Release and Waiver in Loan Modification Documents Block Recoupment Claims Under the Equal Credit Opportunity Act
October 19, 2006
John R. Mussman- Chicago
In Pocopson v. Hudson United Bank, No. 05 6173, 2006 U.S. Dist. LEXIS 51171 (E.D. Pa. Jul. 26, 2006), the U.S. District Court for the Eastern District of Pennsylvania held that broad waiver and release provisions contained in a letter of intent and in a loan modification agreement effectively blocked guarantors’ claims for alleged violations of the Equal Credit Opportunity Act (ECOA).
The lender, Hudson United Bank, had originally obtained guaranties not only from the principals of
the Borrower, but also from their spouses. When the Borrower needed to refinance the loans, Hudson asked
the Borrower and each of the guarantors, including the spouses, to sign a letter of intent and, subsequently, a loan modification agreement.
Under both the letter of intent and the loan modification agreement, the
Borrower and each of the guarantors, including the spouses, reaffirmed their obligations. The loan modification agreement and the letter of intent each contained broad provisions releasing all claims of the obligors against Hudson. When the bank later tried to enforce their loans and the related guaranties,
the Borrower and the guarantors asserted ECOA violations under the doctrine of recoupment which permits otherwise time-barred claims to be raised as a defense. Nonetheless, based on the release and waiver provisions, the court granted Hudson United Bank’s motion for summary judgment, effectively denying the obligors’ ECOA claims.
The Alleged ECOA Violation: Forbidden Spousal Guaranties
ECOA prohibits discrimination in credit on the basis of race, color, religion, national origin, sex or marital status in connection with any credit transaction including commercial loans. 15 U.S.C. § 1691a. Regulation B was issued by the Federal Reserve Board to implement ECOA. Section 202.7(d) of Regulation B generally prohibits a creditor from requiring “the signature of the applicant’s spouse or 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).
Effectiveness of the Borrower Releases and Waivers
The district court held that even if the alleged ECOA claims were otherwise valid, the release provisions in the letter of intent and the loan modification agreement effectively blocked the
Borrower and guarantors from asserting the claims. The letter of intent contained a “general release.” The loan modification agreement contained a broadly drafted release that provided in part that the obligors:
VOLUNTARILY AND IRREVOCABLY REMISE, RELEASE AND FOREVER DISCHARGE THE LENDER ... FROM ANY AND ALL MANNER OF CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, RIGHTS OF ACTION, MANNERS OF ACTION, SUITS, DEBTS, DUES, COVENANTS, BONDS AND OTHER LIABILITIES OF ANY NATURE OR DESCRIPTION WHATSOEVER, AT LAW OR IN EQUITY, AND INCLUDING, BUT NOT LIMITED TO, ALL CLAIMS RELATING TO THE MAKING, VALIDITY AND ENFORCEMENT OF THE LOANS, LOAN ADMINISTRATION AND LOAN DOCUMENTS ...
Hudson United Bank, 2006 U.S. Dist. LEXIS 51171 at *10. Neither release specifically waived violation of federal statute generally or the Equal Credit Opportunity Act in particular. Nonetheless, the court found the releases broad enough to include the alleged violations of Regulation B and the Equal Credit Opportunity Act.
The obligors attempted to argue that honoring the waiver would thwart the public policy underlying the Equal Credit Opportunity Act, but the court reasoned that such release and waiver in a commercial transaction “negotiated between two sophisticated parties over a period of months throughout which both parties were represented by counsel” would not “frustrate the federal statutory scheme underlying the ECOA.” (Hudson
United Bank, 2006 U.S. Dist. LEXIS 51171 at *9). In ruling against the claim, the court distinguished this commercial transaction from cases cited by the obligors involving consumers under the Truth in Lending Act which involved credit for “personal, family or household purposes.”
What’s the Point?
First, in loan documentation generally, and in loan workout and loan modification agreements in particular, lenders should remember to negotiate broad and well-drafted releases and waivers of claims against them by the borrower and any guarantors in each step of the documentation of a loan modification or refinancing. Here Hudson included releases in both the letter of intent and in the loan modification: the release in the letter of intent becomes important if for some reason Hudson had not moved forward with the refinancing. Also, generally such provisions should be highlighted – in italics, bold or all capital print – particularly in those instances where one or more of the obligors opt not to hire legal counsel. Although a broad, well-drafted release and waiver provision may not block every conceivable claim (particularly if blocking the claim is found to violate public policy), a broad, well-drafted release provision will be effective against many claims – in some cases, even against an alleged violation of federal law.
Second, in commercial lending transactions, lenders should use caution in requesting spousal signatures. There are certainly important exceptions to Regulation B’s prohibition of spousal signatures: for instance, in community-property states or where the spouse is a joint applicant. Nonetheless, these exceptions to the spousal-signature prohibition are technical and require careful analysis of the credit under Regulation B and under applicable state law. The default position in non-community property states should be that a spousal guaranty should not be requested; for any exception to such general policy, lenders would be well advised to consult with competent counsel to verify that the credit falls within an exception before seeking a spousal guaranty.
For more information, e-mail John Mussman at john.mussman@hklaw.com or call toll free, 1-888-688-8500.