“The judgment is affirmed by an equally divided Court.” With that one sentence, the Supreme Court on March 22, 2016, decided the Equal Credit Opportunity Act case of Hawkins v. Community Bank of Raymore, Case No. 14-520. This was the first 4-4 decision from the Supreme Court since the death of Justice Antonin Scalia, and it leaves unresolved a disagreement among the lower federal courts about the rights of guarantors under the Equal Credit Opportunity Act, 15 U.S.C. §1691 et seq. (the “ECOA”), to claim improper discrimination as a defense to enforcement of a loan guaranty. This is because an unexplained 4-4 Supreme Court decision is not considered to have any precedential value. Rutledge v. United States, 517 U.S. 292, 304 (1996).
The Hawkins case was important to Kentucky banks because the ruling was expected to decide the correctness of a 2014 decision of the U.S. Sixth Circuit Court of Appeals in RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC, 754 F.3d 380 (6th Cir. 2014). The Sixth Circuit, which includes Kentucky, Michigan, Ohio, and Tennessee, decided that a wife who signed a loan guaranty could assert a discrimination claim under the ECOA. The spouse could raise her ECOA claim as a defense to enforcement of the guaranty if she could prove either (a) that she was required to act as a guarantor even if her husband was independently creditworthy, or (b) the lender would require a spousal guaranty as the only acceptable guaranty and would not consider alternative guarantors. The technical legal issue underlying this analysis was whether or not a guarantor would satisfy the requirement that the injured party be an “applicant” under the ECOA.
The Sixth Circuit in RL BB Acquisition upheld a regulation promulgated by the Federal Reserve Board that included a spousal guarantor as an “applicant.” The three judges on the Sixth Circuit panel were not sympathetic to the lender’s legal arguments and wrote that “We will not strike down a valid regulation to salvage bad underwriting” of the loan. See RL BB Acquisition, at p. 9. As an aside, the Sixth Circuit’s “criticism” of the supposed “bad underwriting” seems questionable since the bank’s underwriting conclusion that it needed a loan guarantor was proven correct by the fact that it was having to sue to obtain repayment of the loan.
In the Hawkins case, the Sixth Circuit’s legal conclusion under the ECOA was rejected by the U.S. Court of Appeals for the Eighth Circuit, which includes the states of Arkansas, Iowa, Minnesota, Missouri and Nebraska. The Eighth Circuit held that the definition of “applicant” in the ECOA statute does not include loan guarantors. It further found that the Federal Reserve Board’s regulatory attempt to expand that definition exceeded its powers. See Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014). In Hawkins, the wives of two businessmen alleged the lender improperly required them to personally guarantee roughly $2 million of their husbands’ business real estate loans. They contended that the bank’s requirement constituted discrimination against them on the basis of their marital status in violation of the ECOA. The Eighth Circuit affirmed the district court’s order of summary judgment in favor of the bank, concluding that “the text of the ECOA clearly provides 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.” Hawkins, 761 F.3d at 941. The Hawkins Court also concluded that because the text of the ECOA statute was clear, the Court did not have to defer to the Federal Reserve Board’s interpretation of “applicant.”
Because of the disagreement between the Sixth and Eighth Circuits, the United States Supreme Court decided to review the Hawkins decision, and many court observers were expecting a 5-4 decision approving the Eighth Circuit’s ruling. However, with the death of Justice Scalia, the Court split 4-4 and issued its one sentence conclusion upholding the Hawkins decision. Because of the even split and the lack of any analysis, the Supreme Court’s opinion does not have precedential value and does not invalidate the holding of the Sixth Circuit case. Thus, bankers in Kentucky and the other states within the Sixth Circuit must still tread very carefully when deciding whether or not to require a spouse’s loan guaranty.
In addition to the ECOA issue, many commentators viewed the Hawkins case as a vehicle for the Supreme Court to address more generally the issue of administrative agency regulatory overreach. For bankers, or other businesses, who believe that regulators are too frequently expanding their powers beyond what Congress intended, the 4-4 split in Hawkins is a disappointing outcome for a case that might have had results beyond just the ECOA aspects of spousal guaranties.
M. Thurman Senn’s practice concentrates on banking and finance law, bankruptcy, foreclosure, commercial litigation and arbitration.
