Opinion ID: 3009965
Heading Depth: 1
Heading Rank: 4

Heading: Right of Recoupment

Text: 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.