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Opinion: Mo. courts mixed on spousal guarantees

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When a business owner takes out a business loan, lenders often request a spousal guarantee – a promise from the business owner’s spouse guaranteeing payment on the loan.

The guarantee provides maximum protection in the event the owner defaults.

Whether a lender may enforce a spousal guarantee largely depends on whether the issue is litigated in Missouri state or federal courts.  

When a spouse is sued on a personal guarantee, they may assert as an affirmative defense that the guarantee is unenforceable because it violates the Equal Credit Opportunity Act and the Federal Reserve’s Regulation B. The spouse also may assert a counterclaim against the lender, seeking damages, including punitive damages and legal fees, for the lender’s claimed violation of the ECOA.

These cases arise when the spouse is not involved in the corporate debtor’s operations and is not a joint applicant with the spouse for credit. The spouse asserts the lender required the guarantee solely because of the spousal relationship, violating the ECOA and Regulation B.

The ECOA prohibits a creditor from discriminating against any applicant for credit on the basis of a number of grounds, including marital status. Regulation B limits when a creditor can require a signature other than the applicant on credit documents and prohibits a lender from requiring the signature of an applicant’s spouse or any other person if the applicant qualifies for the amount and terms of credit. Regulation B includes guarantors in the definition of “applicant” but the ECOA does not, at least not expressly.

Missouri state courts have taken the position that the protections of the ECOA and Regulation B extend to spousal guarantees.

Most Missouri federal courts have rejected state interpretations and hold the ECOA does not include guarantors in the definition of “applicant” and that Regulation B’s interpretation impermissibly expands the ECOA and will not be enforced.

Given the divergence in Missouri, how should a lender proceed? A lender seeking to enforce a spousal guarantee should first consider whether to file suit in federal court, where likely they will be better positioned. But filing in federal court is generally only an option if a federal question is raised or if the parties are residents of different states. In a number of cases, the validity of a spousal guarantee must be litigated in state court.

The lender can take a number of steps in the loan process to aid its argument.

First, lenders should not use a preprinted form for these guarantees. Multiple Missouri state court decisions have cited the lender’s use of a preprinted spousal guarantee form as evidence of discrimination.

Second, lenders should include in the guarantee language about the voluntary nature of the guarantee to rebut the spouse’s argument that the lender required the spousal guarantee as a condition of the loan in violation of the ECOA. For the same reason, lenders should include both spouses in all discussions about the “offer” of the guarantee.

Third, the lender should generate and keep documentation concerning its determination that one spouse is not independently creditworthy before requesting the other spouse to personally guarantee the loan.

In many of the Missouri state court cases finding discrimination, the courts have relied on the lender’s apparent lack of investigation into one spouse’s creditworthiness before requiring the other spouse to personally guarantee the loan.

Fourth, the lender should be willing to deny credit if a spousal guarantee is not offered.

Should lenders still require spousal guarantees in some situations? Absolutely. But lenders should be mindful that a case-by-case investigation and determination is required.

Ginger Gooch is a partner in the Springfield office of Husch Blackwell LLP. She can be reached at ginger.gooch@huschblackwell.com.[[In-content Ad]]

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