BayBank v. Bornhofft

• Decision Date: 03 June 1998
• Citation: 427 Mass. 571,694 N.E.2d 854
• Parties: BAYBANK 1 v. Henry J. BORNHOFFT, Third, & others. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 854

694 N.E.2d 854

427 Mass. 571

BAYBANK ¹ v. Henry J. BORNHOFFT, Third, & others. ²

Supreme Judicial Court of Massachusetts,

Essex.

Argued April 9, 1998.

Decided June 3, 1998.

John D. Hanify, for Nancy L. Bornhofft.

David J. Gallagher, for plaintiff.

Before ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

FRIED, Justice.

The plaintiff bank brought a collection action against various parties including the defendant, Nancy L. Bornhofft, to collect on a $440,000 note in default. She counterclaimed, alleging that the bank violated the Equal Credit Opportunity Act (ECOA), 15 U.S.C. §§ 1691-1691f (1994), and G.L. c. 93A, by requiring her signature on the note. The judge granted summary judgment for the bank, finding that the defendant lacked standing to seek redress under ECOA. We affirm in part and remand in part for further proceedings.

I

The Superior Court judge found the following facts. In 1983, Henry J. Bornhofft, Third (Henry), bought out two partners to acquire control over the Gloucester Yankee Marine Service, Inc. (GYMS), a full-service yacht yard in Gloucester owned by a trust established in 1982 (trust). Henry thereupon became the one hundred per cent beneficiary of the trust. In 1985, the defendant, Henry's mother, gave Henry $50,000 in exchange for a twenty-five per cent interest in the trust. At that time, the yacht yard was worth approximately $600,000. The defendant apparently often assisted Henry financially. During the period from 1984 to 1994, for example, she gave over $650,000 to Henry or to other individuals on his behalf.

In July, 1987, GYMS was suffering a severe cash flow shortage, and its primary lender had begun foreclosure proceedings against GYMS and the trust. Henry was also seriously delinquent on a number of personal loans. In 1987, Henry completed a business plan and a loan application for the bank in order to secure additional financing of $400,000 to $500,000. The business plan showed that GYMS had a year-end net income of $31 as of April 30, 1987. On the application, Henry designated the trust as the borrower and under the words "Guarantees: names of persons who will guarantee or endorse loan," Henry listed himself as seventy-five per cent beneficiary of the trust and his mother, the defendant, as twenty-five per cent beneficiary. Henry signed the application on the trust's behalf. Henry did not inform the defendant of this, nor did the bank request or receive any financial or net worth information about her.

Based on the application, the bank completed a commitment letter setting forth the terms of the loan and providing that the defendant would be personally liable for the loan obligations as comaker of the loan. Both Henry Bornhofft and the defendant signed the letter. The bank then drafted the loan instruments, and on July 24, 1987, a promissory note in the amount of $440,000 was executed by Henry Bornhofft and the defendant as "Borrower," and endorsed by Henry Bornhofft as trustee of the trust as guarantor.

In November, 1989, the defendant was assigned Henry Bornhofft's seventy-five per cent interest in the trust after she paid $285,000 to another creditor, Richard Ravech, to rescue Henry from foreclosure proceedings. At that time, she acknowledged that she was comaker of the $440,000 note with the bank and agreed to make all payments on the loan. In 1989, the defendant also signed several forbearance agreements under which the bank agreed to forbear from collection activities for a one-year period.

On April 11, 1994, the bank filed a complaint against Henry Bornhofft and his mother, individually; J. Eric Bornhofft and Henry Bornhofft as trustees of the trust; and GYMS, to recover on the $440,000 note and on a second $45,000 note to GYMS. See note 2, supra. After Henry Bornhofft sought bankruptcy protection, the bank dismissed its claims against him. On May 18, 1994, the defendant filed a counterclaim alleging that the bank had violated ECOA and G.L. c. 93A. Both parties filed motions for summary judgment, and on September 22, 1995, the judge denied the defendant's motion and entered judgment for the bank. In a revised memorandum of decision filed March 11, 1996, the judge held that the defendant did not have standing under ECOA because neither she nor the trust was a member of a class protected by the statute. We transferred the defendant's appeal to this court on our own motion.

II

"The standard of review of a grant of summary judgment is whether, viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to a judgment as a matter of law. Mass. R. Civ. P. 56(c), 365 Mass. 824 (1974). See Yakubowicz v. Paramount Pictures Corp., 404 Mass. 624, 626, 536 N.E.2d 1067 (1989).... We may consider any ground supporting the judgment." (Citations omitted.) Augat, Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117, 120, 571 N.E.2d 357 (1991). "[A] party moving for summary judgment in a case in which the opposing party will have the burden of proof at trial is entitled to summary judgment if he demonstrates, by reference to material described in Mass. R. Civ. P. 56(c), unmet by countervailing materials, that the party opposing the motion has no reasonable expectation of proving an essential element of that party's case." Kourouvacilis v. General Motors Corp., 410 Mass. 706, 716, 575 N.E.2d 734 (1991).

A

ECOA provides that:

"It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction: (1) on the basis of race, color, religion, national origin, sex or marital status, or age...." 15 U.S.C. § 1691(a)(1).

ECOA defines an applicant as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit." 15 U.S.C. § 1691a(b). ³ ECOA provides a remedy for violation of the act: a Federal civil action against the creditor for damages, punitive damages not to exceed $10,000, and attorney's fees. See 15 U.S.C. § 1691e(a),(b),(d). ⁴

Pursuant to its statutory authority, 15 U.S.C. § 1691b, the Federal Reserve Board (board) has promulgated regulations under ECOA. See 12 C.F.R. §§ 202 et seq. (1997) (Regulation B). Prior to January 1, 1986, Regulation B excluded guarantors from the definition of the term "applicant," and thus from the protection of ECOA. ⁵ On that date the board amended the definition of "applicant," as follows:

"Applicant means any person who requests or has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of § 202.7(d), the term includes guarantors, sureties, endorsers and similar parties." 12 C.F.R. § 202.2(e).

In support of this change, the board's official staff commentary regarding Regulation B states:

"The principal effect of the change is to give guarantors and similar parties standing to seek legal remedies when a violation occurs under § 202.7(d).... The Board has included guarantors and similar parties within the definition of 'applicant' to resolve th[e] question of standing." 50 Fed.Reg. 48,020 (1985) (official staff commentary).

Section 202.7(d) of Regulation B sets out rules governing applications for credit. Section 202.7(d)(1) states that 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)(1).

The usual application of § 202.7(d)(1) prohibits a creditor from requiring the signature of an applicant's spouse if the applicant is otherwise qualified for a loan. See Anderson v. United Fin. Co., 666 F.2d 1274, 1276 (9th Cir.1982). If additional guarantors are required, an applicant's spouse may serve as guarantor but may not be required to do so in the place of an acceptable substitute. See 12 C.F.R. § 202.7(d)(5). In addition, the board has made clear that because a guarantor is to be considered an applicant for the purposes of § 202.7(d), a creditor may not require the signature of a guarantor's spouse:

"The rules in § 202.7(d) bar a creditor from requiring the signature of a guarantor's spouse just as they bar the creditor from requiring the signature of an applicant's spouse. For example, when all officers of a closely held corporation are required to personally guarantee a corporate loan, a creditor may not automatically require that spouses of married officers also sign. However, an evaluation of the financial circumstances of an officer may indicate that an additional signature is necessary, and this may be the signature of a spouse in appropriate circumstances." 50 Fed.Reg. 48,052 (1985) (official staff commentary).

B

The bank argues, and the Superior Court judge agreed, that the defendant does not come within the class of persons protected by ECOA and thus cannot avail herself of the statute. As the Court of Appeals for the First Circuit has stated, the protected class approach used under the Equal Employment Opportunity Act, 42 U.S.C. §§ 2000e-2 (EEOA), is generally an appropriate model in the ECOA context. See Mercado-Garcia v. Ponce Fed. Bank, 979 F.2d 890, 892-893 (1st Cir.1992) (requiring plaintiff who alleged discrimination by bank in credit decision to prove prima facie case). When it is alleged that a loan was denied for discriminatory reasons, for example, courts have required ECOA litigants to show that they are members of a class protected by the statute and to plead a prima facie case of discrimination. Various courts have made this analogy. See Bhandari v. First Nat'l Bank of Commerce, 808 F.2d 1082, 1100-1101 (5th Cir.1987) (applying EEOA analysis to claim of discrimination in credit transaction and finding no prima facie case); Gross v. United States Small Business Admin., 669...