Wednesday, September 3, 2014

FYI: 8th Cir Holds Guarantors Not Subject to ECOA

The U.S. Court of Appeals for the Eighth Circuit recently held that an individual who executes a guaranty -- but does not participate in any other aspect of a loan application process -- is not an “applicant” as defined by the federal Equal Credit Opportunity Act (“ECOA”), and thus is not protected under the ECOA.


A copy of the opinion is available at:  Link to Opinion


The husbands of the plaintiff wives (collectively referred to as “Guarantors”) are co-owners of a limited liability company (“LLC”).  The LLC’s only members are Guarantors’ husbands.  Guarantors do not have any legal interest in the LLC. 


Between 2005 and 2008, Defendant Lender Bank (“Lender”) made four loans to the LLC, totaling more than $2,000,000.00 (the “Loans”), for the purposes of building a residential subdivision.  These Loans were modified several times. 


In connection with each Loan and subsequent modification, Lender required that Guarantors and their husbands all execute personal guaranties (the “guaranties”).  In 2012, the LLC failed to make payments due under the loan agreements causing Lender to declare the Loans to be in default.  Lender proceeded to accelerate the Loans and demanded payment from the LLC, Guarantors’ husbands, and Guarantors. 


Guarantors subsequently filed a lawsuit against Lender seeking damages and an order declaring the guaranties void and unenforceable.  Guarantors alleged that Lender required them to execute the guaranties securing the Loans solely because they are married to their respective husbands.  Guarantors claimed this requirement was unlawful discrimination on the basis of marital status, and thus violated the ECOA. 


Lender proceeded to file several state-law counterclaims, including breach of the guaranties.  In response and as an affirmative defense, Guarantors argued the guaranties were unenforceable and in violation of the ECOA.  Lender subsequently filed a motion for summary judgment concerning Guarantors’ ECOA claim and its breach-of-guaranty counterclaim.


The district court determined that Guarantors were not “applicants” within the meaning of the ECOA, and thus Lender did not violate the ECOA by requiring Guarantors to execute the guaranties.  Accordingly, the district court granted Lender’s motion for summary judgment and this appeal followed.


As you may recall, 15 U.S.C. § 1691(a) of the ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.”   The ECOA defines the term “applicant” as “any 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.” 15 U.S.C. § 1691a(b).


In interpreting the ECOA’s definition of “applicant,” the Federal Reserve promulgated 12 C.F.R. § 202.2(e) (“section 202”), which states, “the term applicant includes guarantors.”


The issue on appeal was whether section 202’s definition of “applicant” should apply to Guarantors, and thus allow them to pursue their ECOA claim.  If Guarantors did not fall under the ECOA’s definition of “applicant,” Lender did not violate the ECOA, and the district court properly granted Lender’s motion for summary judgment. 


In order to determine whether the Court should defer to the Federal Reserve’s interpretation of the ECOA’s definition of “applicant,” the Court applied the two step test established under Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). 


Under Chevron, the Court first determines whether the intent of Congress is clear as to the specific question at issue. If the Court determines that “Congress’ intent is clear, that is the end of the matter.” North Dakota v. E.P.A., 730 F.3d 750, 763 (8th Cir. 2013) (quoting Baptist Health v. Thompson, 458 F.3d 768, 773 (8th Cir. 2006)).  If the Court determines the statute is silent or ambiguous with respect to the specific issue presented, it will proceed to the second step of the Chevron framework, which requires it to consider whether “the agency’s reading fills a gap or defines a term in a reasonable way in light of the Legislature’s design.”  Id. (quoting Baptist Health, 458 F.3d at 773).


As to Chevron’s first step, the Court determined that the ECOA clearly stated 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.”   


In order to qualify as an “applicant” under the ECOA, a person must “apply to a creditor directly for . . . credit, or . . . indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  15 U.S.C. § 1691a(b).  In addition, a person executing a guaranty is not requesting credit because a guaranty “is collateral and secondary to the underlying loan transaction between the lender and the borrower.” 


The Court explained that the execution of a guaranty does not mean a guarantor has requested credit or otherwise been involved in applying for credit.  Accordingly, the Court held that a guarantor does not request credit and cannot qualify as an applicant directly under the ECOA. 


The Court next examined a recent Sixth Circuit opinion, which held the ECOA to be ambiguous as to whether a guarantor is an “applicant” under the ECOA.  In RL BB Acquisition, LLC v. Bridge mill Commons Dev. Grp., 754 F.3d 380, 2014 WL 2609616 (6th Cir. 2014) (“RL BB Acquisition”), the Sixth Circuit acknowledged “a guarantor does not traditionally approach a creditor herself for credit. Rather, . . . a guarantor is a third party to the larger application process.”  Id. at 4.  The Court agreed with RL BB Acquisition on this point as it demonstrates a guarantor unambiguously does not request credit.  The Eighth Circuit stated that this should have ended the RL BB Acquisition’s court’s inquiry because when “Congress has manifested its intention, we may not manufacture ambiguity in order to defeat that intent.”  Bifulco v. United States, 447 U.S. 381, 387 (1980).


However, the Sixth Circuit in RL BB Acquisition further held that “a guarantor does formally approach a creditor in the sense that the guarantor offers up her own personal liability to the creditor if the borrower defaults.” Id.  The Eighth Circuit disagreed stating that a “guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant.”  As a result, the Eighth Circuit declined to apply the RL BB Acquisition’s holding to Guarantors’ appeal.


Lastly, the Eighth Circuit determined its holding comported with the ECOA’s purpose of ensuring fair access to credit “by preventing lenders from excluding borrowers from the credit market based on the borrowers’ marital status.”  The Court explained that its holding does not interfere with the ECOA’s purpose because a lender does not exclude the guarantor from the lending process or deny the guarantor access to credit by requesting the execution of a guaranty.  The Court explained that Guarantors did not claim they were excluded from the lending process due to their marital status, but instead argued they were improperly included due to their marital status.  Accordingly, the Court held its interpretation of “applicant” did not offend the ECOA’s underlying policy and purpose. 


Therefore, the Eighth Circuit held that the text of the ECOA is not ambiguous regarding whether a guarantor constitutes an “applicant,” and further held that a guarantor is not protected from marital-status discrimination under the ECOA.  Accordingly, the Court affirmed the district court’s ruling.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: