Wells Fargo Bank (WFB) extended a revolving line of credit to Interpharm. Under the credit agreement, WFB could exercise ‘commercially reasonable discretion’ to make adjustments to the borrowing base of the loan. Interpharm defaulted in 2007 but WFB chose not to exercise its default remedies, instead entering into a forbearance agreement under which Interpharm agreed to tighter terms (which could be further tightened in WFB’s discretion) and to release prior claims against the lender. Four further defaults and four further forbearance agreements ensued over the course of 2007-08, each containing a release. Interpharm sold all of its assets in mid 2008, paid off WFB, repudiated the forbearance agreements (and releases) and sued WFB. Among its allegations was a claim that the lender had procured the agreements through economic duress and had exercised its contractual discretion abusively.
Two levels of court wouldn’t buy it. The trial court held that there was nothing wrong in a lender increasing its level of security as a borrower became less creditworthy. The 2d Circuit agreed, finding that the crucial element of wrongful conduct was missing for the duress claim; while WFB had driven a hard bargain, it was merely invoking its legal rights and its actions were within the realm of commercially reasonable discretion: Interpharm Inc v Wells Fargo Bank, National Association (2d Cir, 26 August 2011) [Link available here].