On March 22, 2016, the U.S. Supreme Court, by a 4-4 per curiam opinion, affirmed the Eighth Circuit Court of Appeals’ decision that guarantors are not “applicants” within the meaning of the Equal Credit Opportunity Act (ECOA), notwithstanding the Federal Reserve Bank’s interpretation to include guarantors as applicants in ECOA’s implementing Regulation B. The value of the case to lenders – reminiscent of the real estate adage – depends on location, location, location.
While the Supreme Court’s opinion provides precedential value to lenders in the event a spousal guarantor raises ECOA claims or defenses in a matter pending in a federal court in the Eighth Circuit, Justice Antonin Scalia’s untimely death resulted in this critical issue being kicked down the road with respect to all other federal circuits and contrary state court decisions.
The Eighth Circuit case (Hawkins v. Community Bank of Raymore) involved a fairly common scenario – a loan default by a real estate developer during the height of the recession. The loan was secured by, among other collateral, four guaranties – two husbands operating the LLC borrower and their spouses, who had no interest in or management of the borrower.
After default, the lender accelerated the loan and demanded payment from borrower and the guarantors. The wife guarantors preemptively filed a lawsuit seeking monetary damages and a declaration that their respective guaranties were void and unenforceable under Reg. B. The bank filed counterclaims, including for breach of all guaranties. The wife spouses additionally pled affirmative defenses based on Reg. B. The District Court, in accord with several other Missouri federal court opinions, found guarantors were not applicants under ECOA and granted summary judgment in favor of the bank.
The Eighth Circuit opinion focused squarely on the Fed’s interpretation that to include guarantors as applicants in Reg. B was warranted and entitled to judicial deference. As the Eighth Circuit stated:
“This case turns on whether we should apply [Reg. B] § 202(e)’s definition of applicant, which would permit [Guarantors] to pursue an ECOA claim as applicants because they executed guarantees to secure [Borrower’s] loan. If they do not qualify as applicants, then [Bank] did not violate ECOA by requiring them to execute guaranties.”
The Eighth Circuit applied the Chevron test to determine whether it should defer to the Fed’s interpretation that the term “applicant” should include guarantors. Chevron requires a court to examine whether Congress’ intent is clear in determining whether deference to a federal agency’s interpretation is due. Only if legislative intent is silent or ambiguous should the court examine whether the agency interpreted the statute in a reasonable manner.
The Eighth Circuit found that the term “applicant” as used in ECOA was clear and did not encompass guarantors. Guarantors do not apply for credit, and applying for credit is the touchstone of who qualifies as an applicant. Rather, a guaranty is collateral for and secondary to the underlying loan transaction. Thus the Fed’s extension in Reg. B to include guarantors as applicants was not entitled to deference. The Eighth Circuit concluded that “a guarantor is not protected from marital-status discrimination by the ECOA.”
Opinion Offers No Clear Direction
Lenders were heartened when the Supreme Court agreed to hear Hawkins, believing the Court would resolve the uncertainty created by other decisions, including the Sixth Circuit Court of Appeals’ contrary decision in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp. But the Supreme Court’s “tie goes to the runner” affirmance delivered neither a favorable outcome (at least outside the bank in Hawkins and lenders in Eighth Circuit federal courts) nor certainty.
More troubling, numerous state supreme courts have held as the Sixth Circuit did – guarantors are applicants under the ECOA and Reg. B – and these decisions are unaffected at the state court level. This issue is especially acute in Missouri, where the Missouri Supreme Court has determined guarantors are applicants for purposes of ECOA claims and defenses. Further, Missouri has broad and presumptive spousal tenancy-by-the-entirety rules – that is, property is held in the marital union, with each spouse able to use the marital property but without individual spousal ownership. Therefore, the marital property is immune from effective collection in the absence of both spouses’ guaranties. Creditworthiness determinations of an individual spouse will almost inevitably result in that spouse’s guaranty being considered worthless and, only when both spouses guaranty a loan, can the guaranties have any practical merit.
What This Means to You
The U.S. Supreme Court’s decision leaves the “spouse as an applicant” question unanswered on a national basis. Only if a lender can effectively seek Eighth Circuit federal court jurisdiction, can it reasonably expect to be successful with an initial dispositive motion.
Lenders and their counsel need to thoroughly think through potential spousal guaranty claims and defenses, analyze whether federal or state court is the better option, and consider whether federal jurisdiction is available. Until the Supreme Court effectively decides this question, lenders are advised to treat guarantors as applicants and to expect that spousal guaranty claims and defenses will be used as leverage in loan workouts and litigation.