A case before the Guam Supreme Court could make it significantly more difficult for institutions to extend credit in states and territories where they do not have offices.

A lower court in the western Pacific territory ruled in August that banks must obtain business licenses to make loans to Guam residents, even if they do not maintain a branch there. Institutions that fail to get licenses forfeit their right to foreclose on properties, the court said.

At least 42 states have similar licensing laws, but this is the first time a court has ruled that the laws require out-of-state banks to have a business license in order to make legally enforceable loans.

The case is now before the Guam Supreme Court. The American Bankers Association and the Institute of International Bankers are preparing to file a brief urging the court to overturn the ruling.

"You ought to be able to make a loan to whoever walks in the door," said Michael F. Crotty, the ABA's deputy general counsel for litigation. "Once you make the loan you ought to be able to enforce it without having to go out and get a foreign corporation license in every state, province, territory, and canton in the world."

The case began in the 1980s when EIE Guam Corp. borrowed $150 million from Long-Term Credit Bank of Japan to build a Hyatt Hotel resort in the Mariana Islands territory.

Management troubles in the early 1990s caused EIE to lose money, making it unable to repay its loans. In 1992, with the Guam Hyatt half finished, Long-Term Credit Bank lent EIE Guam an additional $103 million. In exchange, EIE Guam pledged the hotel and an adjacent employee housing complex as collateral.

EIE Guam stopped making interest payments on the loans in January 1995, prompting the bank to initiate foreclosure procedures in April of that year. The developer sued in August 1995 to block the foreclosure, charging that Long-Term Credit Bank's loan contract was invalid because the lender never received a license to conduct business in Guam. A trial judge ruled for EIE Guam.

In its appeal, Long-Term Credit Bank said that the decision is contrary to the U.S. Constitution's commerce clause, Guam law, and common sense.

Writing in a March 31 brief, the bank said the decision gives Guam the right to regulate interstate and foreign commerce, powers the Constitution specifically reserves for the federal government.

"This holding was simply wrong," the bank said. "Mortgage lending by a bank outside its jurisdiction is interstate commerce and therefore does not constitute doing business in the jurisdiction for purposes of invoking the statutory licensing requirements."

The bank also said the lower court judge misread the law as merely authorizing licensed lenders to extend credit in Guam. A more careful reading of the law shows that legislators intended to exempt out-of-state and foreign lenders from the licensing requirement.

Finally, the bank said the court's interpretation of the law is patently unfair and defies common sense. "What makes the ruling all the more dismaying to a foreign investor or lender is the manifestly unjust result of the trial court's misreading of the law," the bank said. "The borrower gets to keep for free a hotel that was built with $250 million in borrowed funds while the foreign lender is locked out of the Guam courts in its attempts to be repaid."

EIE Guam is expected to file its brief in late spring. The court is expected to consider the case this summer.

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