Monday, September 5, 2011

FYI: 2nd Cir Rejects Borrower's Arguments that Release Provisions Were Obtained by Duress

The U.S. Court of Appeals for the Second Circuit recently affirmed the
dismissal of allegations that a lender obtained release agreements from a
borrower through economic duress, because no evidence appeared in the
record to suggest that the lender made a wrongful threat against the
borrower. A copy of the opinion is attached.

Wells Fargo Bank, N.A., ("Wells Fargo") agreed to extend a line of credit
to Interpharm, Inc. ("Interpharm"), a drug manufacturer. The line of
credit was secured by various assets, including Interpharm's accounts
receivable, inventory, and equipment. Interpharm defaulted on the line of
credit agreement, and subsequently entered into and defaulted on each of a
series of forbearance agreements with Wells Fargo.

Each forbearance agreement included a provision wherein Interpharm
released all claims to date against Wells Fargo, as well as a merger
clause stating that the written agreement represented the entire agreement
between the parties. In addition, one of the forbearance agreements
reflected Wells Fargo's decision to exclude certain receivables from the
calculation used to determine the amount of money available to Interpharm,
as well as to reduce the percentages used for that calculation.

After Interpharm defaulted on the final forbearance agreement, the company
was liquidated. Interpharm then sued Wells Faro, alleging numerous causes
of action including breach of contract and unjust enrichment.
Interpharm's causes of action were based on the theory that it had been
forced to agree to the forbearance agreements through economic duress.

As you may recall, New York law provides that a contract may be voided
based on economic duress where the "agreement was procured by means of (1)
a wrongful threat that (2) precluded the exercise of its free will. See
Stewart M. Muller Constr. Co. v. N.Y. Tel. Co., 40 N.Y. 2d 955, 956
(1976). A threat to exercise a legal right cannot constitute economic
duress. See 805 Third Ave. Co. v. M.W. Realty Assocs., 58 N.Y. 2d 447,
453 (1983).

After reciting the relevant case law, the Court had little difficulty in
affirming the lower court's decision to dismiss Interpharm's claims.
Wells Fargo had the legal right to terminate the line of credit.
Consequently, the Court held that Wells Fargo's threat to do so was not
wrongful, and Wells Fargo's insistence that Interpharm execute various
agreements to induce Wells Fargo to forbear from terminating the line of
credit did not constitute economic duress.

Interpharm advanced two additional arguments. First, Interpharm argued
that Wells Fargo's decision to exclude certain receivables from the
calculation used to determine the line of credit was not reasonable,
within the meaning of a "reasonable discretion" provision in the contract
between the parties. Second, Interpharm argued that Wells Fargo
purportedly agreed to maintain a higher percentage of receivables for use
in that same calculation, an agreement that did not appear in any of the
contracts executed by the parties.

The Court rejected both arguments. The agreement between the parties
afforded Wells Fargo "reasonable discretion" in determining both the
receivables to be used and the percentages of those receivables to be used
to determine the amount of money available to Interpharm. The Court found
that Interpharm failed to allege any facts to show that that Wells Fargo's
decisions fell outside the bounds of "reasonable discretion." Further,
the Court held that as the initial agreement and all subsequent
forbearance agreements included merger clauses, any purported agreement
that did not appear in the written contracts had no bearing on Wells
Fargo's contractual rights.

Thus, the Court affirmed the lower court's judgment of dismissal.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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