United States: N.C. Supreme Court Issues Significant Ruling On Commercial Forbearance Agreements And Spousal Guaranties

On August 20, 2014, the North Carolina Supreme Court issued an opinion giving great weight to properly-drafted forbearance agreements in a commercial loan and guaranty context.   RL REGI N.C., LLC v. Lighthouse Cove, LLC, No. 427PA13 (N.C. Aug. 20, 2014) reverses the Court of Appeals decision from 2013, which focused on a defense pursuant to the federal law Equal Credit Opportunity Act ("ECOA").  

The Supreme Court's decision in RL REGI is a significant victory for lenders in North Carolina not only for what it says (highlighting the immeasurable value of well drafted loan documents) but also for what it abrogates (the lower court's holding that the ECOA is valid defense to a spousal guaranty in a commercial loan context).  

We begin this piece by noting that one of the editors of this blog was involved in this matter at the trial stage on the lender side.  Though that involvement was ultimately only on the behalf of the original lender, which was not involved at the trial stage or the appellate stage. 

The borrower and the guarantors defaulted on the forbearance agreement, and debt holder RL REGI foreclosed on the property and filed a lawsuit against the borrower and guarantors.  


Regions Bank provided over $4 million in financing for the acquisition and development of real property near Wilmington, North Carolina. The loan was secured by the real property, and the loan was backed by personal guaranties of the borrowers' individual business partners and their spouses.  The wives were not officers of, employees for or otherwise involved in the borrowing entity though nonetheless executed personal guaranties.  

As the economy took a poor turn -- we all remember those days -- the borrower and the guarantors defaulted on the loan.  After default, and before foreclosure on the real property, the borrowing entity and the individual guarantors -- two couples, husbands and wives --  entered into a single, omnibus forbearance agreement. The forbearance provided that the lender would forego exercising its remedies under the loan documents (note and the personal guaranties) for a defined time period in exchange for certain agreements from borrowers and guarantors.  The forbearance agreement acknowledged the validity and enforceability of the loan documents and the agreement included a "Waiver of Claims" section, whereby the borrowers and guarantors specifically waived and released any claims that the lender failed to act in good faith or conduct itself in a reasonable manner and generally released the lender from "any and all claims, defenses and causes of action" that occurred prior to the date of the forbearance agreement.  After the execution of the forbearance agreement, the loan was purchased from Regions Bank by a different entity, debt holder RL REGI North Carolina, LLC.

The Lawsuit and the "Equal Credit Opportunity Act" Defense

The foreclosure was granted, but appealed.  The appeal stayed while the parties litigated the separate lawsuit against the borrower and the guarantors.  Along the way, summary judgment was entered against the borrower (a single asset entity), one of the guarantors filed personal bankruptcy, and the other two guarantors settled with the debt buyer.  Thus, the lawsuit proceeded against the last guarantor, alone, whom we will call the "Spouse Guarantor".  That Spouse Guarantor is the wife of the bankrupt guarantor, and she claimed no leadership, operational or employment role in the borrowing entity.

At trial, the Spouse Guarantor asserted an affirmative defense that her guaranty was obtained in violation of the ECOA.  At its core, the ECOA affirmative defense stated: (1) Spouse Guarantor did not offer  to serve nor was she offered  by the borrower to serve as a personal guarantor to the loan, (2) Spouse Guarantor was required  by Regions Bank to guaranty the loan simply because she was the spouse of an officer of the borrowing entity, and (3) Spouse Guarantor was required  to serve as personal guarantor despite that Regions Bank did not first determine the creditworthiness of Spouse Guarantor's husband, a valid guarantor (i.e., Regions Bank did not first determine the financial strength of husband's guaranty before requiring  wife's guaranty).

The trial court found that the guaranty violated the ECOA and denied recovery on Spouse Guarantor's personal guaranty.

The North Carolina Court of Appeals

The N.C. Court of Appeals affirmed the trial court.  Most notably, in a case of first impression, the Court held that the ECOA may be asserted as an affirmative defense in the context of a spousal guaranty as opposed to a claim for relief or for recoupment, an issue over which courts are split.  

The Court of Appeals:  "A number of other state and federal courts have addressed this question [as to how to treat the ECOA] and have typically resolved it in one of three ways....  The first approach requires that a debtor can only assert an ECOA violation as a claim or counterclaim for damages, a position supported by Plaintiff in its brief....  The second approach allows a debtor to assert an ECOA violation as an affirmative defense in the nature of a 'recoupment.'....   The third approach allows a debtor to assert an ECOA violation as an affirmative defense based on the defense of illegality....  We believe that the third approach above is the most consistent with the law of this State and, therefore, we hold that a guarantor-spouse may assert an ECOA violation as an affirmative defense in an action brought by a lender."  

The significance of this decision for lenders in North Carolina could not have been overstated: in most instances, the limitations period for such ECOA claims had long run, as it did in this case, but the limitations period does not affect the ECOA as an affirmative defense.   In other words, if the ECOA is a valid affirmative defense in North Carolina, as it was determined to be by the Court of Appeals, there is no limitations period applicable to invalidate the ECOA defense.

In the wake of this Court of Appeals decision, a number of commercial guaranties governed by North Carolina law were, overnight, rendered toothless.

The North Carolina Supreme Court

The North Carolina Supreme Court reversed the Court of Appeals in RL REGI North Carolina, LLC v. Lighthouse Cove, LLC, No. 427PA13 (August 20, 2014).  However, the Supreme Court did not address the Court of Appeals' analysis of the ECOA and how it is to be treated in North Carolina.  Rather, the Supreme Court focused on the forbearance agreement.  

The Supreme Court determined that the trial court improperly allowed the Spouse Guarantor to assert a defense that she waived under the forbearance agreement, thus depriving RL REGI of the benefit of its contractual bargain.  The Spouse Guarantor had previously argued (and ultimately unsuccessfully, to the Supreme Court) that the forbearance agreement lacked consideration as to Spouse Guarantor because the guaranty on which the forbearance was based -- the "only" consideration as to Spouse Guarantor, according to her -- was invalid.

Specifically, the Supreme Court held that parties are free to waive various rights, including those arising under statutes. Although the guarantor did not specifically waive the ECOA defense in the forbearance agreement, the Court found the "comprehensive language contained in the agreement" and "overall expansive language of the waiver" to be sufficient to include any potential claim or defense. Ultimately, the Court stated that "a waiver of potential defenses to the guaranty, including a potential defense for a violation of the ECOA, was a part of defendant's decision to accept the benefits of the forbearance agreement."

What's It All About, Alfie?

The Supreme Court's decision in RL REGI is as important for what it says as it is for what it abrogates.  The Supreme Court's decision says that a well drafted forbearance agreement is a very good insurance agreement for a lender, it hits the "reset button" and it can cure potential ills with existing loan documents.  The Supreme Court's decision abrogates the Court of Appeals holding as to the ECOA:  "It is unnecessary, however, for us to determine in this case whether a violation of the ECOA occurred and, if so, whether such a violation creates an affirmative defense to the recovery of the indebtedness."

The RL REGI decision sends a clear signal that waivers and releases contained in forbearance agreements, modifications, and other loan documents will be enforced by North Carolina courts.  Lenders should be diligent in properly and fiercely documenting forbearance agreements, modifications, extensions and other restructuring documents to include adequate waiver and release language both  to protect from affirmative liability and  to limit defenses to foreclosure and collection.

The RL REGI decision is also a reminder to lenders to strategically evaluate the use of forbearance agreements and other modification opportunities as means to obtain lender protections and reduce risk throughout the life of a loan, including protecting the loan's value on the secondary market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions