It’s becoming an all-too-familiar fact pattern: a former spouse loses his business and is uncollectable/bankrupt leaving the bank to look to the former spouse for collection pursuant to a guaranty taken out during the marriage. In those instances, lawyers need to closely evaluate whether the spousal guarantor has a defense under the Equal Credit Opportunity Act. (“ECOA”).
While a complete description of an ECOA claim is beyond the scope of this post, spousal guaranties often violate the ECOA when (1) the applicant spouse and/or business is independently credit worthy when the credit was extended, or (2) the spouse was required to provide a guaranty without an analysis of assets and how they are held. Essentially, while a creditor may require an additional guarantor, it may not require that the spouse provide it. See Regulation B, especially §§ 202.7 which can be found here
And while the statute of limitations on an ECOA claim is two years, courts are allowing debtors to assert an ECOA affirmative defense regardless of whether the claim would otherwise be barred. The most common rationale for the defense is one of recoupment or illegality. A great analysis of the state of the law was set forth by the Iowa Supreme Court this past summer in the case of Bank of the West v Kline, 782 NW2d 453 (2010). See also FDIC v Medmark, 897 FSupp 511 (D Kan 1995). An while no appellate court in Michigan has yet considered this question - - I believe the defense will be viable if and when it is challenged.