She never thought she’d be a defendant in a foreclosure case. She didn’t even buy property. All she did was sign a personal guarantee for her husband’s business loan. It was routine, they said.
And now she’s facing a foreclosure suit that could cause her to lose everything she has. Does she have any defense?
The answer is….maybe. Spouses can’t be forced to sign personal guarantees just because they’re married to someone who is buying property or taking out a loan. But if the bank has a good reason for asking for the guarantee, then it may stand.
In Richardson v. Everbank, two wives signed personal guarantees when their husbands’ limited liability company took out a commercial loan. When they challenged the legality of those guarantees, one wife’s guarantee was voided, but the other’s was not.
Banks commonly require personal guarantees on business loans when the business does not have sufficient income, assets and credit history. When you sign a personal guarantee, you agree to pay the loan yourself if the business cannot pay it.
In the Richardson case, the business defaulted on the loan, and the lender filed a lawsuit for foreclosure and recovery of money due under the promissory note and personal guarantees. Because of the personal guarantees, both of the wives were named as defendants in the lawsuit.
The wives, claimed, however, that it was wrong for the bank to ask them to sign guarantees in the first place. They said that this violated the Equal Credit Opportunity Act of 1974, which prohibits a lender from discriminating against a loan applicant based on marital status. This discrimination could include requiring a wife to sign a personal guarantee if the husband could qualify for the loan on his own.
The Florida Court of Appeal outlined two reasons a lender could legitimately ask a wife to sign a personal guarantee. First, if the loan is secured by assets held jointly by the husband and wife, the lender might be unable to access those assets if the husband defaulted – unless the wife signed a guarantee. Second, if the husband couldn’t qualify for the loan on his own, the wife could act as a co-signer.
The financial statements submitted by the Richardsons showed that they jointly owned numerous assets, including a home, vehicles and personal property. It appeared that they also co-owned business ventures.
Because of the co-ownership of assets and Mr. Richardson’s failure to identify any assets that he owned by himself, the appeals court found that it wasn’t unreasonable for the bank to seek a guarantee from Mrs. Richardson. The guarantee protected the bank’s ability to reach the assets if Mr. Richardson’s company defaulted.
The other couple presented a different situation. That couple didn’t identify any joint assets on the loan application. The trial court found that the wife was only asked to sign a guarantee because she was married to a co-owner of the business. This was discrimination based on marital status, and therefore the guarantee she signed was void and unenforceable.