Frontenac Bank v. T.R. Hughes, Inc.

Citations: 404 S.W.3d 272; 2012 Mo. App. LEXIS 1181; 2012 WL 4486312Docket: No. ED 97499

Court: Missouri Court of Appeals; September 25, 2012; Missouri; State Appellate Court

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Frontenac Bank initiated legal action against Summit Point, L.C., T.R. Hughes, Inc., Thomas R. Hughes, and Carolyn Hughes to recover on seven promissory notes and related guaranty agreements. The circuit court granted summary judgment in favor of Frontenac against the Defendants, who are now appealing the decision. Conversely, the court ruled in favor of Carolyn Hughes, granting her equitable relief based on her defense that Frontenac violated the Equal Credit Opportunity Act (ECOA) concerning claims against her, which Frontenac is also appealing. 

In 2003, Borrowers, including Homebuilder and Summit, secured financing from Frontenac for two real estate projects, leading to the execution of seven promissory notes and related deeds of trust. In 2009, Frontenac declared the notes in default and conducted three foreclosure sales, purchasing the properties involved. Subsequently, Frontenac filed a 16-count petition against the Defendants and Carolyn for the outstanding loan balances. The Defendants counterclaimed for breach of contract and fraud, but these claims were dismissed as affirmative claims for relief, although they established the basis for their affirmative defenses.

Frontenac filed a motion for summary judgment, which was opposed by the Defendants and Carolyn, who argued that the personal guarantees were void due to ECOA violations, asserting the borrowers were sufficiently creditworthy. Following a hearing, the circuit court awarded summary judgment to Frontenac for specific amounts against the Defendants while acknowledging Carolyn's defense under the ECOA, ruling that her guarantees were null and void, leaving that determination for trial.

A trial was conducted on May 23-24, 2011, leading to a judgment on June 16, 2011, in favor of Carolyn. The court ruled her guarantees invalid and unenforceable, citing discrimination based on marital status as a violation of the Equal Credit Opportunity Act (ECOA). The court found that while Thomas submitted joint financial statements for loan applications, Carolyn did not intend for these to serve as a credit application or personal guaranty. Additionally, the court established that Frontenac treated these submissions as applications for joint credit and that Carolyn only signed the guarantees under Frontenac's pressure, not voluntarily.

Key findings included: 
1. Frontenac’s loan policy primarily relied on specific loan-to-value ratios to assess borrower creditworthiness.
2. Frontenac's requirement for Carolyn to execute guarantees was a violation of the ECOA, given that the Borrowers met Frontenac's own credit standards.
3. Carolyn was neither a member nor manager of Summit and had no operational involvement with Homebuilder, despite being listed as treasurer in annual reports.

Frontenac's motion to vacate and amend the judgment was denied, leading to an appeal filed on October 4, 2011, challenging the judgment favoring Carolyn. Defendants also appealed on October 14, 2011, contesting the summary judgment in favor of Frontenac.

On appeal, Defendants argued:
1. The circuit court erred in granting summary judgment for Frontenac, asserting a genuine dispute over material facts concerning the deficiency judgment linked to foreclosure sale prices, which they claimed were below fair market value.
2. They contended that Frontenac committed a material breach of the promissory notes, which should preclude enforcement against them, and breached the duty of good faith and fair dealing, invalidating the deficiency judgment claim.

The standard of review for appeals from summary judgment is de novo, meaning the appellate court examines the case as if it were being decided for the first time. Summary judgment is upheld if no genuine dispute of material fact exists and the moving party is entitled to judgment as a matter of law. The appellate court reviews the record in a light favorable to the non-moving party.

Defendants claimed a genuine issue of material fact regarding the deficiency owed on promissory notes, arguing that the foreclosure sale prices were significantly below fair market value. They referenced a Missouri Supreme Court decision in *First Bank v. Fischer, Frichtel, Inc.*, which established that deficiencies are calculated based on foreclosure sale prices rather than fair market values unless there is a legal challenge to the sale itself. The court stated that a debtor must demonstrate that the sale price inadequacy is egregious enough to indicate fraud, which Defendants did not do. Consequently, it was concluded that the foreclosure sale prices adequately credited the Defendants’ loans.

Additionally, Defendants argued that Frontenac breached its duty of good faith and fair dealing in conducting the foreclosure sales. They suggested that better notice and more time for bidders could have led to higher sale prices for the properties. However, this claim did not substantiate a genuine dispute of material fact regarding the proper crediting of their loans based on the sale prices.

Defendants did not contest the time allowances during the foreclosure sales, and their supporting affidavit was found to be vague and speculative. Expert opinions based on speculation cannot establish disputed factual issues, as indicated in Neiswonger v. Margulis. Thomas's affidavit failed to demonstrate any breach of the implied duty of good faith and fair dealing, resulting in no genuine issue of material fact regarding deficiency balances or the foreclosure process. Consequently, the circuit court correctly granted judgment in favor of Frontenac on multiple counts related to recovery under the Notes and personal guarantees by Defendants.

In their second argument, Defendants claimed Frontenac breached the Notes by improperly declaring insecurity and violating the duty of good faith and fair dealing, asserting that this prevented Frontenac from obtaining a deficiency judgment. They contended that Frontenac wrongfully denied Summit the ability to draw on a Note to cover interest payments on other Notes, leading to defaults on those Notes. Specifically, they cited loan 1124004, established for interest payments, arguing that Frontenac had no good faith grounds for declaring defaults, especially since it renewed several Notes prior to these declarations without material changes.

The analysis of Frontenac's refusal to advance funds under Note 1124004 hinged on its express provisions, which allowed for withholding advances if the Borrower or guarantor was in default, insolvent, or if the Lender believed itself insecure. Missouri courts define insolvency as the inability to pay debts as they come due or when liabilities exceed assets. A debtor not paying debts as they become due is presumed insolvent. The Western District Court of Appeals clarified that the covenant of good faith is not merely a reasonableness standard; it is based on the belief of the party acting in good faith, regardless of the truth or reasonableness of that belief, emphasizing the importance of adhering to the actual agreement between parties.

Reasonableness serves as evidence of subjective intent to undermine contract fulfillment. Good faith is a legal obligation aimed at preventing opportunistic behavior and ensuring parties do not exploit changing economic conditions for undue gains. Summit established loan 1124004 for $665,000 in October 2007 and drew $128,334.52 on its line of credit from November 2007 to early 2009, primarily to pay interest on other Notes. In early 2009, Frontenac denied further draws on this loan, despite Summit being current on all payments, leaving an untapped principal balance of $536,665.48. Defendants argue that this refusal was improper since no defaults had been declared and payments were up to date. Frontenac contends its refusal was justified by a belief of 'insecurity' due to an economic crisis affecting Summit's financial stability, supported by testimony from its CEO regarding adverse conditions. However, Defendants countered with evidence of Summit’s operational status, including timely bill payments and continued employment, arguing that Frontenac had previously allowed loan renewals without indication of insolvency. The court finds genuine material issues of fact regarding Defendants' insolvency, the definition of good faith, and whether Frontenac's refusal was justifiable. Additionally, Defendants assert that loan 1124004 was intended for interest payments on other loans, and Frontenac's refusal to allow further draws led to wrongful defaults on those Notes.

Defendants argue that the line of credit loan is interconnected with other loans, but Frontenac asserts that there is no provision in the loan documents linking repayment of the other loans to the line of credit, which Frontenac claims constitutes impermissible parol evidence. The court clarifies that the parol evidence rule only prohibits contradicting integrated contracts and does not apply to testimony that merely explains the terms of the written agreements. Testimony indicates that Frontenac's refusal to allow further draws on the line of credit impacted Borrowers' ability to pay other loans, leading to defaults. Frontenac's designee confirmed that proceeds from the line of credit were used for interest payments on other loans, and the court finds that this testimony does not alter the written contracts' terms. Consequently, there are genuine disputes of material fact regarding Defendants' affirmative defense of Frontenac's material breach of the promissory notes. The circuit court's summary judgment in favor of Frontenac on multiple counts is deemed erroneous and is reversed and remanded for further proceedings.

In Frontenac's appeal, it raises six issues, including challenges to the circuit court's findings on the creditworthiness of Summit and Homebuilder, Carolyn's role as an officer in the businesses, and the validity of her personal guarantees. Specifically, Frontenac claims evidence shows the businesses were not independently creditworthy, that Carolyn was an officer based on documentation submitted, and that her personal guarantees were voluntarily provided as additional security for the loans.

Frontenac claims the circuit court erred in declaring Carolyn's personal guarantees void under the Equal Credit Opportunity Act (ECOA). In Point I, Frontenac argues that under Missouri property law, which follows 'tenants by the entirety' rules, a lender can require a personal guaranty from Carolyn due to her joint ownership of assets with Thomas. Point II contends that the ECOA does not prohibit spousal guarantees when one spouse is not independently creditworthy, asserting that no evidence was presented to prove Thomas's creditworthiness. In Point VI, Frontenac asserts that the ECOA does not extend to spousal guarantees, challenging the circuit court's decision.

The document also outlines the applicable standard of review. In appeals from civil cases tried in court, judgments are affirmed unless they lack substantial evidence, are against the weight of the evidence, or misapply the law. The Missouri Supreme Court clarifies that appellate courts review questions of law de novo, while deferring to trial courts on factual determinations. The standard for overturning a judgment as against the weight of the evidence requires a strong belief that the judgment is incorrect. Appellate courts do not reassess testimony but focus on whether substantial evidence supports the trial court's findings. The party asserting an affirmative defense carries the burden of proof in civil actions.

The Circuit Court made several key findings of fact regarding the ECOA defense in relation to the loan applications submitted by Borrowers Thomas and Carolyn. Notably, Thomas submitted joint financial statements without Carolyn's intention to apply for credit or to provide a personal guaranty. Frontenac, however, interpreted this submission as an application for joint credit, adhering to its practice of requiring financial statements for such applications. The court found that Carolyn only executed the guarantees at Frontenac's insistence, which was a condition for the loans, and that Frontenac's Loan Policy included specific loan-to-value ratios determining whether a loan was considered "conforming." Each loan in question fell within these acceptable ratios, indicating that the Borrowers met Frontenac's creditworthiness standards. Importantly, evidence showed that Frontenac did not properly analyze the Borrowers' creditworthiness before demanding Carolyn's guarantees, nor did it explore alternative collateral options. Additionally, the court established that Carolyn was neither a member nor manager of Summit, had limited involvement with Homebuilder despite being listed as Treasurer, and that Frontenac’s demand for her guarantees was solely based on her marital relationship to Thomas, not any business affiliation. Frontenac claimed that Carolyn voluntarily offered the guarantees without request from the lender.

The appellate court reviewed the circuit court’s factual findings regarding Frontenac's appeal, which raised three main issues: the independent creditworthiness of Summit and Homebuilder, Carolyn's status as an officer or director, and her personal guarantee to Frontenac. 

1. **Independent Creditworthiness**: Frontenac argued that the circuit court improperly determined that Summit and Homebuilder were independently creditworthy based solely on their compliance with Frontenac's loan-to-value ratios. Frontenac asserted that it considered multiple factors, including the necessity of personal guarantees from Carolyn and Thomas, prior to approving the loans. However, despite some evidence supporting Frontenac's claims, the appellate court deferred to the circuit court's credibility assessments, ultimately finding substantial evidence supported the circuit court’s conclusion that the borrowers were independently creditworthy. The written loan policy of Frontenac emphasized loan-to-value ratios without acknowledging additional criteria that Frontenac claimed were considered.

2. **Carolyn’s Status**: Frontenac contended that the circuit court erred in finding Carolyn was not an officer or director of the businesses, which would affect the validity of her personal guarantees. The court noted that Carolyn and her husband provided sworn documentation to the Missouri Secretary of State and to Frontenac indicating her role as treasurer of Homebuilder and part owner of Summit. 

The appellate court concluded that Frontenac's points on appeal were without merit, affirming the circuit court’s findings.

Carolyn was identified as treasurer on Homebuilder's registration reports, but this was contested during the trial. Testimony indicated that Carolyn was not involved in Homebuilder’s operations, nor was she a shareholder or owner. Evidence also revealed that Frontenac provided a borrowing resolution to Thomas, listing Carolyn as a member of Summit; however, Thomas did not read this document and claimed it was incorrect. Summit's operating agreement, possessed by Frontenac, confirmed Carolyn was neither a member nor a manager. Both Thomas and Carolyn testified about her lack of involvement in business decision-making.

Frontenac asserted that it did not demand Carolyn's guarantees based on her alleged officer status but rather because she was Thomas's wife, which was supported by testimony from Rocco Russo, Frontenac’s former banking center president. Russo indicated that personal guarantees from spouses were routine but he was unaware of any requirement for Carolyn's guaranty due to her officer status.

The circuit court found substantial evidence supporting the conclusion that Carolyn was neither an officer nor director of the businesses and that Frontenac did not demand her guarantees based on any relationship with Summit or Homebuilder. Additionally, Frontenac's claim that Carolyn voluntarily offered her personal guarantees was disputed. The court found it did not err in its judgment, as it adhered to the Equal Credit Opportunity Act (ECOA) regulations, which were not misapplied. Frontenac's argument centered around written documentation signed by Carolyn, which indicated the guarantees were executed at the Borrower's request, but the court upheld that parol evidence could not alter this. Frontenac also argued that personal financial statements submitted should be considered a voluntary offer for guarantees, but this contention was not upheld by the court.

The personal financial statement indicates its purpose is to persuade the lender, Frontenac, to extend or maintain credit based on the undersigned’s guarantees. The applicant must complete all sections if relying on another's income or assets for repayment. Frontenac contends that the circuit court's findings overlook these statements and the parol evidence rule, which prohibits introducing external evidence that contradicts a written agreement. However, testimony from Carolyn and Thomas suggests Carolyn did not voluntarily offer her guarantees but signed at Thomas's request to secure loans. Frontenac’s former executives confirmed that it was standard practice to treat joint financial statements as joint credit applications, often requiring personal guarantees from spouses. Notably, the personal financial statements included an unchecked box next to the guarantee terms, indicating Carolyn's non-agreement.

Frontenac's argument for excluding external evidence based on the parol evidence rule is countered by the principle that such evidence can be admissible to show that a contract relates to illegal agreements. The circuit court found sufficient evidence to support its conclusion regarding Carolyn's involuntary guarantees, ruling that its findings were not contrary to the evidence or misapplications of the law. 

In addressing Frontenac's appeal concerning the Equal Credit Opportunity Act (ECOA), the court determined that the circuit court correctly deemed Carolyn's personal guarantees void under the ECOA. Frontenac's claim that Missouri property law allows for requiring such guarantees in a “tenants by the entireties” context was rejected, affirming that the ECOA does not permit the enforcement of guarantees that violate its provisions.

Frontenac argues that Thomas's personal financial statement, which included jointly owned assets with Carolyn, was crucial in obtaining loans, as it underpinned Thomas's personal guarantees. It challenges the circuit court's findings, claiming they lack substantial evidence and misinterpret the Equal Credit Opportunity Act (ECOA). The ECOA prohibits discrimination in credit transactions based on marital status and states that creditors cannot require a spouse's signature unless necessary for secured credit. Regulation B, under the ECOA, specifies that a creditor cannot treat a joint financial statement as a joint credit application and outlines exceptions for secured credit, allowing for a spouse’s signature if required by state law. A recent bankruptcy court case in Tennessee affirmed that requiring a limited guaranty from a spouse, confined to their interest in property, fell within this exception. The court concluded that Carolyn's unlimited personal guarantees exceeded the bounds of what Regulation B permits, as they were not merely for securing property related to Thomas's debts.

The circuit court found that Frontenac did not have the right to require a broad relinquishment of rights from a spouse or joint owner to satisfy a debt. Evidence indicated that Frontenac failed to analyze the Borrowers' creditworthiness, although they met the lender's standards. Frontenac incorrectly treated Thomas’s joint financial statements as personal guarantees, a practice that appeared to be standard for them regarding significant loans. Furthermore, Frontenac did not explore less stringent collateral options that could secure the loans without requiring unlimited personal guarantees. This conduct exceeded the limitations set by Regulation B of the ECOA, leading to a violation of the act. 

In its second point, Frontenac argued that the ECOA permits a spouse to provide a personal guaranty if their partner is not independently creditworthy, claiming that there was no evidence that Thomas was independently creditworthy. However, the circuit court found substantial evidence that the loan applicants, Summit and Homebuilder, were independently creditworthy according to Frontenac's own criteria, making the inquiry into Thomas’s creditworthiness unnecessary. Consequently, the provisions allowing for a spouse's involvement as a guarantor were not applicable, and the court correctly determined that Frontenac's treatment of Thomas's submission as an application for joint credit violated the ECOA.

Frontenac's second point was denied, affirming that C. Boone National Savings and Loan Assoc. is not overruled. In its sixth point, Frontenac argued that the circuit court incorrectly declared Carolyn's personal guarantees void under the Equal Credit Opportunity Act (ECOA). Frontenac cited several federal cases post-Boone National Savings that rejected the application of the ECOA to spousal guarantees, asserting that the circuit court relied solely on Boone National Savings and overlooked these developments. The Missouri Supreme Court's decision in Boone allowed a wife to use the ECOA as a defense against a creditor’s claim on a guaranty. Frontenac noted the absence of cases in Missouri invalidating spousal guarantees under the ECOA since Boone and referenced federal rulings indicating that spousal guarantees do not fall under ECOA protections. The definition of “applicant” under the ECOA does not include guarantors, as established by subsequent interpretations. However, the court maintained that Carolyn was protected as a guarantor under the ECOA based on Boone's binding precedent. Thus, the circuit court’s ruling to void Carolyn’s guarantees was upheld. The judgment was reversed and remanded for further proceedings on Frontenac’s claims regarding loan agreements, while affirming the ruling in favor of Carolyn based on the ECOA defense on specific counts of Frontenac's petition. The judges concurred, and the document noted what constitutes an event of default related to lender insecurity.