharm advised Wells Fargo that, without working capital, it would have to liquidate. Wells Fargo would not advance further funds without a new agreement, which the parties signed on February 1, 2008 (February Interim Forbearance Agreement), further amending the Credit Agreement. Therein, Wells Fargo agreed to forbear from exercising its default rights through February 4, 2008. Meanwhile, Interpharm acknowledged that it was in default of both the Credit Agreement and the October Forbearance Agreement; released all claims to date against Wells Fargo; agreed to amend the Credit Agreement's definition of Eligible Accounts specifically to exclude receivables from any wholesalers, including the four already excluded by Wells Fargo in January; and promised to retain a chief restructuring officer acceptable to Wells Fargo in its sole discretion, who would prepare and administer Interpharm's operating budget and oversee all credit requests and payments to Wells Fargo. On February 5, 2008, the parties entered into a longer-term agreement (February Forbearance Agreement) further amending the Credit Agreement, wherein Wells Fargo agreed not to exercise its default rights against Interpharm through June 30, 2008, and to continue extending credit. In return, Interpharm released all claims against Wells Fargo arising prior to the date of the agreement and agreed to pay additional fees, to furnish more collateral, and to restructure its operations so as to pay down its obligations to Wells Fargo by June 30, 2008, through either refinancing or an asset sale. Interpharm alleges that it was a critical premise of the February Forbearance Agreement and the budget incorporated therein ... that Wells Fargo would continue to include 50% of Eligible Inventory in the revolving credit line calculation. Id. ¶ 60. Such terms were not included in the February Forbearance Agreement, which did, however, contain a merger clause stating that [t]his Agreement represents the entire agreement between Wells Fargo and Interpharm. Feb. Forbearance Agreement ¶ 29.