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Interpharm, Inc. v. Wells Fargo Bank

March 25, 2010

INTERPHARM, INC., PLAINTIFF,
v.
WELLS FARGO BANK, NATIONAL ASSOCIATION, DEFENDANT.



The opinion of the court was delivered by: Pitman, United States Magistrate Judge

OPINION AND ORDER

I. Introduction

By notice of motion dated March 2, 2009 (Docket Item 4), plaintiff, Interpharm, Inc. ("Interpharm") moves to disqualify Jeffrey A. Wurst, Esq. and his former firm,*fn1 Ruskin, Moscou, Faltischek, P.C. ("Ruskin, Moscou") from representing defendant Wells Fargo Bank, National Association ("Wells Fargo") in this matter. For the reasons set forth below, the motion is denied without prejudice.

II. Facts

A. Overview of Plaintiff's Allegations

This action arises out of the financial collapse of Interpharm, a manufacturer of pharmaceuticals. In summary, Interpharm alleges that Wells Fargo, Interpharm's principal secured creditor, was responsible for its collapse because Wells Fargo progressively imposed more draconian conditions on Interpharm as a condition to forbearing from foreclosing on its collateral, allegedly in violation of the lending agreements between the two. According to Interpharm, the conditions became so restrictive that they prevented Interpharm from doing business and left it with no alternative to going out of business. Wells Fargo not only alleges that it did not breach any covenants with Interpharm, it also claims that it repeatedly entered into the forbearance agreements in a good-faith effort to keep Interpharm in business. According to Wells Fargo, Interpharm's failure was due to mismanagement and had nothing to do with its efforts to limit its exposure as a creditor. As set forth in more detail below, the motion to disqualify grows out of Wurst's alleged involvement in the discussions between Interpharm and Wells Fargo that resulted in the forbearance agreements.

The complaint alleges the following facts. Until mid 2008, Interpharm was in the business of manufacturing and selling the generic forms of various prescription and non-prescription medications (Compl. ¶ 11). Beginning in 2006, Wells Fargo and Interpharm entered into a Credit and Security Agreement under which Wells Fargo provided a $41 million "credit facility" to Interpharm, including a revolving line of credit of up to $22.5 million. The Credit and Security Agreement's termination date was February 10, 2010 (Compl. ¶ 16). The line of credit was secured by Interpharm's accounts receivable, eligible inventory and equipment, among other things (Compl. ¶ 17).

Interpharm's performance in 2007 was not as successful as expected and by sometime by mid-2007 it was in default under the Credit and Security Agreement (Compl. ¶¶ 24-25). Wells Fargo advised that it would forebear from enforcing its rights under the Credit and Security Agreement only if Interpharm were able to find additional sources of credit that were willing to be subordinate to Wells Fargo (Compl. ¶ 26). Interpharm agreed to Wells Fargo's conditions and obtained additional credit from other sources (Compl. ¶ 26).

The amount of credit available to Interpharm under the Credit and Security Agreement was dependent on certain discretionary judgments concerning Interpharm's inventory and accounts receivable (see generally Compl. ¶¶ 18-20). In general terms, the amount of credit Wells Fargo was obligated to extend was proportional to the value it assigned to Interpharm's inventory and accounts receivable. In October 2007, Wells Fargo began excluding the receivables owed by Cardinal Healthcare from Interpharm's assets which had the effect of diminishing the amount of credit available to Interpharm under the Credit and Security Agreement (Compl. ¶ 27).

In October and November 2007, the parties entered into a Forbearance Agreement ("November 2007 Forbearance Agreement"). In return for certain additional payments and commitments from Interpharm, Wells Fargo agreed to extend an additional $2 million to Interpharm. Among other things, the November 2007 Forbearance Agreement required Interpharm to raise an additional $8 million in subordinated debt (Compl. ¶ 28). It also required that Interpharm's net income before taxes and cash flow be positive in the month of November 2007 and for the entire quarter ending December 31, 2007 (Compl. ¶ 29).

Interpharm was unable to meet the November 2007 Forbearance Agreement's requirements for the month of November 2007 and the quarter ending December 31, 2007, and was again in non-compliance with its covenants with Wells Fargo (Compl. ¶¶ 30, 34). In response, Wells Fargo proposed new financial covenants for the first half of 2008 to which Interpharm agreed (Compl. ¶ 32). Although the chronology is not entirely clear from the complaint, Interpharm appears to allege that Wells Fargo had improperly restricted the credit it was extending to Interpharm by disregarding the receivables from four large customers of Interpharm (Compl. ¶¶ 36-41, 48-49 ). Interpharm alleges that this caused and/or exacerbated any financial problems it was experiencing (¶ 41) and appears to claim that Wells Fargo's credit restriction was a substantial factor contributing to Interpharm's financial problems.

In February 2008, Wells Fargo and Interpharm entered into another forbearance agreement ("February 2008 Forbearance Agreement") (Compl. ¶ 53). This agreement required Interpharm to reduce its payroll expense, to liquidate real estate valued at $20 million and to take other steps to pay down its debt to Wells Fargo (Compl. ¶ 54).

In March 2008, Wells Fargo advised Interpharm that it was going to further restrict the credit being made available under the Credit and Security Agreement based on its re-evaluation of the liquidation value of Interpharm's inventory; according to Interpharm, there was no valid reason for this action and it constituted a material breach of the February 2008 Forbearance Agreement (Compl. ¶¶ 61, 64). Interpharm claims that these new credit restrictions made it impossible to comply with the requirements of the February 2008 Forbearance Agreement (Compl. ¶ 65).

In March 2008, Wells Fargo and Interpharm entered into yet another Forbearance Agreement ("March 2008 Forbearance Agreement") (Compl. ¶¶ 70-71). Interpharm alleges that the restrictions on credit Wells Fargo had previously imposed had pushed it to the brink of bankruptcy and that it had no viable alternative to the new forbearance agreement (Compl. ¶¶ 71, 74). Among other things, the March 2008 Forbearance Agreement required an additional cash payment to and release of all claims against Wells Fargo, and a written acknowledgment that Wells "ha[s] complied in good faith" with its contractual obligations to Interpharm (Compl. ¶¶ 72, 76, 77). Although the March 2008 Forbearance Agreement did relax some of the restrictions Wells Fargo had previously imposed (Compl. ¶ 79), Interpharm claims that the relief afforded was too little and too late and created a situation in which Interpharm was ultimately forced into liquidation (Compl. ¶¶ 79-81). Interpharm claims that "[b]ut for ...


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