Franchisors often require the owners of its corporate franchisees to sign personal guaranties, which are agreements by which those persons assume the responsibilities, e.g., payment obligations, of the franchised entity. Some franchisors, however, may require the husband or wife of a shareholder, partner or member of its franchised entities to also sign a personal guaranty. In some circumstances, this may be a violation of federal law.
Under the Equal Credit Opportunity Act (the “ECOA”), “creditors” cannot discriminate against “applicants” with respect to any aspect of a credit transaction on the basis of marital status. If they do, aggrieved applicants can bring a lawsuit to recover their actual damages, up to $500,000 in punitive damages, and litigation costs, including reasonable attorneys’ fees. While not all franchisors are creditors, some—such as those who finance or require installment payments of their initial franchise fee or lease land or equipment—may be.
Furthermore, while the Courts of Appeals are split, in some places the spouse of a shareholder, partner or member of franchised entity that guaranties the franchisee’s responsibilities is an “applicant” within the meaning of the ECOA. Compare, e.g., RL BB Acquisition, LLC v. Bridgemill Commons Dev. Group, LLC, 754 F.3d 380 (6th Cir. 2014) (“A guarantor may …. seek relief for violations of [the Federal Reserve Board’s Regulation B]”); Anderson v. United Fin. Co., 666 F.2d 1274 (9th Cir. 1982) (holding lender violated ECOA by requiring applicant’s spouse to co-sign loan documents even though applicant was individually credit-worthy), with Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) (“[W]e conclude that a guarantor is not protected from marital-status discrimination by the ECOA”), and Moran Foods, Inc. v. Mid-Atl. Mkt. Dev. Co., LLC, 476 F.3d 436 (7th Cir. 2007) (“[T]here is nothing ambiguous about ‘applicant’ and no way to confuse an applicant with a guarantor”).
Finally, while requiring a spousal guaranty may not be discriminatory if the spouse’s assets or efforts will support the franchise, e.g., where the spouse is a joint applicant, the spouse is involved in the franchisee’s operations, the spouse’s assets are necessary for the franchisee to qualify as credit-worthy, or the spouse’s guaranty is necessary to perfect a security interest in pledged assets that are jointly held, a blanket policy requiring the spouse of every shareholder, partner or member of all franchised entities to sign a guaranty is very likely a violation of the ECOA.
Did you guarantee the obligations of a franchised business because you were or are married to someone who partly owned that business? If so, you may have claims for relief. Punitive damages of up to $500,000 may be recoverable even if you have not suffered any actual damages so long as the franchisor/creditor acted recklessly. If you are interested in a confidential and free consultation, call William Daniel Davis at 404.869.5261 today.
