Silony Medical International, AG v. SWK Funding LLC

Background

Silony Medical International, AG and SWK Funding LLC were each lenders to 4WEB, Inc. SWK Funding agreed to lend 4WEB $17 million. Silony and 4WEB later entered into a $4 million promissory note with 12 percent annual interest.

On the same day, Silony and SWK Funding entered into a subordination agreement. Under that agreement, Silony agreed not to demand or accept payment from 4WEB, accelerate the note, or take action to enforce the note until all of SWK Funding’s existing and future debt from 4WEB had been paid in cash. The agreement stated that SWK Funding had sole discretion to consent to Silony’s collection efforts. It also allowed interest to continue accruing and preserved Silony’s option to convert the note into equity in 4WEB.

The planned merger between Silony and 4WEB did not occur, and the note became due on December 30, 2020. 4WEB made no payments, stating that it believed the subordination agreement prohibited payment. Silony asked SWK Funding in May and June 2021 to consent to payment, but SWK Funding refused. Silony alleged that SWK Funding did not review or evaluate whether 4WEB could economically make any payment.

Claims and Legal Analysis

SWK Funding moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The court accepted the complaint’s factual allegations as true for purposes of the motion and considered the agreement because it was attached to or incorporated into the complaint.

Implied covenant of good faith and fair dealing. Silony argued that SWK Funding breached the implied promise to act in good faith by refusing consent without reviewing the request. Applying New York law, the court explained that the implied covenant cannot override an express contract term or create rights that the parties did not bargain for. The agreement gave SWK Funding sole discretion and provided no criteria or process for evaluating Silony’s requests. The court also concluded that limiting SWK Funding’s discretion was not necessary to preserve Silony’s benefits under the agreement because Silony had agreed to give up immediate collection rights in exchange for accruing interest and the equity-conversion option. The court therefore granted dismissal of this claim.

Declaratory judgment. Silony sought a declaration that the agreement was void because it was unconscionable and procured by fraud. The court dismissed this request. Silony did not allege that it lacked a meaningful choice or that there were procedural problems during contract formation, so it did not adequately plead unconscionability. Silony also did not identify the speaker, time, or place of the alleged fraudulent statements, as required for a fraud claim. The court further noted that the alleged representations were contradicted by the written agreement’s provisions concerning SWK Funding’s sole discretion and future debt.

Tortious interference with contract. The court held that Silony did not allege that SWK Funding intentionally caused 4WEB to breach the promissory note. The complaint alleged only that 4WEB believed the subordination agreement prevented payment, and 4WEB had agreed to follow that agreement. The court also concluded that, even if SWK Funding had caused a breach, protecting its financial interests would have justified its conduct. The court therefore granted SWK Funding’s request to dismiss this claim.

Disposition

Judge Analisa Torres granted SWK Funding’s motion to dismiss. The court granted dismissal of the implied-covenant claim, dismissed Silony’s request for a declaratory judgment, and granted dismissal of the tortious-interference claim. The court directed the Clerk to enter judgment and close the case.