A River—and a State Line—Runs Through It

This is a time of regulatory uncertainty for both banks and businesses as we face the possibility of sweeping changes to Dodd-Frank and the tax code, increased regulation of credit unions and financial-tech firms, and changes to the structure and authority of the Consumer Financial Protection Bureau. In addition, fair lending continues to be a focus for regulators as they look at potential gender discrimination in small business lending and Web site and app accessibility under the Americans with Disabilities Act.  

 In this time of regulatory uncertainty, and increased competition for loans, it is important for banks to continue to make strong loans, which support economic growth for businesses, while protecting themselves in the event of a default. Three legal issues remain certain to be considered by banks, borrowers and guarantors regarding loans made in Kansas and Missouri while the regulatory uncertainty in Washington continues.  

First, following last year’s U.S. Supreme Court’s 4-4 split decision in Hawkins v. Community Bank of Raymore, there continues to be a split of authority regarding whether a guarantor can bring an action or defense for violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.  Because the U.S. Supreme Court affirmed the 8th Circuit Court of Appeals’ ruling that guarantors are unambiguously excluded as “applicants” under ECOA and cannot claim a violation of ECOA as an affirmative defense to avoid liability on guarantees with lenders, in Missouri, guarantors cannot bring and banks no longer need to be concerned with ECOA claims or defenses. 

In Kansas, however, as well as many other jurisdictions outside of the 8th Circuit, the possibility of ECOA claims and affirmative defenses by guarantors remains alive and well. See. F.D.I.C. v. Medmark and Boyd v. U.S. Bank Nat’l Ass’n. As a result, banks making loans in Kansas need to continue to exercise an abundance of caution when requiring guaranties from spouses of loan applicants and guarantors should be aware of their rights under ECOA and Regulation B. 

Second, both Kansas and Missouri have enacted credit agreement statutes of fraud.  In Missouri, the statute provides that “[a] debtor may not maintain an action upon or a defense, regardless of legal theory in which it is based, in any way related to a credit agreement unless the credit agreement is in writing.”  R.S.M.O. § 432.047[2]. “This language is very broad and demonstrates the legislature’s intent to eliminate all claims and defenses relating to a credit agreement if that credit agreement is not in writing.”  Smithville 169 v. Citizens Bank & Trust Co.  

Put simply, in Missouri, guarantors cannot avoid their guaranty obligations through allegations about oral promises related to the guaranty or related written credit agreements. The statute in Kansas, however, is different and the scope of claims barred by the statute is less clear.  K.S.A. § 16-118. In any event, both statutes require that certain language be included in the loan documents in order to trigger the protections of the statute and banks should be careful to include the prescribed language in order to protect the banks against claims in the event of a default while borrowers and guarantors would do well to get any agreement impacting the loan in writing.

Third, if a loan is secured by both real estate and guaranties, Missouri and Kansas law impose different standards for recovering against the guarantor on a deficiency after foreclosure.  In Missouri, the “mortgagor cannot defend [in] an action to recover a deficiency after foreclosure on the ground that the property was sold for less than its value, if the sale was conducted regularly and fairly.”  Reed v. Inness and Macon-Atlanta State Bank v. Gall. Accordingly, in Missouri, a bank need only conduct a regular and fair sale of the real estate before pursuing a deficiency against the guarantors.  

In Kansas, however, a bank must confirm the foreclosure and the court must find as a condition to confirmation that the fair value of the property be credited upon the judgment, interest, taxes and costs. “Fair value” is not simply the intrinsic value, but is “determined by all of the circumstances affecting the intrinsic value of the property at the time of the sale.” Olathe Bank v. Mann. So, in
Kansas, a bank must establish the fair value of the property prior to or contemporaneously with pursuing the guarantors for the deficiency.