Silverman v. Eastrich ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
3-28-1995
Silverman v Eastrich
Precedential or Non-Precedential:
Docket 94-1783
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Recommended Citation
"Silverman v Eastrich" (1995). 1995 Decisions. Paper 86.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/86
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________________
No. 94-1783
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Janice Silverman,
Appellant,
v.
Eastrich Multiple Investor Fund, L.P.
_____________________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 94-cv-2881)
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Argued February 2, 1995
Before: SCIRICA, ROTH, and SAROKIN, Circuit Judges
(Filed March 28, l995)
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Neil E. Jokelson (argued)
Neil E. Jokelson & Associates, P.C.
230 South Broad Street, 18th Floor
Philadelphia, PA 19102
Attorney for Appellant
Thomas J. Elliott (argued)
Elliott Reihner Siedzikowski
North & Egan, P.C.
Union Meeting Corporate Center V
P.O. Box 3010
925 Harvest Drive
Blue Bell, PA 19422
Attorney for Appellee
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OPINION OF THE COURT
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SAROKIN, Circuit Judge:
Plaintiff Janice Silverman appeals the dismissal of her
complaint claiming violations of the Equal Credit Opportunity Act
("ECOA"), 15 U.S.C. § 1691 et. seq., and the denial of her motion
for declaratory and injunctive relief. Plaintiff alleges that
she was required to guaranty a loan for the benefit of her spouse
in violation of the ECOA. Assuming, without deciding, that
plaintiff's right to initiate an action for damages based upon
such alleged violation is barred by the statute of limitations,
no such bar exists to asserting such violation as a defense to
efforts to collect on said guaranty. Plaintiff did not forfeit
her right to raise such defense merely by her failure to
institute an independent action to assert it. Accordingly, we
reverse the district court's dismissal of plaintiff's complaint
and denial of declaratory and injunctive relief and remand for
further proceedings for the reasons hereinafter set forth.
I. Facts and Procedural History
In February of 1986, Hunt's Pier Associates ("Hunt's
Pier"), a New Jersey general partnership, borrowed $10,000,000
(the "Loan") from Atlantic Financial Federal ("Atlantic").
Atlantic required all Hunt's Pier partners to guaranty the
repayment individually, jointly, and severally. Plaintiff, one
of the partners' wives, was required to sign the Guaranty
Agreement ("Guaranty").
In January of 1990, Atlantic was declared insolvent,
and the Resolution Trust Corporation ("RTC") took control of the
Loan. Hunt's Pier defaulted and ultimately filed a voluntary
bankruptcy petition under Chapter 11 of the United States
Bankruptcy Code on October 23, 1991. The RTC approved and
supported the Third Amended Plan of Reorganization
("Reorganization Plan" or "Plan"), and in February of 1993, the
bankruptcy court confirmed it. The Plan extended the payment
period upon the Loan, expressly leaving the Guaranty intact.
Eastrich Multiple Investor Fund, L.P. ("Eastrich")
subsequently acquired the RTC's right, title, and interest in the
Loan. On April 21, 1994, Eastrich confessed judgment against the
Loan's guarantors, including plaintiff, in state court.
On May 9, 1994, plaintiff filed suit in federal court,
alleging Atlantic and Eastrich violated her rights under the
ECOA: (1) Atlantic, by requiring her signature on the Guaranty
although she allegedly had no other connection to the transaction
and (2) Eastrich, by instituting state collection proceedings
against her. In Count II of her complaint, plaintiff alleged the
Reorganization Plan altered the Guaranty to her detriment and
without securing her approval, which should have resulted in
discharge of her guaranty.
Silverman moved for injunctive relief in federal
court,1 requesting Eastrich be enjoined from executing on the
$10,000,000 state court confession of judgment against her. In
addition to her claims against Atlantic and Eastrich, she also
argued that the RTC violated the ECOA and its implementing
regulations by approving the Reorganization Plan and failing to
reevaluate the legality of her obligation under the Guaranty.
Eastrich filed a motion to dismiss plaintiff's complaint for
failure to state a claim. On July 13, 1994, the district court
denied injunctive and declaratory relief and granted Eastrich's
motion to dismiss. Plaintiff filed a timely notice of appeal.
II. Jurisdiction and Standard of Review
The district court exercised jurisdiction under 28
U.S.C. § 1331. This court has jurisdiction over the district
court's final judgment pursuant to 28 U.S.C. § 1291.
We have plenary review of the district court's
dismissal of the complaint. Moore v. Tartler, 986 F.2d 682, 685
(3d Cir. 1993). We review the denial of injunctive and
declaratory relief for abuse of discretion, and in making this
determination we will exercise plenary review over the district
1 Although plaintiff applied for a preliminary injunction, the district court noted the parties'
agreement to treating it as a motion for final injunctive and declaratory relief. Silverman v.
Eastrich Multiple Investor Fund, L.P., 857 F. Supp. 447, 449 (E.D.Pa. 1994).
court's conclusions of law. Natural Resources Defense Council,
Inc. v. Texaco Refining & Marketing, Inc., 906 F.2d 934, 937 (3d
Cir. 1990); United States v. Pennsylvania, Dep't of Envtl.
Resources, 923 F.2d 1071, 1073 (3d Cir. 1991).
III. Discussion
The ECOA provides that it is unlawful "for any creditor
to discriminate against any [credit] applicant with respect to
any aspect of a credit transaction on the basis of . . . marital
status." 15 U.S.C. § 1691(a)(1). The Board of Governors of the
Federal Reserve System (the "Board"), charged with making
implementing regulations, provided in pertinent part in
Regulation B:
Except as provided in this paragraph, a
creditor shall not require the signature of
an 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).
A. Standing
Eastrich argues plaintiff lacks standing to assert a
violation of the ECOA. Section 1691(a) of the ECOA prohibits
creditors from discriminating against any "applicant." An
earlier version of Regulation B had defined an applicant as
any person who requests or has received an
extension of credit from a creditor, and
includes any person who is or may be
contractually liable regarding an extension
of credit other than a guarantor, surety,
endorser, or similar party.
12 C.F.R. § 202.2(e)(1985)(emphasis added). In a subsequent
amendment, the definition was revised to include guarantors as
"applicants."
The parties' dispute on this issue stems from the two
dates provided in the amendment:
The revised regulation and official staff
commentary will become effective December 16,
1985. However, creditors have the option of
continuing to comply with the Board's current
regulation and existing interpretations,
which remain in effect, until October 1,
1986.
Revision of Regulation B, 50 Fed. Reg. 48,018 (1985). Eastrich
contends that the revised definition should be interpreted as
effective from the mandatory compliance date, October 1, 1986,
leaving Silverman without standing. Eastrich relies upon
Boatmen's First National Bank v. Koger, in which the court
applied the mandatory compliance date as the effective date and
ruled the guarantor thereby lacked standing. 784 F. Supp. 815
(D.Kan. 1992); see also Mayes v. Chrysler Credit Corporation, 37
F.3d 9 (1st Cir. 1994)(adopting, without discussion, effective
date of October 1, 1986).
The district court declined to follow Koger, noting the
Koger court did not discuss or even mention the December 16, 1985
date. If October 1, 1986 is the effective date, then the
December 16, 1985 date is unmoored to any purpose. In effect,
the Koger decision renders this latter date entirely superfluous.
This violates a basic tenet of statutory construction, equally
applicable to regulatory construction, that a statute "should be
construed so that effect is given to all its provisions, so that
no part will be inoperative or superfluous, void or
insignificant, and so that one section will not destroy another
unless the provision is the result of obvious mistake or error."
2A Norman J. Singer, Sutherland, Statutes and Statutory
Construction, § 46.06, at 119-20 (5th ed. 1992)("Sutherland
Statutory Construction").
The Board's discussion of the revised Regulation B
supports the district court's interpretation of the effective
date. The mandatory compliance date should not be misconstrued
as the effective date of the revisions. The prior version of
Part 202 was redesignated as Part 202a, and the Board repeatedly
referred to the "new [revised] Part 202" as effective on December
16, 1985.2 The Board specifically commented that several
revisions may necessitate "operational changes," and the October
1, 1986 date offered creditors a grace period to implement such
2
Under the section entitled, "Effective Date," the Board noted a "new Part 202 is added to be
effective on December 16, 1985" and made no mention of an optional compliance period.
Revision of Regulation B, 50 Fed. Reg. 48,018 (1985). Later, under the section, "Supplementary
Information," the Board added the language giving creditors the "option" of continuing to follow
the then existing Part 202. Id.
changes. 50 Fed. Reg. 48,018. However, the Board deemed
expansion of the term "applicant" as a "substantive" change not
requiring modification of procedures. Id. The district court
emphasized the fact that the ECOA has from its inception
prohibited requiring spousal guaranties. Hence, conferring
standing upon guarantors places no additional requirements upon
creditors, which accords with the Board's commentary, and thus
the expanded definition of "applicant" was immediately effective
as of December 16, 1985.
B. Statute of Limitations
The statute of limitations for bringing an ECOA claim
is two years from the date of an alleged violation. The district
court concluded that the statute of limitations had run on the
initial alleged violation and that the failure to release her
from the Guaranty during the bankruptcy proceedings, as well as
the institution of collection proceedings against her, did not
constitute new violations of the ECOA, each with its own two-year
limitations period. We need not reach those issues because we
conclude that the alleged violation is not barred as a defense.
III. Right of Recoupment
There are numerous circumstances under which a
guarantor may institute an action to declare his or her guaranty
void and seek damages or other relief. The expiration of the
statute of limitations calculated from the execution of said
guaranty may bar the institution of such independent action. No
such bar exists, however, to the utilization of such grounds as a
defense.
A guarantor may have the right to challenge a loan as
usurious or on other recognized grounds. See, e.g., McCarthy v.
First Nat'l Bank, 223 U.S. 493, 498 (1911)("As to the defense
[that a contract is usurious], there is no statute of
limitations. Whenever sued the debtor may plead the usurious
contract and be relieved from paying any interest whatever. But
if he elects to avail himself of the cause of action, he must sue
'within two years from the time the usurious transaction
occurred'"). However there may be no need to do so, if no effort
is made to seek collection from the guarantor. Numerous other
examples exist which do not and should not bar debtors or
guarantors from asserting such defenses notwithstanding that
independent actions based thereon are time-barred. See, e.g.,
Mellon Bank, N.A. v. Pasqualis-Politi, 800 F. Supp. 1297, 1301-02
(W.D.Pa. 1992)(assertion of otherwise time-barred securities
fraud claim is permissible recoupment defense in an action for
judgment on promissory notes if related to the nature of
plaintiff's demand), aff'd sub nom. Bhatla v. United States
Capital Corp., 990 F.2d 780 (3d Cir. 1993); Household Consumer
Discount Co. v. Vespaziani, 490 PA 209, 217-24 (1980)(statute of
limitations does not bar recoupment claim of Truth in Lending Act
violation to lenders' suit to collect on loans).
In this matter, plaintiff retained the right to assert
the violation when efforts were made to collect and enforce the
Guaranty.3 See Integra Bank v. Freeman, 839 F. Supp. 326, 330
(E.D.Pa. 1993)("Claims by way of recoupment are 'never barred by
the statute of limitations so long as the main action itself is
timely'")(quoting Bull v. United States, 295 U.S. 247, 262
(1935)). Although plaintiff brought this suit in federal court,
her ECOA claim was raised in direct response to Eastrich's state
court confession of judgment, which did not require or provide
for an answering pleading. The Loan note provided that in the
event of default, the maker, Hunt's Pier, "authorizes any
attorney of any court of record to appear for Maker and confess
judgment for the same . . . against Maker in favor of the holder
hereof." App. at 188. Through the confession of judgment
provision, Hunt's Pier, in effect, gave consent to having
judgment entered against itself and by extension, its guarantors.
Such a provision permits the creditor or its attorney simply to
apply to the court for judgment against the debtor in default
without requiring or permitting the debtor or guarantors to
respond at that juncture. The Guaranty further provided that the
guarantors irrevocably waived notice of "the commencement or
3
Pennsylvania law requires that "the defense asserted by way of recoupment must be related
to the nature of the demand brought by the plaintiff." Mellon Bank, 800 F. Supp. at 1301
(citation omitted). This "mutuality of demand" requirement is clearly met in this case. Id.
prosecution of any enforcement proceeding, including any
proceeding in any court, against Borrower or any other person or
entity with respect to any of the Guaranteed Obligations." App.
at 242. In fact, after the state court entered judgment,
plaintiff received a notice from a prothonotary of the state
court, notifying her that a judgment of confession had been
entered against her. App. at 295-96. Thus, in essence,
plaintiff's alleged ECOA violation is asserted as a defense to
the state confession of judgment.
We, therefore, reverse the district court's
determination that the ECOA cannot be used defensively. The
district court held that the "ECOA's statutory scheme does not
contemplate the invalidation of a guaranty as a remedy for an
ECOA violation, and that a defensive use of the ECOA is therefore
impermissible." 857 F. Supp. at 453. Although the Integra court
noted that some courts have refused to grant relief from
obligations under an unlawful credit instrument, we find the
court's analysis of the ECOA persuasive:
Congress -- in enacting the ECOA -- intended
that creditors not affirmatively benefit from
proscribed acts of credit discrimination. To
permit creditors -- especially sophisticated
credit institutions -- to affirmatively
benefit by disregarding the requirements of
the ECOA would seriously undermine the
Congressional intent to eradicate gender and
marital status based credit discrimination.
Integra, 839 F. Supp. at 329. This interpretation of the statute
best forwards its purposes, particularly in light of the
inclusion of a broad remedial provision, Section 1691e(c), in the
ECOA.4 Furthermore, as the Integra court observed, "[t]his rule
places a creditor in no worse position than if it had adhered to
the law when the credit transaction occurred. A creditor may not
claim to have relied factually upon a guarantor's assets if it
has never requested nor received financial information regarding
them. Further, a creditor may not claim legal reliance on a
signature that was illegally required in the first instance."
Id. at 329.
If Atlantic did in fact violate the ECOA, then
plaintiff may have a valid defense and obtain relief from her
obligations under the Guaranty. We note however that if
plaintiff's guaranty is voided, this would not void the
underlying debt obligation nor any other guaranties. See id.
("[W]hile an ECOA violation should not void the underlying credit
transaction[,] an offending creditor should not be permitted to
look for payment to parties who, but for the ECOA violation,
would not have incurred personal liability on the underlying debt
in the first instance"). The district court ruled in favor of
defendant as a matter of law and did not make a factual
determination that Atlantic required her signature solely based
upon her marital relationship with a borrower. Although the
4
Section 1691e(c) provides that "[u]pon application by an aggrieved applicant, the
appropriate United States district court or any other court of competent jurisdiction may grant
such equitable and declaratory relief as is necessary to enforce the requirements imposed under
this subchapter." 15 U.S.C. § 1691e(c).
district court noted plaintiff was not a partner in Hunt's Pier,
Atlantic may have justifiably required her to guaranty the loan
if it determined her husband was not independently creditworthy.
Eastrich also raises another critical consideration.
It claims it is not a "creditor" as defined in the statute:
Creditor means a person who, in the ordinary
course of business, regularly participates in
the decision of whether or not to extend
credit. The term includes a creditor's
assignee, transferee, or subrogee who so
participates . . . . A person is not a
creditor regarding any violation of the act
or this regulation committed by another
creditor unless the person knew or had
reasonable notice of the act, policy, or
practice that constituted the violation
before becoming involved in the credit
transaction . . . .
12 C.F.R. § 202.2(l)(emphasis added). If Eastrich was a holder
in due course and thus, not a "creditor," then it is not subject
to plaintiff's ECOA defense. The district court did not address
this issue, and the record lacks sufficient factual findings for
this court to make such a determination. If plaintiff was
compelled to execute the Guaranty in violation of the ECOA and
Eastrich knew or had reason to know of the violation, plaintiff
is not barred from asserting the violation as a defense to any
efforts by Eastrich to collect thereon, notwithstanding that her
right to institute an independent action may be time-barred. If
plaintiff was required to sign said Guaranty without any reliance
by the lender upon her creditworthiness, solely for the purpose
of expediting a loan for her spouse and his business, that
Guaranty cannot be enforced against her by the original lender or
any subsequent holder of the loan who knew or had reason to know
of those circumstances. Although such circumstances would have
permitted the institution of an independent action within the
statutory period, the violation may be asserted as a defense at
any time following efforts to enforce the Guaranty. To hold
otherwise would not protect against the discrimination which the
statute seeks to prevent and prohibit. Accordingly, we will
remand to the district court for a hearing to determine,
factually and legally, whether Atlantic violated the ECOA in
requiring plaintiff's signature and whether Eastrich knew or had
reason to know of the violation when it acquired the Guaranty.
On the basis of these findings, if appropriate, the district
court should reconsider granting the request for injunctive
relief.
IV. Conclusion
For the foregoing reasons, we reverse the district
court's dismissal of plaintiff's complaint and denial of
injunctive and declaratory relief. We remand for further
proceedings consistent with this opinion.
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