Did the Federal Reserve Board overstep its authority when it defined someone who guarantees the debt of another as an “applicant” for credit? It’s an issue seemingly about as sexy as watching white paint dry. Still, of all the cases on the U.S. Supreme Court’s docket during the 2015–2016 term, which was so defined by the unexpected death of Justice Antonin Scalia in February, the one that stood out most to me was Hawkins v. Community Bank of Raymore, a case that boiled down to exactly that question. That’s because Hawkins touched on so much more than what an “applicant” is or is not.
What Is Reg. B, and Why Does It Matter?
Hawkins originated in Missouri and concerned validity of Regulation B (“Reg. B”), a federal lending regulation under the Equal Credit Opportunity Act (“ECOA”) intended to guard against marital discrimination in credit transactions. Reg. B protects applicants for credit who meet a lender’s creditworthiness requirements individually from being forced to procure their spouse’s guaranty on the debt, and it arguably protects the guarantors themselves as well. In other words, if an obligor can show the only reason she was required to obtain a personal guaranty from her spouse was because she had a spouse, she likely has a defense under Reg. B.
A quintessential Reg. B case, Hawkins involved a Missouri LLC that applied to a bank for a loan to finance the development of a residential subdivision. As is usually the case in a loan to an LLC, the bank required the personal guaranties of the LLC’s two members to ensure repayment. Problematically, the bank also required the guaranties of the two members’ wives in an apparent violation of Reg. B. The legal question before the Court was whether the federal agency that promulgated Reg. B overstepped its authority by protecting guarantors, given that the language of the ECOA was written to protect “applicants” for credit and not “guarantors.”
Lower courts had split on the issue, with the Seventh and Eighth Circuit Courts of Appeals recently declaring the regulation void (meaning Reg. B cannot be enforced in federal courts within the ten Midwestern states covered by those circuits). Meanwhile, federal courts in the rest of the country, as well as state courts, have largely held to the decades-old presumption that Reg. B is valid. This disagreement has been nowhere more apparent than in Missouri, where even as the Missouri’s federal courts condemned Reg. B has an invalid regulation, Missouri’s state courts continued to uphold its presumed validity.
Before the Hawkins case found itself in the national spotlight, I wrote extensively about this topic in an article published in the Spring 2014 issue of the Missouri Law Review, “Reg. B Is No Guaranty: Missouri Courts’ Openly Divergent Views on the Enforceability of Coerced Spousal Guaranties in Commercial Lending,” available here. In that article, I covered both the question whether Reg. B itself is good public policy and remarked on the decidedly bad public policy that guarantors in Missouri can avail themselves of Reg. B in state court, yet if the action is filed or removed to federal court, they enjoy no such protection based on the existing precedents in each court system. I concluded by calling for the resolution of this judicial inconsistency, either by Congress or the Supreme Court. To my (and many others’) surprise, it appeared I had gotten my wish when the Supreme Court decided to hear Hawkins.
Nobody Likes a Tie
At oral argument back in October 2015, Justice Scalia in particular was harshly critical of the agency’s stretching of the word “applicant” to include guarantors, analogizing it to calling someone an applicant when all they’ve done is write a letter of recommendation on behalf of a prospective student. “Would anybody use the English language that way?” he asked. By all accounts, it looked like the Hawkins case was destined to set a national precedent abolishing Reg. B’s protection of guarantors, along the way shedding light on other important issues such as what the limits of an agency’s authority to interpret statutes are.
As it turned out, the only thing Hawkins would shed light on is what happens when there’s a 4–4 tie on the Supreme Court. Due to Justice Scalia’s passing, that is exactly what happened. In a one-sentence opinion, the Eighth Circuit’s decision was affirmed by “an equally divided court.” Had Justice Scalia still been alive at the time the case was handed down, it almost certainly would have been a 5–4 decision in favor of the bank, declaring Reg. B invalid nationwide and eliminating the uncomfortable reality in Missouri that federal law on this matter is effectively different in Missouri’s state and federal courts, which are often just a few blocks from each other.
Instead, the tie means that the Eighth Circuit’s decision stands, but no precedent is set as to the other federal circuits or to state courts, since in most states the Supreme Court is the only federal court with the authority to set mandatory precedent in state courts. Essentially, it’s as if the Supreme Court never decided to hear the case, and alas, my wish was not to be granted after all.
The upside of this non-decision is that those who have been coerced into obtaining a spousal guaranty will often still have a defense or counterclaim to enforcement of the guaranty available under Reg. B in most jurisdictions. For the same reason, this result is no doubt disappointing for the lending industry, which in some cases risks seeing otherwise-enforceable debts invalidated entirely by violations of this relatively obscure regulation. In any case, Hawkins highlights the importance of obtaining local counsel in an enforcement action on a spousal guaranty, as the current availability of Reg. B as a defense varies wildly between jurisdictions and sometimes even between state and federal courts within the same jurisdiction.