Opinion ID: 612629
Heading Depth: 2
Heading Rank: 1

Heading: The Commercial Transaction Giving Rise to this Lawsuit

Text: On this review of a judgment of dismissal, we accept as true the following facts as to the commercial transaction at issue, which are drawn from Interpharm's complaint as well as from the contracts referenced therein that are integral to the pleading. See Hess v. Cohen & Slamowitz LLP, 637 F.3d 117, 119 (2d Cir.2011); Chambers v. Time Warner, Inc., 282 F.3d 147, 152-54 (2d Cir.2002).
In 2006, Interpharm, a manufacturer of generic drugs, sought credit to support the expansion of its business. In the February 2006 Credit Agreement that is the basis for this action, Wells Fargo agreed to provide Interpharm with a revolving line of credit up to $22.5 million through February 10, 2010. Interpharm secured this credit line with various assets, including its accounts receivable, inventory, and equipment. The amount available to Interpharm at any particular time under the line of credit varied, depending on the values of its eligible inventory and accounts receivable. Specifically, the Credit Agreement indicated that the borrowing base would be calculated based on 50% of Interpharm's eligible inventory and 85% of its eligible accounts receivable, but the agreement also permitted Wells Fargo, in its reasonable discretion or commercially reasonable discretion, both to reduce those percentages and to deem particular receivables or inventory ineligible for credit calculation. Credit Agreement § 1.1 (definitions of: Accounts Advance Rate; Borrowing Base; Eligible Accounts; and Eligible Inventory). The Credit Agreement also contained financial covenants and performance standards that Interpharm was required to satisfy. In the event of any default, the Agreement afforded Wells Fargo a range of remedies, including termination of the line of credit, acceleration of Interpharm's obligations to be due and payable forthwith, and liquidation of collateral.
In the third calendar quarter of 2007, a decline in Interpharm's revenue put it in default of the Credit Agreement. Rather than exercise its default remedies, however, Wells Fargo entered into a new agreement with Interpharm on October 26, 2007 (October Forbearance Agreement), that partially amended the Credit Agreement, increasing Interpharm's revolving line of credit by $2 million in exchange for additional fees and higher interest rates. As part of the October Forbearance Agreement, Interpharm admitted that it was in default of the Credit Agreement and that it owed Wells Fargo $30,032,630.29, plus interest and costs. Wells Fargo agreed to forbear from invoking its default remedies provided that Interpharm raised additional capital and complied with certain financial requirements, including a covenant that it have a positive net pre-tax income and cash flow for both the month of November 2007 and the quarter ending December 2007. Interpharm alleges that, at the time the October Forbearance Agreement was negotiated, it thought these targets highly uncertain and unreasonable and communicated its concerns to Wells Fargo. Compl. ¶¶ 30-31. Wells Fargo purportedly responded by vaguely propos[ing] to negotiate new financial covenants for the first half of 2008 that would provide Interpharm with the relief it needed to succeed. Id. ¶ 32. Thinking it had little choice but to agree to Wells Fargo's terms, Interpharm signed the October Forbearance Agreement. Id. Therein, it agreed to release all claims against Wells Fargo arising prior thereto. The October Forbearance Agreement also contained a merger clause stating that [t]his Agreement represents the entire agreement between the parties. Oct. Forbearance Agreement ¶ 24.
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.
On March 6, 2008, Wells Fargo lowered the multiplier on Interpharm's eligible inventory from 50% to 39.6%, ostensibly based upon the work of a third party vendor sent in by Wells Fargo to evaluate the liquidation value of the inventory. Compl. ¶ 61. Interpharm alleges that Wells Fargo's action was a material breach of the February Forbearance Agreement, and had the practical effect of reducing available credit below the amount Interpharm required to meet its obligations. In response to Interpharm's protests that it needed still more credit to operate, Wells Fargo proposed, and on March 25, 2008, the parties signed, yet another agreement (March Forbearance Agreement). Therein, Wells Fargo reiterated its promise to forbear pursuit of its existing default remedies through June 30, 2008, and temporarily raised the multiplier for credit calculation to 49% of inventory, though reserving the right to impose such lesser rate as Wells Fargo, in its sole discretion, deemed appropriate. Mar. Forbearance Agreement ¶ 14. In return, Interpharm reiterated its default status, agreed to higher fees, and released all claims against Wells Fargo arising prior to the date of the agreement.
Interpharm asserts that but for Wells Fargo's actions, it would likely have been able to secure refinancing to repay its obligations under the Credit Agreement. Instead, it was obliged to sell its assets, entering into purchase agreements in April 2008, scheduled to close in late June of that year. In early May, Interpharm advised Wells Fargo that it could not survive through closing unless Wells Fargo agreed to abide by certain unspecified aspects of the Credit Agreement in calculating Interpharm's available credit. Compl. ¶ 92. Wells Fargo conditioned its agreement on a new forbearance agreement signed May 12, 2008 (May Forbearance Agreement), wherein Interpharm, for the fifth time, released its claims against Wells Fargo. That is the release relied on by the district court to grant the challenged dismissal: By executing this Agreement, the Borrower [ i.e., Interpharm] and Guarantor [ i.e., an Interpharm entity called Interpharm Holdings, Inc.] hereby waive, release and discharge any and all claims or causes of action, if any, of every kind and nature whatsoever, whether at law or in equity, arising at or prior to the date hereof, which it or they may have against Wells Fargo and/or its officers and employees in connection with the [Credit] Agreement, this Agreement and all documents executed in connection therewith. Borrower also agrees that all waivers, releases and agreements made herein are made in consideration of, and in order to induce Wells Fargo to temporarily forbear the exercise or further exercise of its rights and remedies against the Borrower under the [Credit] Agreement and to induce Wells Fargo to enter into this Agreement. May Forbearance Agreement ¶ 28. After completing the sale of substantially all its assets on June 23, 2008, Interpharm paid its obligations to Wells Fargo. Sometime thereafter, Interpharm advised Wells Fargo in writing that it was repudiating all of the 2008 forbearance agreements, which necessarily included their release provisions.