The U.S. Court of Appeals for the Second Circuit has addressed an economic duress claim by a borrower against a lender regarding provisions of a forbearance agreement entered post-default. The Second Circuit held in favor of the lender and set out a useful framework for analysis of economic duress claims against lenders under New York law, stating that contracts will only be invalidated in extreme and extraordinary cases.

The case involved a borrower who defaulted under the terms of its loan agreement with its lender, Wells Fargo. After the initial default and subsequent defaults by the borrower during the course of the following year, Wells Fargo entered into a series of forbearance agreements (five in total), pursuant to which Wells Fargo agreed not to exercise its default remedies and agreed to amend the terms of the loan (e.g., the interest rate was increased, additional fees were imposed and financial covenants were tightened). Each forbearance agreement also contained a general release of all claims against Wells Fargo by the borrower. The borrower eventually sold certain of its assets and paid the Wells Fargo loan, after which it sued Wells Fargo for damages and claimed, among other things, that the releases and other agreements contained in the forbearance agreements were unenforceable as they were entered into under economic duress.

The doctrine of economic duress is grounded on the principle that courts will not enforce an agreement in which one party unjustly took advantage of the economic necessities of another and thereby unlawfully threatened to cause an injury to that party. Under New York law, the elements of economic duress are: (1) a threat, (2) which was unlawfully made and, (3) which causes involuntary acceptance of contract terms (4) because circumstances permitted no other alternative. Here, although the borrower was in financial distress and agreed to higher interest rates, additional fees, more restrictive covenants and a broad release of claims against Wells Fargo, the Court found no economic duress, stating it was not enough to merely demonstrate financial pressure and unequal bargaining power. In holding that Wells Fargo was within its legal rights with respect to the terms of each forbearance agreement, the court found that a lender may permissibly assert its intention to exercise its legal rights and remedies and that such assertion is not an "unlawful threat," for purposes of analyzing claims for economic duress.

Interpharm Inc. v. Wells Fargo Bank National Association (2nd Cir. August 26, 2011), available at: http://caselaw.findlaw.com/us-2nd-circuit/1578549.html