The following is a case update written by Uzzi O. Raanan, a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:
In a 2-1 decision reflecting a circuit split, the Eleventh Circuit holds that a guarantor is not an “applicant” under 15 U.S.C. section 1691(a), and therefore cannot bring an action for discrimination under the Equal Credit Opportunity Act (ECOA or Act). Click here for the full decision.
Facts: Regions Bank made loans to Legal Outsource PA (“Outsource”), owned by Charles Phoenix (“Charles”), and to Periwinkle Partners, LLC (“Periwinkle”), which was owned through another entity by Charles’ wife Lisa Phoenix (“Lisa”). Charles personally guaranteed the Outsource loan. Lisa, Charles and Outsource guaranteed the Periwinkle loan. Under the Periwinkle loan, a default by any party, including a guarantor, on any loans made by Regions Bank was also a default under the Periwinkle loan.
Ultimately, Regions Bank declared the Outsource loan in default and demanded full payment. It then declared the Periwinkle loan in default. Neither default was cured, and Regions Bank sued all parties, including the guarantors. Defendants asserted multiple affirmative defenses, as well as counterclaims based on an allegation that the bank discriminated against Lisa, Charles, and their entities based on marital status when it required Lisa, Charles and Outsource to guaranty the Periwinkle loan. According to defendants, the lender did not require spouses of male-owned businesses to guaranty their husbands’ business loans, but did so as to female-owned businesses, in violation of the ECOA.
Only Lisa’s and Periwinkle’s discrimination counterclaims survived an initial motion to dismiss. However, the district court ultimately granted summary judgment against Periwinkle, holding that an entity could not allege a marital discrimination claim. It further dismissed Lisa’s counterclaims, holding that as a guarantor of her entity’s loan she was not an “applicant” protected by ECOA.
The majority discusses ECOA, which prohibits, “. . . any creditor [from] discriminat[ing] against any applicant, with respect to any aspect of a credit transaction— (1) on the basis of . . . marital status . . .” 15 U.S.C. § 1691(a). The Act defines “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).
When the Act was first codified, Congress required the Federal Reserve Board (“FRB”) to promulgate regulations to aid in enforcement of the ECOA. 15 U.S.C. § 1691b (1974). In 1985, the FRB issued Regulation B, which defines “applicant” as “any person who requests or who has received an extension of credit from a creditor and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of § 202.7(d), the term includes guarantors, sureties, endorsers, and similar parties.” 12 C.F.R. § 202.2(e) emphasis added. Subsequently, responsibility for ECOA was transferred to the Consumer Financial Protection Bureau.
On appeal of the district court’s grant of summary judgment in favor of Regions Bank, Lisa argued that she has standing under the ECOA, based on the definition of “applicant” in Regulation B. As framed by the two-judge majority, the issue before them was whether the Court of Appeals should defer to the FRB’s definition of “applicant.” The majority’s ruling hinges on the two-prong framework established by Chevron, USA, Inc. v. Nat’l Res. Def. Council, Inc., 467 U.S. 837 (1984).
Under the Chevron test, the court first inquires whether, “after applying the traditional tools of statutory construction,” it could conclude that Congress spoke clearly on whether the term “applicant” encompasses a guarantor. If the statute is unambiguous, the court must apply the statute based on its plain language and give no deference to any contrary administrative interpretations of the statute. If the statute is found to be unclear on its face, the court must decide whether the FRB’s interpretation of the ECOA is “’reasonable or based on a permissible construction of the statute.’ An interpretation is reasonable if it is ‘rational and consistent with the statute.’” Regions Bank, supra, * 4, quoting Arevalo v. U.S. Atty. Gen., 872 F.3d 1184. 1188 (11th Cir. 2017).
Applying the “whole-text and consistent-usage canons,” the court sides with the Seventh and Eighth Circuits’ conclusion that there is “ample evidence that the term [applicant] bears the ordinary meaning of a person who requests a benefit for himself,” which excludes a guarantor from the definition of applicant. Id. at p. 6. The majority holds that the FRB’s interpretation of this term is therefore not entitled to any deference, and its definition in Regulation B does not control with regard to ECOA claims. Id., at p. 6. See also Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) (accord).
In a lengthy dissent, circuit Judge Rosenbaum initially argues that the legal question resolved by the majority, namely whether the term “applicant” encompassed a guarantor, was not properly raised on appeal and should not have been considered by the Regions court.
Regardless, applying the Chevron two-prong test, the dissent finds that the plain ECOA text could be interpreted to include guarantor in the definition of applicant. The dissent acknowledges that under common-usage definitions an applicant “usually” applies for something that benefits him/herself. However, it points out that the common usage definitions do not preclude the possibility that “sometimes” an applicant may also apply for something for the benefit of another, such as when guaranteeing a loan. Id., at p. 23. The dissent further notes that the remedial nature of the ECOA justifies a “broad” construction of the Act to effectuate its remedial goals. Id., at p. 24. Because the ECOA definition of “applicant” is ambiguous, the dissent goes on to consider whether the FRB’s definition of the term merited deference.
Applying the second Chevron prong, the dissent finds that the FRB’s inclusion of guarantor in its definition of “applicant” was a “reasonable interpretation” of ECOA’s text for three reasons: (1) the definition is consistent with ECOA’s text, (2) it furthers a primary purpose of the ECOA, namely discouraging discrimination, and (3) Congress tacitly approved the FRB’s interpretation of ECOA by not amending the Act despite the FRB’s decades-long inclusion of guarantor in the definition of “applicant.” Id., at p. 29.
While the majority opinion focuses on the plain meaning of the words in the statute and notes that the court has no authority to expand the reach of the statute beyond its clear terms, the dissent analyzes the statute under the canon that remedial legislation should be construed broadly to effectuate the statute’s purpose. To that end, Judge Rosenbaum recounts the history of lender discrimination against women and the anti-discrimination policies undergirding the ECOA.
The dissent concludes that construing ECOA as the majority does would result in situations where nobody would have standing to challenge discrimination that the ECOA clearly seeks to root out. Id., at p. 27. The dissent points out that Congress revised the ECOA three times since 1985, when the FRB construed the term “applicant” to include a guarantor. The dissent states that Congress’ failure to revise the definition to exclude guarantors supports the conclusion that it agreed with the FRB’s interpretation of the ECOA. Id., at p. 30. See also RL BB Acquisition, LLC v. Bridgemill Commons Dev. Group, 754 F.3d 380 (6th Cir. 2014) (accord).
Author’s Comments: The disagreement among the circuits on this issue appears to hinge as much on ideology as it does on legal analysis. While the Regions court’s majority and dissent both recognize the impact this case could have on future lender discrimination actions, the majority concludes that unless Congress clearly defines whom a statute protects, the courts should not presume to know Congress’ true intent. The majority relies heavily on Antonin Scalia & Brian A. Garner, Reading Law: The Interpretation of Legal Texts (2012) in support of its statutory construction.
On the other hand, the dissent is keenly focused on the remedial purpose underlying the ECOA, and it sees the majority’s interpretation as contrary to congressional efforts under the ECOA to disentangle spousal credit, and thereby encourage women to develop credit independence free of lender discrimination.
In light of the reality that lenders these days routinely require personal guaranties in small business loans, one wonders whether excluding guarantors from the definition of applicant will inadvertently encourage continued lender discrimination based on marital status.
That said, Congress has been on notice since at least 2014, when the RL BB Acquisition, LLC and Hawkins cases were published, that it should clarify whether it agreed with the FRB’s definition of “applicant.” The fact that it has not done so suggests that either this issue is not on congressional radar or there are insufficient votes to support a revision of this term.
Unless the United States Supreme Court agrees to resolve the circuit split sometime soon, practitioners who advise lenders and borrowers will need to tailor their advice to clients based on the circuit(s) in which they operate. Naturally, uncertainty is greater in circuits where this issue has been resolved. National lenders will continue to find the uncertainty in the law somewhat unsettling.
These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further distributed without the consent of Thomson Reuters.