                                                                                                                           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Precedential or Non-Precedential: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.
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          UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT
              _____________________

                   No. 94-1783
              _____________________

                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)
              _____________________

             Argued February 2, 1995

Before: SCIRICA, ROTH, and SAROKIN, Circuit Judges

            (Filed    March 28, l995)
              _____________________

                      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
                      ____________________

                       OPINION OF THE COURT
                      _____________________


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.

                          __________________
