RL BB ACQUISITION, LLC, Plaintiff-Appellee, v. BRIDGEMILL COMMONS DEVELOPMENT GROUP, LLC, et al., Defendants, Starr Stone Dixon, Defendant-Appellant.
No. 13-6034
United States Court of Appeals, Sixth Circuit.
Argued: March 14, 2014. Decided and Filed: June 12, 2014.
754 F.3d 380
Before: MERRITT, MOORE, and CLAY, Circuit Judges.
OPINION
CLAY, Circuit Judge.
In this action for breach of guaranty, Defendant Starr Stone Dixon (“Starr“) appeals the district court‘s holding that she cannot assert a violation of the Equal Credit Opportunity Act (“ECOA“),
BACKGROUND
Starr‘s husband, Defendant H. Bernard Dixon (“Bernard“), spent a lifetime making his fortune as a franchisee for numerous fast food chains. In 2005, Bernard decided to invest millions in two residential developments in the Atlanta exurbs—one named Bridgemill Commons and the other named Mabry Farms. His timing could have been better. In the wake of the
To accomplish this refinancing, Bernard approached John Bryan, a loan officer at the Cleveland, Tennessee branch of BB & T Bank, where Bernard had been a customer and borrower since the early 2000s. Bernard initially hoped to refinance the outstanding debt on both developments. The Mabry Farms development owed approximately $3.2 million to United Community Bank (the “UCB Loan“). The Bridgemill Commons development owed $6.4 million to Regions Bank (the “Regions Loan“). The listed borrower on the Regions Loan was Defendant Bridgemill Commons Development Group, LLC (“BCDG“), a Georgia company owned by Bernard that had been created to purchase the Bridgemill Commons development. Bernard gave BB & T a personal financial statement in support of his loan application, detailing his and Starr‘s financial circumstances as of March 31, 2008. BB & T also appraised the Bridgemill Commons development, valuing it as $5.65 million.
Based on this information, BB & T concluded that Bernard and BCDG were not independently creditworthy for a loan large enough to refinance both the Regions Loan and the UCB Loan. Bryan informed Bernard of this conclusion, but suggested that BB & T could refinance the Regions Loan, so long Bernard could find additional collateral. Bernard agreed to pledge nearly 40,000 shares of BB & T stock and a corporate debenture. Starr agreed to pledge the same number of BB & T shares, which she owned individually. Including these new pledges, Bernard had over $8.8 million of collateral supporting his loan application. Based on BB & T‘s underwriting policies, the bank determined that it could issue a loan of approximately $6.1 million—still less than the Regions Loan.
To shore up the application, Bernard executed a personal guaranty, meaning that he would be personally liable in the case of a default by the borrower, which would be BCDG. Starr also executed a guaranty—and it is this agreement that gives rise to the appeal now before us.
The parties dispute how Starr came to execute her guaranty. Bryan asserts that he initially discussed the possibility of Bernard‘s daughters—who had apparently received a good deal of the family fortune—providing some collateral or a guaranty to support the loan. Bryan asserts that Bernard suggested that Starr act as guarantor instead. For his part, Bernard insists that Bryan demanded that Starr provide a guaranty. One piece of documentary evidence lends credence to Bernard‘s version of events. BB & T produced a summary of the requirements for the loan, which Bryan gave to Bernard on May 2, 2008. Item one in the summary reads: “[Starr] will be required to co-sign the notes with her future release subject to negotiation.” (R. 68-1, Bryan Aff., at 389.) Bryan counters that this summary simply reflects Bernard‘s own suggestion that his wife execute a guaranty. Starr herself concedes that she never spoke with Bryan or anyone from BB & T; rather, Bernard told her that BB & T required her signature. Starr claims she felt tremendous pressure to sign a guaranty, although she admits that the pressure did not come directly from BB & T.
The loan transaction closed on June 4, 2008. On that date, BCDG issued a note for $6.4 million, plus interest, to BB & T (the “BCDG Note“). Bernard and Starr executed three security agreements related to the BCDG Note. They also each executed a guaranty, which made them individually liable for the amount owed on
On August 12, 2011, Plaintiff filed suit in the U.S. District Court for the Eastern District of Tennessee on the basis of diversity jurisdiction. Plaintiff asserted five causes of action, including breach of guaranty against Starr. Defendants answered on December 12, 2011. In the answer, Starr asserted that her guaranty was unenforceable since it violated ECOA and Regulation B—specifically, Regulation B‘s prohibition on requiring spouses to guarantee loans. See
DISCUSSION
I. ECOA AND REGULATION B
Congress enacted ECOA in 1974 “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 277 F.3d 873, 876 (6th Cir. 2002) (quotation marks omitted). In Congress’ judgment, one‘s marital status—along with race, religion, and other traits, which were added to the statute in 1976—generally “are, and must be, irrelevant to a credit judgment.” S.Rep. No. 94-589, at 3 (1976), reprinted in 1976 U.S.C.C.A.N. 403, 405; see also Lewis v. ACB Bus. Servs., Inc., 135 F.3d 389, 406 (6th Cir. 1998). ECOA thus makes it “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,” among other things.
Congress mandated that the agency charged with overseeing ECOA—first the Federal Reserve, now the Consumer Financial Protection Bureau—promulgate regulations “to carry out the [statute‘s] purposes.”
This appeal raises two issues of first impression concerning ECOA‘s statutory and regulatory scheme. First, we must determine whether Regulation B‘s definition of “applicant,” which differs from the definition in ECOA, is entitled to deference such that guarantors may raise ECOA claims. Second, we must decide if a spouse-guarantor can assert a violation of Regulation B—and therefore of ECOA—as an affirmative defense. We review these questions of statutory and regulatory interpretation de novo. See Metro. Hosp. v. U.S. Dep‘t of Health & Human Servs., 712 F.3d 248, 255 (6th Cir. 2013); Bowling Green v. Martin Land Dev. Co., 561 F.3d 556, 558 (6th Cir. 2009).
II. REGULATION B‘S DEFINITION OF “APPLICANT” IS ENTITLED TO DEFERENCE
ECOA‘s protections and remedies apply to “applicants” for credit, whom the statute defines 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.”
Regulation B was promulgated under ECOA‘s express grant of rulemaking authority. See
Turning to the statute before us, at Chevron step one we must ask whether ECOA‘s definition of “applicant” unambiguously excludes guarantors, or whether the statute is ambiguous on this issue. “[A]pplying the ordinary tools of statutory construction,” we hold that the statutory definition is ambiguous because it could be
First, “applies.” Dictionaries define this verb as “to make an appeal or a request esp. formally and often in writing and usu. for something of benefit to oneself,” Webster‘s Third New Int‘l Dictionary 105 (1993), or “[t]o make an approach to (a person) for information or aid; to have recourse or make application to, to appeal to; to make a (formal) request for.” Oxford English Dictionary (3d ed.2008). A guarantor does not traditionally approach a creditor herself asking for credit. Rather, as was the case here, a guarantor is a third party to the larger application process. But a guarantor does formally approach a creditor in the sense that the guarantor offers up her own personal liability to the creditor if the borrower defaults. A guarantor‘s offer is not gratuitous; she makes it in consideration for credit that she hopes the borrower will receive. Certainly, a guarantor does not ordinarily make the initial approach to a creditor, and one permissible reading of this term is that only the initial applicant can be deemed to “apply” for credit. But the text could just as easily encompass all those who offer promises in support of an application—including guarantors, who make formal requests for aid in the form of credit for a third party.
The term “credit” furthers the ambiguity of the statutory definition. ECOA defines “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor.”
Moving from the text to ECOA‘s larger context, see Disc. Tobacco City & Lottery, Inc. v. United States, 674 F.3d 509, 549 (6th Cir. 2012), we see no reason to artificially limit the possible meanings of “applicant.” ECOA prohibits discrimination “with respect to any aspect of a credit transaction,”
Our task at Chevron step two is to determine whether the regulation stems from a permissible construction of the statute. “In answering this question, we need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading we would have reached if the question initially had arisen in a judicial proceeding.” Alliance for Cmty. Media v. F.C.C., 529 F.3d 763, 778 (6th Cir. 2008) (quotation marks and alteration omitted). Since “at least one of the natural meanings” of applicant includes guarantors, we conclude that “the agency‘s interpretation [] represents a permissible one entitled to deference.” Harris v. Olszewski, 442 F.3d 456, 467 (6th Cir. 2006). It
Our conclusion accords with the vast majority of courts that have examined this issue. See Empire Bank v. Dumond, No. 13-CV-388, 2013 WL 6238605, at *6 (N.D.Okla. Dec. 3, 2013) (collecting cases). But in 2007, this universal deference to Regulation B was upset by a paragraph of dicta in a Seventh Circuit decision, Moran Foods, Inc. v. Mid-Atlantic Market Development Co., 476 F.3d 436 (7th Cir. 2007). According to Moran, “there is nothing ambiguous about” the statutory definition of ” ‘applicant’ and no way to confuse an applicant with a guarantor.” Id. at 441. Furthermore, allowing guarantors to press ECOA claims “opens vistas of liability that the Congress that enacted the Act would have been unlikely to accept.” Id. While ECOA lawsuits typically involve modest amounts of damages, if guarantees can be struck down for violations of the statute, then “the creditor might lose the entire debt.” Id.
As we explained above, ECOA‘s definition of “applicant” is not straightforward and is easily broad enough to capture a guarantor. Moran does not offer a competing interpretation of the statute apart from its offhanded dismissal of Regulation B‘s definition. Furthermore, we are not troubled by the prospect of guarantors being made whole after a creditor violates the law. A creditor will only lose its entire debt if the borrower immediately defaults and the pledged collateral turns out to be worthless. We will not strike down a valid regulation to salvage bad underwriting. Congress has also been unmoved by this argument. ECOA has undergone several amendments since the Federal Reserve included guarantors within the definition of “applicant“—including an extensive amendment to the statute after Moran was decided—and none has clarified that the term “applicant” cannot include guarantors. We will not construe a statute in reliance on “legislative silence that is contrary to all other textual and contextual evidence of congressional intent.” United States v. Martin, 438 F.3d 621, 632 (6th Cir. 2006) (quotation marks omitted). But nor will we invalidate a regulation over a disagreement with an agency‘s policy which Congress has had time and opportunity to reverse.
Regulation B‘s definition of “applicant” constitutes a valid construction of the statutory definition of that term. A guarantor may therefore seek relief for violations of the spouse-guarantor rule.
III. A SPOUSE-GUARANTOR CAN ASSERT AN AFFIRMATIVE DEFENSE OF RECOUPMENT
A creditor who violates Regulation B necessarily violates ECOA itself. See
Many courts have addressed whether ECOA violations can be asserted as an affirmative defense, and those courts have generally taken one of three positions. See Bank of the West v. Kline, 782 N.W.2d 453, 459-61 (Iowa 2010). First, several courts, including the district court in this case, have held that ECOA violations cannot be raised as an affirmative defense—only as a claim or counterclaim. See, e.g., Riggs Nat‘l Bank of Wash., D.C. v. Linch, 829 F.Supp. 163, 169 (E.D.Va. 1993), aff‘d on other grounds, 36 F.3d 370 (4th Cir.1994). Second, some courts—including the only two federal courts of appeals to have addressed this issue—have held that ECOA violations can be raised as a defense of recoupment. See Bolduc v. Beal Bank, SSB, 167 F.3d 667, 672 (1st Cir. 1999); Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28, 32-33 (3d Cir. 1995). And third, a group of courts have allowed violations of ECOA to be asserted as the affirmative defense of illegality, which entirely invalidates the offending instrument. See, e.g., Kline, 782 N.W.2d at 462-63. We now join with the First and Third Circuits and hold that a defendant may raise a violation of ECOA and Regulation B as an affirmative defense of recoupment.
Recoupment “allows a defendant to defend against a claim by asserting—up to the amount of the claim—the defendant‘s own claim against the plaintiff growing out of the same transaction.” Bolduc, 167 F.3d at 672 (quotation marks omitted). “Recoupment claims are generally not barred by a statute of limitations so long as the main action is timely.” Reiter v. Cooper, 507 U.S. 258, 264 (1993). Basic principles of equity compel this result—“it would be incongruous to hold that once a lawsuit is properly before the court, decision must be made without consideration of all the issues in the case and without the benefit of all the applicable law.” United States v. W. Pac. R.R., 352 U.S. 59, 72 (1956). As a result, we allow defendants to raise an affirmative claim as a defense of recoupment, “absent the clearest congressional language to the contrary.” Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415 (1998) (quotation marks omitted).
We see no command in ECOA or Regulation B to deny defendants the ability to assert a violation as a recoupment defense. To the contrary, Congress has explicitly granted courts the ability to craft appropriate equitable remedies for ECOA viola-
The courts that have rejected any affirmative defense for violations of ECOA and Regulation B generally proceed along two fronts. First, these courts point out that ECOA does not expressly permit affirmative defenses, while it lays out a detailed remedial scheme of actual and punitive damages, plus attorneys’ fees. See, e.g., Riggs, 829 F.Supp. at 169. This approach is backwards. Congress does not need to specify that a statutory cause of action can be raised as a recoupment defense—we presume it can, “absent the clearest congressional language to the contrary.” Beach, 523 U.S. at 415 (quotation marks omitted). Far from clearly prohibiting this form of relief, ECOA permits the courts to “grant such equitable and declaratory relief as is necessary to enforce the requirements imposed” by the statute.
IV. THE MERITS OF THE SPOUSE-GUARANTOR DEFENSE
At this point, we would ordinarily turn to the merits of the spouse-guarantor defense in this case. The district court, however, did not reach the merits and the parties did not fully brief them on appeal. We will not rule on this issue in the first instance. See United States v. Henry, 429 F.3d 603, 618 (6th Cir. 2005). We therefore vacate the district court‘s grant of summary judgment against Starr and remand to allow that court to consider the merits of Starr‘s affirmative defense. We will take this opportunity to set out how a motion for summary judgment concerning violations the spouse-guarantor rule should be decided.
We generally evaluate the merits of an ECOA claim using burden-shifting framework developed in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). See Mays v. Buckeye Rural Elec. Coop., 277 F.3d 873, 876 (6th Cir. 2002); Lewis v. ACB Bus. Servs., Inc., 135 F.3d 389, 406 (6th Cir. 1998). The burden-shifting framework operates well in the run-of-the-mill ECOA claim, when an individual is denied credit on the basis of a protected characteristic, such as race, sex, or marital status. The typical ECOA plaintiff is very similar to a Title VII plaintiff, who has been denied a job or promotion or whose employment conditions have worsened because of a protected characteristic. In both cases, the plaintiff must prove discrimination, and the McDonnell Douglas burden-shifting approach “is intended progressively to sharpen the inquiry into [this] elusive factual question.” Tex. Dep‘t of Cmty. Affairs v. Burdine, 450 U.S. 248, 255 n. 8 (1981). But Regulation B prohibits “requir[ing]” the guaranty of a spouse as a general matter, regardless of whether the creditor‘s motivation is benign or invidious.
To prove a violation of the spouse-guarantor rule, a spouse-guarantor need only prove that her spouse applied for credit, and either the creditor “require[d] the signature of [the] applicant‘s spouse” if the applicant was individually creditworthy,
CONCLUSION
For the foregoing reasons, we REVERSE the district court‘s conclusion that Starr may not raise a violation of ECOA and Regulation B as an affirmative defense, VACATE the district court‘s grant of summary judgment against Starr, and REMAND for further proceedings consistent with this opinion.