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Reservist Achieves Victory Under SSCRA: What Every Lender Should Know

By Mary Beth Guard, Esq.

John Odom could scarcely believe what his new client was telling him. A Louisiana attorney with 28 years of military service and extensive experience with the Soldiers' and Sailors' Civil Relief Act, Odom was quite accustomed to hearing about lenders who weren't familiar with the SSCRA requirements, but he had never heard of a case where the resulting consequences were so dire.

According to Odom, Stewart Cathey was a successful businessman with everything going for him before his SSCRA troubles started -- a wife, two kids in high school, and two convenience stores owned by his Subchapter S corporation.

In 1994, the corporation had sought financing to construct a gas station and convenience store, but because it was a fledgling business, the lender, First Republic Bank (now BancorpSouth Bank), required Cathey and his wife to be co-makers on the note, to personally guarantee it, and to give a second mortgage on their personal residence. Subsequently, the Catheys obtained financing from the bank to open a second convenience store and again were required to individually sign the promissory note, guarantee the loans, and allow the second mortgage to cross-collateralize both loans.

In May of 1996, Cathey was called up for active duty in Bosnia as a Lieutenant Colonel in the Army Reserves. The timing was inauspicious because of Cathey's business obligations, but his country needed him. And, Cathey believed, his country would protect him through the provisions of the Soldiers' and Sailors' Civil Relief Act.

As he prepared to don his flak jacket and head off to dodge bullets in Sarajevo, Cathey advised the bank officer through whom he had obtained financing that he had been called up to active duty and that he intended to invoke his rights under the SSCRA, including the maximum interest rate provision in Section 526 of the Act. He delivered a copy of his military orders to the bank as proof of his active duty status and went off to serve his country.

During the nine months Cathey was gone, far from home and without the normal access to communications we take for granted, he had to entrust the operation of his stores to his elderly father who had previously undergone a quadruple bypass operation. It was far from an ideal situation. The profitability of the stores was adversely affected by his military service. And during his absence, the bank never reduced the rate, never adjusted the payments, and his bank account was debited for the full note payments.

The weary lieutenant colonel arrived home from war-torn Bosnia to discover the stores had suffered serious financial setbacks as a result of his absence. Indeed, one was closed and closing of the other was imminent. His calculations indicated that the overpayments resulting from the bank's failure to reduce the interest rate amounted to approximately $50,000. He contacted the bank and demanded a cash refund of the wrongfully charged excess interest, believing that with the cash he would have the working capital needed to reopen the stores and return them to profitability. The bank refused the request, ignored repeated demands by the Catheys individually and through the armed services that the Bank refund the monies due under the SSCRA, and instead seized and sold the convenience stores and allegedly told the couple to "forget about all this garbage concerning the SSCRA".

From there, it went from bad to worse. After losing the stores, the Catheys filed for bankruptcy. The bank purchased both stores at Sheriff's sale after it foreclosed on the loans. Then the bank was able to persuade the bankruptcy court to allow it to pursue foreclosure on the Cathey's home mortgage which had secured the convenience store debt. It was at that point that Stewart Cathey came to see John Odom. Odom filed suit on behalf of the Catheys in federal court, naming the bank and the loan officer as defendants, and alleging violations of the SSCRA and RICO.

The bank vigorously defended against the suit, arguing:
-- that the SSCRA is not applicable where the loan is made to a corporation, rather than to the individual person in the armed services;
-- that the loans were made not to the plaintiffs, but to their corporation, and they argued that the SSCRA protects only "person[s] in the military services". (The bank made this argument despite the fact that the plaintiffs were required to cosign the notes and give personal guarantees);
-- the SSCRA provides assistance to soldiers only for consumer transactions and not for commercial transactions and a serviceman's business corporation is "capable of continued vitality whether the serviceman is home or not". [Their argument was interpreted by the court as the bank's attempt to frame the issue in the 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."];
-- there is no private right of action for violations of the SSCRA interest rate provision;
-- the statute of limitations had run

The bank's arguments failed. A federal magistrate judge, James D. Kirk, issued his report and recommendation. It became the basis upon which the federal district court subsequently granted summary judgment on the Section 526 SSCRA claims to the plaintiffs.

In his strongly worded Report and Recommendation, Judge Kirk said:

  • "Defendants' suggestion that 'the Bank made no loans to plainttifs, only to [their corporation] is simply incorrect, and, as plaintiffs, through counsel, point out, the Bank's failure to understand this is the reason for this litigation."

  • "Any doubts that may arise as to the scope and application of the Act should be resolved in favor of the military person."

  • "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 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 were required to operate the corporate profitably so that its obligations could be met. To suggest that they are not the real parties in interest is simply ludicrous."

  • 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 pay 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 offered 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."

  • "The claim that the Bank refused to honor the federal mandated contractual amendment is pure and simple a contract claim, not a tort claim." [Thus, the statute of limitations for contract claims applied.]

  • Making short shrift of the defendants' argument that there is no private right to sue for violations of the SSCRA, Judge Kirk quoted the plaintiffs, saying, "[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 damages. Any bank, when a service member demanded the protections of Section 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?"

  • "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."

    The judge blew that away with both barrels, saying "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 has been executed upon."


Judge Kirk also said "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."

What does this all mean? At this point, the court has granted summary judgment to the plaintiffs on their claims under Section 526 (the interest rate reduction provision), which means the plaintiffs have won on the issue of liability. The matter will move forward for a determination of damages. The jury trial on damages is not expected to take place until perhaps May of next year.

UPDATE: Shortly before the case was scheduled to go to trial on the issue of damages (since the issue of liability had already been decided upon by the court), the parties settled. Read the press release announcing the settlement.

Related Links
BankersOnline.com's Soldiers' and Sailors' Civil Relief Act Information and Links Page

Copyright, 2001, Bankers Online. All rights reserved.

First published on BankersOnline.com 9/27/01

First published on 09/27/2001

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