Summary
finding implied private right of action under §§ 3919 (formerly § 518), 3936 (formerly § 526)
Summary of this case from Davis v. Hunt Leibert Jacobson P.C.Opinion
CIVIL ACTION NO. 00-2001-M
July 6, 2001, Decided . July 6, 2001, Filed
STEWART A. CATHEY AND DONNA BARNHILL CATHEY VERSUS FIRST REPUBLIC BANK AND WILLIAM M. CRAWFORDFor STEWART A CATHEY, DONNA BARNHILL CATHEY, plaintiffs: John S Odom, Jr, Jones Odom et al, Shreveport, LA.
For WILLIAM M CRAWFORD, BANCORPSOUTH BANK, defendants: Charles C Trascher, III, Wendy E W Giovingo, Ahawn D Akers, Snellings Breard et al, Monroe, LA.
For RESERVE OFFICERS ASSOCIATION, movant: William James Hill, III, Smitherman Lunn et al, Shreveport, LA.
For UNITED STATES OF AMERICA, movant: Robert A Thrall, U S Atty's Office, Shreveport, LA.
For UNITED STATES OF AMERICA, movant: J Christopher Kohn, U S Dept of Justice, Robert M Hollis, Dept of Justice, Washington, DC.
Before the court is a motion for summary judgment by BancorpSouth Bank (formerly First Republic Bank) and William M. Crawford, defendants, [Doc. # 25] and a motion by plaintiffs, Stewart A. Cathey and Donna Barnhill Cathey, for partial summary judgment [Doc. # 32]. Both of these motions seek summary judgment on the question of the applicability of the Soldiers' and Sailors' Civil Relief Act, 50 U.S.C. § 501-593 ("SSCRA"). Both motions were referred to me by the district judge for report and recommendation.
Also, with permission of the court, the Reserve Officers Association filed a helpful amicus brief, as did the Government, pursuant to 28 U.S.C. 517 [Doc. # 52 and # 50, respectively].
Plaintiffs, Stewart A. Cathey and Donna Barnhill Cathey ("the Catheys") sue BancorpSouth Bank (formerly First Republic Bank) ("the Bank") and William M. Crawford ("Crawford")("defendants") alleging damages as a result of violations of the SSCRA and RICO. The Catheys allege that Stewart A. Cathey, as a member of the United States Army Reserve serving as a lieutenant colonel, had an ongoing financial relationship with the Bank through his loan officer William M. Crawford and that the Bank and Crawford failed to abide by the provisions of the SSCRA when Stewart A. Cathey was called to military service during the Bosnia conflict.
Specifically, the Catheys allege that in 1994 they sought financing from the Bank through the bank officer Crawford to construct a gasoline station and convenience store in Bastrop, LA. The loan was secured by personal guarantees by the plaintiffs, individually, and a second mortgage on their home. In addition, plaintiffs were required to be co-makers of the note.
Thereafter, the Catheys decided to open a second store in Monroe and again sought financing through the Bank. Again, the Catheys individually signed a promissory note to the Bank to finance the store's construction. They also personally guaranteed the loans from the Bank and the second mortgage on plaintiffs' home was "cross-collateralized" so as to apply to both loans. The second store opened for business in April 1996. However, in May of that year, Cathey was ordered to active duty in Bosnia. Prior to leaving for active duty, Cathey advised Crawford at the Bank that he intended to invoke his rights under the SSCRA, including the imposition of a maximum interest rate on the loans of 6% as provided by 50 U.S.C. § 526. He delivered a copy of his military orders to Crawford at the Bank and alleges that Crawford assured him that the Bank would "protect his rights."
Plaintiff alleges, however, that during his military service in Bosnia the Bank continued to charge the full amount of interest on the loans and debited his bank account for the note payments. Yet, he claims, because of his military service he was not able to operate the stores at a sufficiently profitable level to pay the additional interest.
Plaintiffs allege numerous actions on the part of the Bank which violate the provisions of the SSCRA, including allegations that the Bank forced them to borrow monies from it in order to cover other loans and required them to sign additional financing documents with the Bank.
After his military service was completed and Cathey returned home, he discovered that the stores had suffered serious financial setbacks because of his absence. He contacted the Bank and demanded a cash refund of the wrongfully charged excess interest and he alleges the Bank refused, always demanding additional concessions by plaintiff in exchange for a refund under the SSCRA. The Catheys claim that they needed the interest refund in order to provide working capital to reopen the stores for business and return them to profitability. Instead, and despite repeated demands by the Catheys individually and through the armed services that the Bank refund the monies due under the SSCRA and comply with the provisions of that Act, the Bank proceeded to seize and sell both of the Catheys' Exxon stores. The Catheys allege that Crawford told them they "should forget about all this garbage concerning the SSCRA."
The Notes
Separate loan documents were executed for the Bastrop store and for the Monroe store. In addition, interim loan documents were executed for each store. The final financing documents for the Monroe store were not executed until plaintiff had returned from active duty in Bosnia. All of the documents at issue in this case were executed at times during 1994 and 1995 when plaintiff was not yet on active duty with the Army.
Following execution of interim construction loan documents, including a promissory note, permanent financing on the Bastrop store was completed in December 1994 when the plaintiffs and their corporation executed a promissory note in the amount of $ 337,500.00. The note provided for a variable interest rate per annum which exceeds the rate of 6%, the amount allowed by the SSCRA. The Catheys' corporation, Stewart A. Cathey & Sons, Inc. ("SACS") and both plaintiffs, Mr. and Mrs. Cathey, were each required to execute that note. In addition, both plaintiffs were required to execute personal guarantees for the debt and to execute a collateral mortgage note and mortgage on their personal residence as additional collateral for the loan. Without the Catheys' personal signatures, the Bank admits that it would not have loaned funds to their corporation. The Catheys also executed a business loan agreement as well as two notes in the amount of $ 187,500.00 and $ 150,000.00, representing the $ 337,500.00 loaned, in order to facilitate the completion of the SBA loan. These additional two notes were also required to be signed by both plaintiffs in their individual capacities. The corporation also executed a note in the amount of $ 64,326.00 and pledged as collateral for it the $ 337,500.00 note of even date and a note in the amount of $ 326,000.00 dated May 20, 1994.
The promissory note signed by both plaintiffs and their corporation SACS on December 22, 1994 provided that the corporation "and all co-signers signing this note" promise to pay the loan to the Bank and are collectively referred to as "Borrower." In addition, the business loan agreement provided that the Borrower refers to the corporation "and all persons and entities signing Borrower's note." And, it provided that it was applicable to all subsequent amendments, substitutions, renewals and refinancing of that loan. Finally, the two commercial guarantee agreements signed by each plaintiff individually further provided that "the word 'Borrower' also includes any and all co-signers." It provided that the guarantee was applicable to all present and future loans.
The Monroe Documents
The Monroe project promissory note was executed October 19, 1995 in the amount of $ 535,000.00 and provided for a variable interest rate at the initial rate of 11.5% per annum, again more than the 6% allowed by the SSCRA. This note was for the purpose of interim or construction financing. That note provided that the borrower was "Stewart A. Cathey and Sons, Inc. and all co-signers signing this note." Both plaintiffs were required to individually sign the note. In addition, each plaintiff was required to sign a commercial guarantee agreement for present and future indebtedness.
Plaintiff, Stewart A. Cathey, a member of the U.S. Army Reserve, was called to active duty in Bosnia on May 17, 1996. At that time, he delivered a copy of his active duty orders to defendant Crawford at the Bank and requested that the interest rate on his loans be reduced to the federally mandated rate of 6% per year pursuant to § 526 of the SSCRA. The Bank refused. Even after Stewart A. Cathey's return from the war, the Bank continued to refuse to reduce the interest rate and to refund the monies plaintiffs allege were illegally collected while Cathey was on active duty. Plaintiffs allege that because they were overcharged interest while Cathey was on active duty that they lacked sufficient cash reserves to get the stores back on their feet once he returned from service. This resulted in the failure of both stores and the Bank's purchase of both stores at Sheriff's sale after it foreclosed on the loans. In addition, the Bank foreclosed on plaintiffs' personal home.
Discussion
Plaintiffs argue that this is a simple case, that the SSCRA applies to the loans to them and their corporation and that the Bank was required by federal law to reduce the interest rate charged to 6% per annum.
Defendants argue, however, that the SSCRA is not applicable where the loan is made not to the individual person in the armed services, but rather is made to a corporation. The Bank, however, candidly admits that without the personal guarantees of the Catheys that neither the Bank nor the Small Business Administration would have loaned money to the plaintiffs' corporation. Defendants argue that the loans were made not to the plaintiffs, but to their corporation and argue that the Act protects only "person[s] in the military services." 50 U.S.C. § 511. Defendants argue that the Act provides assistance to soldiers only for consumer transactions and not for commercial transactions and argues that a serviceman's business corporation is "capable of continued vitality whether the serviceman is home or not." In other words, the defendants posit the issue in this case as "whether a separate entity, with a life and personality of its own, conducting a business of owning and operating convenience stores/gas stations is protected by the SSCRA."
The SSCRA, in pertinent part, provides:
"The term 'military service,' as used in this Act [said sections] shall signify Federal service on active duty with any branch of service . . ."
The Act provides that its stated purpose is to provide for the national defense by suspending enforcement of civil liabilities in certain cases of persons in the military service in order to enable those persons to devote their entire energies to the defense needs of the nation. The Act also provides for stays of proceedings and of execution of obligation and for suspension of statutes of limitations as well as limitations upon evictions and enforcement of installment contracts, mortgages, liens, assignments and leases.
No distinction is made between consumer transactions and commercial ones.
Important to this case is § 526 which provides:
"No obligation or liability bearing interest at a rate in excess of 6 percent per year incurred by a person in military service before that person's entry into that service shall, during any part of the period of military service, bear interest at a rate in excess of 6 percent per year unless, in the opinion of the court, upon application thereto by the obligee, the ability of such person in military service to pay interest upon such obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of such service, in which case the court may make such order as in its opinion may be just. As used in this section the term 'interest' includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) in respect of such obligation or liability."
Plaintiff Stewart A. Cathey was, at all pertinent times, in accordance with 50 App § 526, a person in the military service who had incurred an obligation and liability bearing interest at a rate in excess of 6%. Defendants' suggestion that "the Bank made no loans to plaintiffs, only to SACS, Inc." is simply incorrect and, as plaintiffs, through counsel, point out, the Bank's failure to understand this is the reason for this litigation. Every single promissory note at issue was signed individually by each plaintiff and by the corporation. The notes expressly provide that all three "promise to pay." All three are referred to collectively as borrower in the note and in the business loan agreement. Both plaintiffs and the corporation are referred to as borrower in all of the commercial guarantee agreements. This is not a case where loans were executed by a corporation which happened to be owned in part by a serviceman. Rather, this case involves loans incurred by a serviceman. The fact that the loans were also incurred by others (his wife and his family's corporation) is irrelevant to my consideration.
Any doubts that may arise as to the scope and application of the Act should be resolved in favor of the military person. However, the Act may not be used as a sword rather than a shield. Engstrom v. First Nat. Bank of Eagle Lake, 47 F.3d 1459 (5th Cir. 1995), cert. den., 516 U.S. 818, 116 S. Ct. 75, 133 L. Ed. 2d 35.
In an effort to spin silk from a sow's ear, the Bank suggests that the plaintiffs are not the real parties in interest; rather, that their corporation is. Yet, it is the plaintiffs' home which was put up as collateral for the loans and it is plaintiffs' home upon which foreclosure proceedings were instituted. It is plaintiffs who signed the notes and it is plaintiffs who, although a redundant requirement, guaranteed the loans. It is the plaintiffs whose labor and expertise was required to operate the corporation profitably so that its obligations could be met. To suggest that they are not the real parties in interest is simply ludicrous.
In brief, both plaintiffs and defendants argue in some detail as to the applicability of § 513 of the Act concerning relief provided to co-obligors. While defendants are correct that § 513, by its express terms, applies only to enforcement of an obligation or order or judgment, prosecution of a lawsuit or the performance of an act and provides for a stay, postponement or suspension, the Section's inapplicability to the facts of this case does not change the result that under the SSCRA the Bank was required not to charge interest in excess of 6% per annum on the obligations incurred by Stewart A. Cathey, a serviceman. The fact that other persons happen to be signatories to those obligations is, again, irrelevant. For if the Bank could insist on co-makers paying the contractual rate, then the serviceman maker's rights under the Act would be eviscerated. This would be particularly true where one of the serviceman's co-makers cannot or refuses to pay. Allowing an obligee to force a serviceman's co-makers to pay the contractual rate of interest on an obligation would place pressure on the serviceman to pay the contractual rate and would allow the lender to skirt the protections afforded by the SSCRA. Therefore, while it is the serviceman who is provided interest rate protection under the SSCRA and not his co-makers, the result is the same. Interest on that obligation may not be charged in an amount in excess of the statutory rate of 6% per annum. Defendants' suggestion that, because a corporation is a separate legal entity, it can run itself while the serviceman is away is specifically rejected, especially where, as here, the corporation is a family corporation which depends on its owners' presence for profitability.
In summary, it is difficult for the undersigned to understand why the Bank refused to honor the provisions of the SSCRA after it was notified by plaintiff of his request that it do so. Plaintiff was clearly a serviceman on active duty, the obligations were clearly incurred prior to his service on active duty and, despite defendants' blind eye, all of the primary obligations, without exception, were signed individually by each plaintiff and each plaintiff was personally liable on the obligations pursuant to pledge agreements, continuing guarantees and loan agreements.
Section 518
Plaintiffs also argue that defendants violated § 518 of the Act by changing the terms of the credit agreements during Cathey's active military service. Specifically, they object to the Bank's having required Stewart A. Cathey to sign a note in the amount of $ 35,712.00 for cost overruns during construction while he was overseas.
It does not appear that the $ 35,712.00 note was required as a change to the credit agreements previously executed before Cathey's military service. Rather, it appears that the note was simply a new loan to cover cost overruns on the project the Bank had financed. I do not interpret the SSCRA's provisions in § 518 to mean that a lending institution cannot loan money to a person in the service for cost overruns on an ongoing construction project being completed during the serviceman's military service. To so hold would in effect interfere with the ability of service men and women to obtain financing while on active duty. This is particularly important where, as here, a serviceman on active duty finds himself suddenly confronted with cost overruns and bills for the construction project which must be paid. The Bank simply lent him the money to pay those bills. This does not constitute a change in the terms of the previous credit agreements nor is it, in my opinion, a violation of § 518.
Prescription
Defendants also argue that plaintiffs' claim is prescribed, having been filed more than one year after the date of each installment due. In support of their argument, defendants correctly point out that the SSCRA provides no prescriptive period for claims. Under such circumstances, the federal courts borrow the most closely analogous statute of limitations under state law. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 355, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991). Defendants suggest that the mostly closely analogous statute of limitations is Louisiana's one-year prescriptive period for delictual actions, that is, for tort liability. Defendants implicitly suggest that plaintiffs' claim against the Bank for violating the SSCRA is more in the nature of a tort claim.
In fact, the provisions of the SSCRA provide for an effective amendment of contractual provisions regarding interest rates during the period when a serviceman is in the service on active duty. The claim that the Bank refused to honor the federally mandated contractual amendment is pure and simple a contract claim, not a tort claim. Louisiana's prescriptive period for contractual actions is ten years. La. C.C. art. 3499. Plaintiffs' claims are not prescribed.
Private Right of Action
Next, defendants claim that the SSCRA provides no right of action for private persons, namely servicemen returning from active duty in the service of our country, and have no recourse for violation of the SSCRA. They suggest, in effect, that the SSCRA is a right without a remedy. Again, the court disagrees. Instead, I agree with and adopt the reasoning of Moll v. Ford Consumer Finance Co., Inc., 1998 U.S. Dist. LEXIS 3638, 1998 WL 142411 (N.D. Ill.) and of the Magistrate Judge in Marin v. Armstrong, 1998 U.S. Dist. LEXIS 22792 (N.D. Tx.). Plaintiffs are correct that "[It] would lead to an absurd conclusion to say that the Congress enacted a fairly elaborate legislative scheme to protect service members in a variety of ways and then throw their claims out of federal court when they sued to enforce their rights and collect damages when violation of their rights cause them damages. Any bank, when a service member demanded the protections of § 526 of the SSCRA, for example, could simply ignore the claim and not worry about lowering the interest rates. If they could not be sued, why bother obeying the law?"
Plaintiffs' opposition to defendants' motion for summary judgment [Doc. # 38] p. 6.
Defendants argue, however, that even if the court finds that a private right of action must be inferred from the Act, that the appropriate remedy would simply be equitable relief in the form of a stay, postponement or suspension of an obligation or action. They suggest that none of those remedies have been requested.
None of those remedies have been requested because both of plaintiffs' stores and their home have been seized and sold at Sheriff's sale by the Bank. It would serve little purpose for the plaintiffs at this time to request from this court a stay, postponement or to suspend an obligation which no longer exists and which has been executed upon. The only method for putting plaintiffs back in the position which they enjoyed prior to and during plaintiff's military service would be an action in damages or perhaps for an injunction requiring the return to the status quo. The exact nature of plaintiffs' relief, however, is not now before the court and has not been thoroughly briefed or argued by the parties. For purposes of these motions, the court only finds that the SSCRA does provide a private cause of action under §§ 518 and 526 at least to the extent necessary to enforce its provisions and that the Bank violated that statute.
Conclusion
IT IS RECOMMENDED defendants' motion for summary judgment regarding the SSCRA claims [Doc. # 25] be DENIED and that the plaintiffs' motion for partial summary judgment regarding the SSCRA claims [Doc. # 32] be GRANTED finding that the provisions of the SSCRA are applicable to the facts of this case and provide a private cause of action for their violation, that plaintiffs' claims are not prescribed and finding that the Bank violated the provisions of § 526 of the SSCRA in failing to reduce the interest rate charged on plaintiffs' various obligations to them to no more than 6% per annum.
IT IS FURTHER RECOMMENDED that the issue of entitlement vel non to damages, including causation and the amount thereof, is reserved for trial or for additional dispositive motions.
OBJECTIONS
Under the provisions of 28 U.S.C. § 636(b)(1)(C) and Fed.R.Civ.P. 72(b), the parties have ten (10) business days from service of this Report and Recommendation to file specific, written objections with the clerk of court. A party may respond to another party's objections within ten (10) days after being served with a copy thereof. A courtesy copy of any objection or response or request for extension of time shall be furnished to the district judge at the time of filing. Timely objections will be considered by the district judge before he makes his final ruling.
FAILURE TO FILE WRITTEN OBJECTIONS TO THE PROPOSED FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS CONTAINED IN THIS REPORT WITHIN TEN (10) BUSINESS DAYS FROM THE DATE OF ITS SERVICE SHALL BAR AN AGGRIEVED PARTY, EXCEPT UPON GROUNDS OF PLAIN ERROR, FROM ATTACKING ON APPEAL THE UNOBJECTED-TO PROPOSED FACTUAL FINDINGS AND LEGAL CONCLUSIONS ACCEPTED BY THE DISTRICT JUDGE.
THUS DONE AND SIGNED in chambers, in Alexandria, Louisiana, on this the 6th day of July 2001.
JAMES D. KIRK
UNITED STATES MAGISTRATE JUDGE