The opinion of the court was delivered by: THOMAS N. O'NEILL, JR.
O'Neill, J. November 29, 1993
Currently before the Court are the memoranda of parties regarding the viability of defendants' claim that the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. §§ 1691-1691f, affords them either a defense to liability or an action by way of recoupment in regard to two guaranty/suretyship agreements. The Court holds plaintiff's Motion for Summary Judgement in abeyance while it resolves defendants' claim.
In 1988, RSKC Associates ("RSKC"), a Missouri general partnership formed by two wholly owned corporations -- Wooldridge Construction Co. Of Missouri, Inc. ("Wooldridge Construction") and Southwest Tracor, Inc. ("Tracor") -- received an $ 8,000,000.00 loan from plaintiff's predecessor in interest, Liberty Savings Bank ("Liberty"). Robert Wooldridge -- sole owner of Wooldridge Construction -- negotiated the loan on behalf of RSKC and his partner F.B. Chris Freeman ("C. Freeman") -- the sole owner of Tracor. In 1989, RSKC received an additional $ 4,000,000.00 from Liberty under a loan modification agreement. Liberty required each partner corporation and the two corporate principals (Robert Wooldridge and C. Freeman) to submit financial statements. Based in part upon the information contained in those financial statements Liberty approved the loan agreement and, following a second submission of financial statements by the same parties, approved the modification agreement. Pursuant to each of these transactions Liberty required the partner corporations and the two corporate principals to sign an Unconditional Guaranty and Suretyship Agreement ("the Guaranty Agreements"). Liberty also required that the wives of the corporate principals -- Clarita Wooldridge and Marsha Freeman ("M. Freeman") -- sign the Guaranty Agreements. Liberty neither required nor received financial information from M. Freeman. Further, the Guarantee Agreements did not limit M. Freeman's potential liability to her interest in jointly held assets that appeared on her husband's financial statements.
Thus M. Freeman, along with Tracor and C. Freeman, became an unconditional guarantor of the $ 12,000,000.00 in loans that Liberty made to RSKC.
RSKC defaulted on the loans. In 1993 Integra Bank/Pittsburgh -- Liberty's successor in interest through merger -- commenced this action to recover $ 11,951,000.03 in outstanding principal plus accrued interest, late charges and attorney's fees from defendants Tracor, C. Freeman and M. Freeman. In response, defendants assert that Liberty violated the ECOA when it required M. Freeman to sign the Guaranty Agreements and that this violation -- if proven -- either shields the defendants from liability on the Guaranty Agreements or provides them with a right of recoupment. It is undisputed that the statute of limitations for an affirmative ECOA claim has run.
"The purpose of the ECOA is to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit." Anderson v. United Finance Co., 666 F.2d 1274, 1277 (9th Cir. 1982). The Act provides that "it shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . sex or marital status." 15 U.S.C. § 1691 (a). Regulations promulgated under the authority of the ECOA provide that "a creditor shall not require the signature of an applicant's spouse or any 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." 12 C.F.R. 202.7(d)(1). An applicant under the ECOA is "any person who requests or has received an extension of credit from a creditor, and . . . . for purposes of § 202.7(d), the term includes guarantors, sureties, endorsers and similar parties." 12 C.F.R. 202.2(e). The act defines the term person broadly to include "a natural person, a corporation . . . partnership, cooperative or association."
15 U.S.C. § 1691a(f); 12 C.F.R. 202.2(x).
The Court of Appeals for the Third Circuit has not addressed the issue of whether the ECOA may be asserted -- either defensively or by way of recoupment -- after the statute of limitations has run. In American Security Bank v. York, No. 91-1212, 1992 U.S. Dist. LEXIS 14309 (D.D.C. Sept. 1, 1992), the district court -- when presented with facts similar to those before this Court -- stated that in the absence of binding appellate guidance it was unwilling to limit the broadly remedial language of § 1691e(c) and would therefore permit defendants to assert an ECOA violation defensively -- at least for damages by way of recoupment and possibly to void the underlying debt. Id. at *11. The majority of courts that have confronted the issue of whether an ECOA violation can be asserted defensively, however, have determined that an ECOA violation -- if proved -- does not render the offending instrument void.
Diamond v. Union Bank & Trust, 776 F. Supp. 542, 544 (N.D.Okla. 1991); see also, CMF Virginia Land, L.P. v. Brinson, 806 F. Supp. 90 (E.D.Va. 1992). These courts have hesitated to invalidate an arms length credit transaction where Congress specifically provides an injured debtor an affirmative statutory remedy. As the court in Virginia Land stated, "invalidation of the debt itself is a remedy too drastic for the Court to implement simply by reading between the lines of the ECOA." 806 F. Supp. at 95.
Accepting the merits of this reasoning, I note that an equally strong argument exists in support of the proposition that Congress -- in enacting the ECOA -- intended that creditors not affirmatively benefit from proscribed acts of credit discrimination. To permit creditors -- especially sophisticated credit institutions -- to affirmatively benefit by disregarding the requirements of the ECOA would seriously undermine the Congressional intent to eradicate gender and marital status based credit discrimination. I conclude, therefore, that while an ECOA violation should not void the underlying credit transaction an offending creditor should not be permitted to look for payment to parties who, but for the ECOA violation, would not have incurred personal liability on the underlying debt in the first instance. This rule places a creditor in no worse position than if it had adhered to the law when the credit transaction occurred. A creditor may not claim to have relied factually upon a guarantor's assets if it has never requested nor received financial information regarding them. Further, a creditor may not claim legal reliance on a signature that was illegally required in the first instance.
With regard to other credit applicants involved in a tainted credit transaction -- the primary credit seeker and permissibly required sureties or guarantors for example -- I conclude that the purpose of the ECOA would not be furthered by permitting them to assert an alleged ECOA violation as a defense to liability on the underlying debt. See, Riggs National Bank v. Linch, 829 F. Supp. 163 (E.D. Va. 1993). These parties' liability for the underlying debt exists independent of the alleged ECOA violation. Congress did not enact the ECOA to permit permissibly bound debtors to escape contractual liability when called upon to perform. To allow an ECOA defense to liability in such circumstances would not advance Congress' stated intent to allow creditworthy applicants to enter into credit transactions without regard to their marital status.