Missouri Court of Appeals Decision Finding Violation of Regulation B Under the Equal Credit Opportunity Act

October 3, 2012 at 6:57 pm Leave a comment

 

On September 25, 2012, the Missouri Court of Appeals, Eastern District, issued an opinion in a case titled Frontenac Bank v. T.R. Hughes, Inc. et al., which raises significant concerns for all banks and lenders making loans guaranteed by the spouses of the principal owners of a borrower. The court’s ruling affects loans currently held by banks as well as loans made in the future.

In Hughes, the bank foreclosed on all real property collateral and sued the borrowers and each of the borrower’s principals and his wife under their personal guaranties for recovery of the deficiency balances.

The decision concluded that the wife’s guaranties were void under Regulation B (12 C.F.R. §202.7(d)) of the Equal Credit Opportunity Act (ECOA) (15 U.S.C. §1691(a)(1)) because in each loan the borrower was independently creditworthy (without the wife’s guaranty) in light of the bank’s internal loan policy. The wife was determined to be neither an officer or director of the borrowers (even though she was listed on the Missouri Secretary of State’s records as treasurer of one borrower and a member and part owner of another borrower). The court found that the wife did not voluntarily offer her personal guaranties to the bank (even though she provided to the bank a signed representation that the guaranties were executed by her at the borrower’s request and not at the lender’s request).

Finally, the court concluded that an exception to an ECOA violation, available when the “applicant’s” spouse can be required to provide a signature “to make the property being offered as security available to satisfy the debt in the event of default,” did not apply because the bank failed to consider whether less stringent options could be utilized instead of unlimited spousal guaranties.

The Court of Appeals ignored a 2007 Seventh Circuit U.S. Court of Appeals decision holding that a guarantor is not an “applicant” entitled to ECOA and Regulation B protections. Instead, the court followed an older Missouri Supreme Court decision that held that an alleged ECOA violation could be asserted as an affirmative defense by a spousal guarantor in a creditor’s lawsuit to enforce her guaranty.

The Hughes decision raises questions regarding the enforceability of a personal guaranty of a commercial loan by the spouse of a principal guarantor. The decision calls into question the collectability of deficiency claims under spousal guaranties, especially as to jointly held property. In fact, the Hughes decision appears to give significant leverage to wife guarantors seeking to invalidate their guaranties on Regulation B grounds. Finally, the court’s scrutiny of the process by which the bank obtained the spousal guaranties and the court’s observation that the bank could have utilized less stringent collateral options other than unlimited spousal guaranties raises concerns about the viability of many banks’ existing loan policies and procedures and how bank officers implement those policies and procedures with respect to spousal guaranties. 

Stinson Morrison Hecker LLP has numerous attorneys in its Financial Services Litigation practice group and Banking & Financial Services and Bankruptcy & Creditors’ Rights Divisions, who will answer questions and discuss the implications of this Hughes decision on commercial loans made in reliance on spousal guaranties.

Entry filed under: Uncategorized.

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