The U.S. Supreme Court is set to rule on a case that is sure to have far-reaching implications for any attorneys who represent parties to credit transactions. In Hawkins v. Community Bank of Raymore, __ U.S. __ (2016), the Court will determine whether the protections of the Equal Credit Opportunity Act (ECOA) extend not only to a borrower in a credit transaction, but to guarantors of borrowed funds as well.
The petitioners in Hawkins are the spouses of two members of an LLC (Brief for Petitioners at 2, Hawkins v. Community Bank of Raymore, __ U.S. __ (2016) (No. 14-520)). When the LLC entered into four loans with the Community Bank of Raymore (CBR), the petitioners claim that CBR required the spouses of the LLC members to guarantee the loans. The guaranties at-issue contained industry-standard clauses requiring the spouses to repay the funds guarantied, even if the bank opts not to pursue the LLC’s assets, any collateral, or the individual assets of the LLC membership. Once the bank sought to collect funds from the guarantors, the petitioners filed suit against CBR. The petitioners assert that by requiring the spouses of the LLC members to guarantee the loans, CBR violated the ECOA. The basis of the petitioners’ claim is found in Regulation B published by the Federal Reserve Board, 12 C.F.R. §202.7(d)(1), which states that although a creditor may request additional signatures for a debt, it may not require that it be a spouse. After the Eighth Circuit denied the petitioners’ claims against CBR on the grounds that the petitioners, as guarantors of a loan, could not be considered “applicants” (defined as “any person” who directly applies for “credit.” U.S.C. §1691a(b)) for the purpose of the ECOA and therefore lacked standing to assert claims under the act, the petitioners appealed to the U.S. Supreme Court.
A number of arguments set forth in the petitioners’ brief seek to expand the class of individuals and entities which may be considered “applicants” for the purposes of the ECOA, and more specifically, present a number of compelling justifications for why a “guarantor” should be considered an “applicant” under the act. First, the petitioners assert that as guarantors they should qualify as “debtors” of who applied for “credit,” as the petitioners were primarily and unconditionally liable for the debts of the LLC and faced the same legal consequences as if they had cosigned the LLC’s loans themselves. Second, the petitioners demonstrate that if the definition of “applicant” is limited to the actual borrower to whom credit is extended, then the members of an entity-borrower who are discriminated against would have no standing to make claims under the act. Specifically, because an entity-borrower has no race, gender, marital status, or religion, limiting the definition to the actual borrower to whom credit is extended will create an end-run around the act’s prohibitions and open the door for the very discrimination that the act aims to restrict.
While the above are only two of a number of arguments presented by the petitioners in this case, the consequences of a ruling in favor of the petitioners is far-reaching for those involved in credit transactions and attorneys alike. From a practical standpoint, the outcome of this case may require a new approach in counseling clients involved in credit transactions—both creditors, debtors, and all other interested parties—as to the potential liabilities, rights, and remedies that each faces in an otherwise straightforward deal. An expansion in the class of claimants under the ECOA would require attorneys to widen their scope of analysis when assessing an ECOA claim made by or against a client. Rather than viewing a credit transaction as a simple exchange between a single creditor and a single debtor, counsel may need to thoroughly investigate all involved parties to assess and advise in regard to the plethora of potential claims that may now arise in light of the Court’s interpretation. Although the Court’s decision remains to be seen, practitioners should keep an eye on a case that could create new avenues of claims and liabilities for clients.
Jared Shwartz is with Cohen and Wolf P.C. in Bridgeport, Connecticut.