Late last year we wrote about a 4th Circuit Court of Appeals opinion that starkly reminded commercial lenders to heed the federal Equal Credit Opportunity Act (ECOA) and Regulation B when considering a commercial loan involving a guarantor (typically a spouse) that does not own or participate in the business of the borrower, or suffer the consequences.
The 8th Circuit Court of Appeals has now weighed in on this issue in its August 5, 2014 opinion in Hawkins v Community Bank of Raymore (Case No. 13-3065). Rejecting the legal underpinnings of that 4th Circuit opinion, the 8th Circuit Court of Appeals ruled in Hawkins that ECOA and Regulation B do not cover, and therefore do not benefit, loan guarantors.
Hawkins involved a fairly typical commercial loan structure, with an LLC as the borrower and personal guaranties from the LLC members and their spouses, where neither spouse was a member of the LLC or involved in the operation of the LLC’s business. The loan went into default, after which the bank accelerated the loan and made demand for repayment against the borrower and all guarantors. The spousal guarantors filed a lawsuit seeking damages and an order declaring their guaranties to be void and unenforceable, based upon ECOA and Reg. B, specifically the Federal Reserve Board promulgated regulation, 12 C.F.R. § 202.2(e), which provides that the term “applicant” as used in ECOA includes guarantors. The guarantors appealed after losing at the US District Court level.
In analyzing the issue, rather than adopting the obvious result (in favor of the spousal guarantors) that would flow from perfunctorily accepting the Federal Reserve Board’s regulatory definition of “applicant” as including a guarantor, the 8th Circuit determined that it was required to follow the so-called Chevron framework and first ask and answer whether the intent of Congress as expressed in the statute (ECOA) is clear as to the specific issue; i.e., is ECOA clear and unambiguous, or silent or ambiguous, on the question of whether a guarantor is an “applicant” covered by the protections of ECOA. Based upon its review of ECOA’s text, the 8th Circuit concluded that a guarantor is clearly and unambiguously not an “applicant” under ECOA, and therefore is not afforded ECOA and Regulation B protections.
The 8th Circuit’s conclusion is contrary to an opinion issued by the 6th Circuit Court of Appeals earlier in 2014,RL BB Acquisition, LLC v Bridgemill Commons Dev. Grp., 754 F.3d, 380 (6th Cir. 2014), which discerned enough ambiguity in the text of ECOA to move to the second step of the Chevron framework and conclude that Reg. B’s definition of “applicant” as including a guarantor is reasonable and therefore valid. The 8th Circuit Court of Appeals in Hawkins clearly rejected the 6th Circuit’s ambiguity discussion and conclusions.
It will be interesting to monitor how the split in authority between the 6th and 8th Circuit opinions will impact cases in jurisdictions outside the 6th and 8th Circuits. It will also be interesting to see if this split in authority ultimately results in US Supreme Court review or action by the federal regulators so as to provide uniformity on this issue across the entire country.