by Thom Avery
A common scenario for Missouri business owners: You approach the Bank for a loan on behalf of your business, and the Bank requires you to sign a personal guaranty on the debt. But, the lender also requires that your spouse—who is in no way involved in the business—must sign a personal guaranty as well. If something goes wrong and the Bank comes calling, can your spouse be held personally liable for the debt?
Luckily, spousal guarantors in Missouri can raise an affirmative defense under the Equal Credit Opportunity Act (“ECOA”), 16 U.S.C. § 1691. As more fully explained below, Missouri still recognizes a defense under ECOA for spouses who sign personal guarantees for loans made for their spouse’s business. Even though the U.S. Supreme Court called this protection into doubt in a case decided in 2016, ECOA protection for spouses is still good law in Missouri. Any spouse who signed a personal guaranty on their spouse’s business loan should consider whether it is enforceable under the protections afforded under ECOA.
Under ECOA, creditors cannot “discriminate against any applicant, with respect to any aspect for a credit transaction . . . on the basis of race, color, religion, national origin, sex or marital status, or age[.]”[i] The Bureau of Consumer Financial Protection promulgates regulations under the Act.[ii] One such regulation concerns lenders requiring the signatures of spouses.[iii] The regulation provides:
[A] creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.[iv]
Development of the Law in Missouri
In Boone Nat. Sav. & Loan Ass’n, F.A. v. Crouch,[v] the Missouri Supreme Court held that a borrower’s wife (“Wife”), who had signed a personal guaranty on the borrower’s loan, was entitled to raise ECOA as an affirmative defense in an action to recover under the guaranty agreement. In her answer, Wife brought a counterclaim under ECOA, and also argued that the bank was “equitably estopped” from enforcing the guaranty, as requiring her to guarantee the loan was a violation of ECOA.[vi] Under ECOA, courts “may grant such equitable and declaratory relief as is necessary to enforce the requirements imposed under this subchapter.”[vii] The Court held that Wife’s counterclaim brought under ECOA was barred by the statute of limitations.[viii] However, the Court considered that in order for Wife’s claim to be within the statute of limitations, Wife would have had to bring an action for violation of ECOA before the Bank attempted to collect.[ix] The Court concluded that “[i]t would be inconsistent with the equitable relief recognized in the federal statute to allow a violator to enforce its guaranty claim simply because the victim of the violation had not brought an action within the two-year [statute of limitations] period.”[x] As such, the Court noted that if the Bank required Wife’s guaranty in violation of ECOA, the guaranty would not have existed but for the violation.[xi] Therefore, the Court found that to enforce the guaranty would be inconsistent with ECOA’s provision requiring equitable relief, and that Wife had a properly pleaded affirmative defense to enforcement of the guaranty.[xii]
Boone did not end the Missouri courts’ inquiries, however. In 2012, the Missouri Court of Appeals for the Eastern District returned to the issue of whether a personal guaranty was required in violation of ECOA in Frontenac Bank v. T.R. Hughes, Inc.[xiii] It was my honor to represent Tom and Caroline Hughes in this case. In T.R. Hughes, two homebuilding companies, Summit Point, L.C. and T.R. Hughes, Inc. (collectively “Borrowers”), sought loan financing for the development of real estate projects.[xiv] Husband and Wife signed personal guarantees on the loan.[xv] Subsequently, the Bank declared the loan to be in default, held a foreclosure sale, and sued Borrowers, Husband and Wife to collect the outstanding loan balances.[xvi] Husband and Wife filed affirmative defenses, specifically that the guarantees were void, invalid and/or unenforceable, because they were required in violation of ECOA.[xvii] The trial court entered judgment in favor of Wife on her affirmative defense, concluding that her personal guarantees were invalid and unenforceable “because they constituted discrimination based on marital status in violation of the ECOA.”[xviii] The Bank appealed the trial court’s judgment.[xix] In reviewing the Bank’s points on appeal, the Court first addressed whether there was substantial evidence to support the trial court’s factual findings, specifically the trial court’s conclusions that Borrowers were independently creditworthy, Wife was not an officer or director of Borrowers, and Wife did not voluntarily offer her personal guaranty.[xx] The Court ultimately concluded that there was substantial evidence to support the above factual findings.[xxi]
The T.R. Hughes Court then turned to the Bank’s other points on appeal, in which the Bank argued that the trial court erred in declaring Wife’s personal guarantees void as they were required in violation of ECOA.[xxii]
The Bank first argued that the court erred because, under ECOA, “in a ‘tenants by the entireties’ state like Missouri, a lender may require the personal guaranty of a spouse jointly owning property with his or her spouse as tenants by the entireties” in order for the Bank to be able to reach the joint property/assets in the event of default.[xxiii] In considering the Bank’s argument, the Court referenced Regulation B’s provision that a creditor “may require the signature of the applicant’s spouse . . . under applicable state law to make the property being offered as security available to satisfy the debt in the event of default[.]”[xxiv] However, the Court concluded that an “unlimited personal guaranty . . . is more than a financial instrument necessary to make property being offered as a security available to satisfy a debt upon default, as the exception in Regulation B provides.”[xxv] As explained by the Court, Regulation B does not “provide for such a broad relinquishment of rights from a spouse or other joint owner in order to make the property available to satisfy a debt[.]”[xxvi] Accordingly, the Court concluded that the Bank “exceed[ed] the limits set forth in Regulation B’s exception” and denied the Bank’s point on appeal.[xxvii]
Second, the Bank argued that ECOA does not prohibit a spouse from providing a personal guaranty when her spouse is independently creditworthy.[xxviii] The Bank relied on 12 C.F.R. § 202.7(d)(5), a Regulation B provision which provides as follows:
If, under a creditor’s standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, a creditor may request a cosignor, guarantor, endorser, or similar party. The applicant’s spouse may serve as an additional party, but the creditor shall not require that the spouse be the additional party.[xxix]
The Court again noted that there was substantial evidence to support the trial court’s finding that Borrowers were independently creditworthy.[xxx] Therefore, “the inquiry stopped there and never turned to the creditworthiness of [Husband].”[xxxi] As a result, § 202.7(d)(5) was never applicable.[xxxii] Instead, the Court noted, 12 C.F.R. § 202.7(d)(1) applied, which provides “that a creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.”[xxxiii] Accordingly, the Court denied the Bank’s point on appeal.[xxxiv]
Finally, the Bank argued that the Court should overturn Boone.[xxxv] The Bank relied on several federal court decisions which “have rejected the extension of the ECOA and its governing regulations to spousal guarantees.”[xxxvi] The Court found the Bank’s argument unconvincing and, relying on stare decisis, denied the Bank’s point on appeal.[xxxvii]
Development of the Law Elsewhere
Indeed, while Missouri courts have applied the protections of ECOA and Regulation B to spousal guarantors, some federal courts have been more hesitant, finding that guarantors are not “applicants” entitled to pursue claims or raise affirmative defenses under ECOA.[xxxviii]
For example, in Hawkins v. Community Bank of Raymore, the Eighth Circuit held a guarantor does not qualify as an applicant under ECOA.[xxxix] In Hawkins, an LLC with two members received loans from the Bank to fund development of a subdivision.[xl] The members and their wives signed personal guarantees.[xli] When the Bank declared the loans to be in default, it demanded payments from the wives as guarantors.[xlii] The wives filed an action against the Bank, arguing their guarantees were void because they were required solely because they were married to their husbands, in violation of ECOA.[xliii] The district court concluded that the wives “were not applicants within the meaning of the ECOA and thus that [the Bank] had not violated the ECOA by requiring them to execute” the personal guarantees.[xliv] The wives appealed.[xlv]
The Eighth Circuit first noted ECOA’s provision, above, that a creditor cannot discriminate against any applicant based on his or her marital status.[xlvi] ECOA defines “applicant” as:
[A]ny person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.[xlvii]
ECOA’s regulations provide that the term applicant includes guarantors.[xlviii] Accordingly, the wives argued that ECOA’s protections extended to them as guarantors.[xlix] In considering the wives’ argument, the Court stated that it was required to determine whether it should “defer to the Federal Reserve’s interpretation of the ECOA’s definition of applicant” by applying the Chevron deference standard.[l]
The first question under the Chevron standard is “whether the intent of Congress is clear as to the precise question at issue.”[li] As to this question, the Court concluded that the text of ECOA “clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another.”[lii] This is because, the Court reasoned, a person who executed a guaranty does not apply for or request credit.[liii] Having concluded that the text of ECOA unambiguously does not apply to guarantors, the Court did not defer to the Federal Reserve’s interpretation and affirmed the district court.[liv]
What does this mean for borrowers and guarantors in Missouri? That the future is uncertain. For the time being, Missouri courts apply the protections of ECOA to spousal guarantors. Other courts have done the same.[lv] However, the Eighth Circuit, and other federal courts, have come to the opposite conclusion. Even though the issue went before the United States Supreme Court in the Hawkins case, the Supreme Court was split 4-4, which affirmed the decision of the Eighth Circuit.[lvi] As a result of the deadlocked Court’s affirmance, while the decision was binding on the parties to that case, it does not have precedential value for other cases.[lvii] Furthermore, the Eighth Circuit’s decision is not binding on Missouri state courts.[lviii]
Until a majority of the United States Supreme Court rules on the topic, ECOA provides an important protection for spouses in Missouri. While spouses have only two years to bring a claim under ECOA,[lix] it is always available as an affirmative defense to the enforcement of a guaranty.[lx]
Thom Avery is a recognized leader in Missouri on the subject of lender liability. He has extensive experience representing businesses and developers in disputes and litigation with banks and other financial institutions. On behalf of his clients, Thom has obtained large settlements from banks for lender liability, judgments voiding guarantees and negotiated favorable work-outs.
[i] 15 U.S.C. § 1691a(1).
[ii] See § 1691b(a) (“The [Bureau of Consumer Financial Protection] shall prescribe regulations to carry out the purposes of this subchapter.”).
[iii] 12 C.F.R. § 202.7(d)(1).
[v] 47 S.W.3d 371, 376 (Mo. banc 2001).
[vi] Id. at 375.
[vii] Id. (citing 15 U.S.C. § 1691e(c)).
[viii] Id. at 374.
[ix] Id. at 375.
[x] Id. at 374-75.
[xi] Id. at 376.
[xiii] 404 S.W.3d 272 (Mo. banc 2012).
[xiv] 404 S.W.3d at 276.
[xvi] Id. at 276-77.
[xvii] Id. at 277.
[xix] Id. at 278.
[xx] Id. at 284-88.
[xxii] Id. at 288-91.
[xxiii] Id. at 288.
[xxiv] Id. at 289 (citing 12 C.F.R. § 202.7(d)(4)).
[xxv] Id. (citing In re Huston, 2010 WL 4607823, at *2 (Bankr. E.D. Tenn. 2010)).
[xxvi] Id. at 290.
[xxix] Id. (citing 12 C.F.R. § 202.7(d)(5)).
[xxxv] Id. at 290-91.
[xxxvi] Id. at 291.
[xxxviii] See, e.g, Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) (aff’d by an equally divided Court, 136 S.Ct. 1072 (2016)); Moran Foods, Inc. v. Mid-Atlantic Market Dev. Co., 476 F.3d 436 (7th Cir. 2007).
[xxxix] Hawkins, 761 F.3d at 941.
[xl] Id. at 939.
[xliv] Id. at 940.
[xlv] Id. at 940.
[xlvi] Id. at 940 (citing 15 U.S.C. § 1691(a)).
[xlvii] Id. (citing 15 U.S.C. § 1691a(b)).
[xlviii] Id.; see also 12 C.F.R. § 202.2(e).
[l] Id. (citing Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984)).
[lii] Id. at 941.
[lv] See RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC, 754 F.3d 380 (6th Cir. 2014).
[lvi] Hawkins v. Community Bank of Raymore, 136 S.Ct. 1072 (2016).
[lvii] See Hertz v. Woodman, 218 U.S. 205, 213-214 (1910); U.S. v. Pink, 315 U.S. 203, 216 (1942).
[lviii] See ASARCO Inc. v. Kadish, 490 U.S. 605, 617 (1989) (“[S]tate courts . . . possess the authority, absent a provision for exclusive federal jurisdiction, to render binding judicial decisions that rest on their own interpretation of federal law.”); Lockhart v. Fretwell, 506 U.S. 364, 375-76 (1993) (Thomas, J., concurring) (concurring for the purpose of clarifying that state courts are not bound by a decision of the federal court of appeals).
[lix] Boone, 47 S.W.3d at 374.
[lx] Id. at 376; T.R. Hughes, 404 S.W.3d at 291.