The Servicemembers Civil Relief Act: What it means for creditors’ rights

The Servicemembers Civil Relief Act (“SCRA”) was enacted in 2003 as a modern update to the Soldiers’ and Sailors’ Civil Relief Act of 1940. Congress’s purpose behind enacting the SCRA was to “strengthen and expedite the national defense” by relieving soldiers of some of their financial and legal concerns while serving abroad.  Accordingly, the act does this through “the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of service-members during their military service.” With over two million United States citizens currently serving in the military, use of the protections afforded under the act is widespread.

First, it is important to note that the act is not an all-encompassing protection for service-members. In particular, SCRA’s protections are only available to service-members while they are on active duty.  It does not apply to service-members in prison, nor does it apply to criminal proceedings. Furthermore, it does not provide any protections against the payment of taxes and is not available to civilian employees working for the armed forces. 

This outline will examine some of the SCRA’s many provisions and highlight court interpretation and enforcement of the act. Specifically, this outline will look at some of the major provisions of the SCRA that creditors should expect to encounter.

1.  50 U.S.C. app § 521

Protection of Servicemembers Against Default Judgments.

Section 521 of the SCRA  provides all service-members protection against default judgments while on active duty. The SCRA provides this protection by requiring courts to demand affidavits from plaintiffs, prior to judgment, that state whether or not the defendant is in military service.

If the court determines that the defendant is in military service, a judgment cannot be entered against them until they are appointed an attorney. Accordingly, if they are appointed an attorney and the attorney is unable to reach them, the attorney’s actions will not be held to bind the service-member.

(a)  Creditors may be required to file a bond to indemnify the debtor in a default judgment case if they are uncertain of military status.

In Seton v. United Gold Network, LLC, 2008 WL 1925180 (D. Md. 2008), the creditor-plaintiff was unable to establish whether the debtor was a service-member prior to the court’s ruling. Because of this, the court required the creditor to file a bond to indemnify the defendant before awarding a default judgment. The court reasoned that this bonding was to protect the defendant, should they be found the be an active duty service-member protected under the SCRA.

(b)  Courts may vacate default judgments against service-members found to have been on active duty.

In U.S. v. Payton-Hubbard, 2008 WL 824249 (C.D. Ill. 2008), the court vacated default judgments entered against the defendant after it was later found that they had been in active military service during the trial. Before setting aside the judgment, the court required the service member show that they were on active duty and that the active duty materially affected their ability to appear for trial.

(c)  Courts have vacated default judgments when plaintiffs fail to issue the required affidavit.

In Merrill v. Beard, 2007 WL 461469 (N.D. Ohio 2007), the court granted a service-member relief from a default judgment after finding that the plaintiff had not filed an affidavit with the court certifying whether or not the defendant was a service-member. Accordingly, the court held that the statue required strict adherence and rendered the judgment void.

2.  50 U.S.C. app § 522

Stay of Proceedings When Servicemember Has Notice.

Section 522 of the SCRA provides all active service-members the option to have a court temporarily suspend a civil proceeding in which they are a party.  This option is available to service-members any time prior to the final judgment of a case and can be requested any time during active duty and up to ninety days after the active duty has been terminated.

Courts are required to suspend the case upon the active member’s request, if they meet two conditions:

1) the service-member must provide the court with a document explaining why their  current active service will affect their ability to appear in court and provide a date when  they will be available;

2) the service-member must provide a letter or other communication from their  commanding officer that states that the service-member’s military duty prevents them  from appearing and that military leave will not be authorized.

Should a service-member meet these requirements, a court must suspend the case for no less than 90 days.

(a)  Case suspensions are mandatory if the service-member meets the act’s requirements.

In In re A.R., 88 Cal. Rptr. 3d 448 (4th Dist. 2009), the court suspended a case after the service-member met the requirements of the act. The other party argued that, as the case had to do with a civil juvenile proceeding, the suspension should be denied. The court disagreed, explaining that the specific language of the act made the suspension mandatory upon the service-member meeting the requirements .

(b)  Service-members do not have to be a central to the case for the suspension to be granted.

In Garcia v. Grimm, 2008 WL 4629928 (S.D. Cal 2008), the court suspended a case after one of the defendants in the case was called to active duty. The court found that, while there were multiple defendants, the service-member’s active duty status was grounds to suspend the entire case until they had returned from duty. 

(c)  Courts have suspended cases even though service-members have failed to meet all requirements.

In Keane v. McCullen, 2009 WL 331455 (N.D. Cal. 2009), the court suspended a case event though the requesting active service-member had failed to meet the SCRA’s requirements. The court stated that the service-member, who was a police officer charged with unreasonable search and seizure, was integral to the case and found that the SCRA gave the court discretion to suspend a case due to a service-member’s active duty. 

(d)  Courts have denied requests for case suspension when service-members have failed to meet the requirements.

In Jones v. Van Horn, 640 S.E.2d 712 (2006), the court denied a service-member’s request for suspension when they failed to meet the act’s requirements. Specifically, the court found that the service-member, who was serving active duty in Korea, had failed to provide information regarding his active military service. Accordingly, the court found him ineligible to suspend the child-custody proceedings against him.

(e)  Courts have denied requests for suspension when they have found them unwarranted.

In Krutke v. Krutke, 693 N.W.2d 147 (Wis. Ct. App. 2005), the court denied a service-member’s request to have child support proceedings suspended. In particular, the request was made months before the service-member was to leave for Iraq. The court found that this was more than enough time for the service member and their attorney to gather any necessary information and that any defense the service-member wished to offer could be presented by counsel

(f)  Case suspensions do not provide immunity from all actions.

In Boylston v. Our Lady of Bellefonte Hospital, Inc., 2008 WL 5047678 (E.D. Ky 2008), the court found that while the SCRA grants service-members the option to suspend certain cases, it does not give them immunity from claims. In particular, the service-member was given loan-assistance from an employer prior to being called up to active duty. After the service-member’s active duty, they took a job with a new employer. The former employer filed a claim seeking repayment for the loan-reimbursement per their contract. The service-member claimed that Section 522 of the SCRA released them from their contractual obligations. The court disagreed, finding that the section only afforded the opportunity for the service-member to suspend proceedings during active duty. 

3.  50 U.S.C. app. § 513 (a)-(b)

Protection of persons secondarily liable.

Section 513 of the SCRA provides protection for sureties, guarantors, endorsers, accommodation makers, comakers, and others who “may be primarily or secondarily subject to the obligations or liability” of an active service-member. Specifically, the statute provides that whenever a court “stays, postpones, or suspends (1) the enforcement of an obligation or liability, (2) the prosecution of a suit or proceeding, (3) the entry or enforcement of an order, writ, judgment, or decree, or (4) the performance of any other act,” for a service-member, the court may also do the same for any other party that may be primarily or secondarily liable for the service-member.

Accordingly, the section provides that when a judgment against a service-member is vacated or set aside, the court may also do the same for any party that is “primarily or secondarily liable on the contract or liable for the enforcement of the judgment or decree.”

(a)  Service-member’s spouses and dependents are a protected party under the SCRA.

In Hurley v. Deutsche Bank Trust Co. Americas, 2008 WL 373426 (E.D. Mich. 2008),  the court acknowledged that dependents of service-members are protected under the SCRA. While the court found that the act was inapplicable in the particular manner, it explained that in other matters it could certainly be used to provide protection for a co-debtor on a residential mortgage with a service-member.

(b)  The SCRA protection provided non-service-members is only available when they service-member is also seeking protection under the act.

In In re Cockerham, 336 B.R. 592 (Bankr. S.D. Ga. 2005), a bankruptcy court held that the SCRA could not be used to grant a wife a stay for a collection action on a vehicle. Specifically, the service-member and his wife had separated and the service-member had proposed the forfeiture of the vehicle as payment for a debt owed. The wife argued that the SCRA granted her protection as a co-debtor and allowed her to suspend the action. The court disagreed and explained that the language of the statute specifies that the protection is only available to co-debtors after the service-member has claimed protection under the act.

4.  50 U.S.C. app. §524

Stay or vacation of execution of judgments, attachments, and garnishments.

Section 524 of the SCRA provides that if a court determines that a service-member’s active duty has materially affected their ability to observe a court judgment/order, it may suspend the judgment or order. The section also provides that a court may vacate or suspend any attachment or garnishment to wages, debts in possession of the service member or third party, or property.

This section is applicable to any proceeding against a service member “before or during” the service-member’s active duty or within 90 days of the active duty’s termination.

5.  50 U.S.C. app. § 531

Eviction and distress.

Section 531 of the SCRA provides that a landlord cannot evict a service-member on active duty if the premises is intended to be the service-member’s residence and the monthly rent does not exceed $2,400 (as of 2003—subject to adjustment). Nor may the landlord “subject such premises to a distress” during the active service.

Upon the court’s receipt of an eviction or distress application from a landlord regarding the residence of an active service-member, the court may suspend the proceedings for a 90-day period (length of time adjustable by court) or adjust the lease in the interest of both parties. Upon receipt of a request by a service-member showing that their active service has materially affected their ability to pay, the court must issue this suspension. However, this section also provides that a court may issue whatever relief  might be necessary as a matter of fairness to the landlord.

(a)  Courts hold that Section 531 gives service-members a private right of action for violations under the SCRA.

In Hurley v. Deutsche Bank Trust Co. Americas, 2008 WL 373426 (E.D. Mich. 2008), the court held that the plaintiff, a service-member, had grounds to file suit against the foreclosure of his property. The court further found that a creditor’s foreclosure on the plaintiff’s property was invalid as it was not done under court order, as required by the SCRA.

6.  50 U.S.C. app. § 535

Termination of residential or motor vehicle leases.

Section 535 of the SCRA provides service-members an opportunity to terminate leases or joint-leases. Specifically, a lease may be terminated upon a non-member entering into military service or a service-member’s receipt of military orders for permanent relocation or deployment with a military unit for no less than 90 days.

The section also provides for service-members to terminate motor vehicle leases. A service-member may terminate a motor vehicle lease signed prior to their military service if the individual then enters military service and receives a call or order of no less than 180 days. If the service-member enters the lease while in the service, they may terminate the lease when permanently changing stations or upon deployment of no less than 180 days.

(a)  Courts require lessors to repay lessees any advance payments upon the termination of the lease through the SCRA.

In Wolf v. Nissan Motor Acceptance Corp., 2011 WL 2490939 (D.N.J. June 22, 2011), the court explained that a service-member could recover any advance payments made on a motor vehicle lease that was subsequently terminated due to deployment. The court explained that the  “SCRA aspires to free members of our Armed Forces from civilian obligations to the extent that those obligations may distract or interfere with our service members' military service and objectives.”  However, the court suspended the action so that the parties could attempt to resolve the matter through arbitration.

(b)  Courts have held that early-termination penalties are in violation of the SCRA.

In United States v. Williams, 2013 WL 596473 (E.D. Va. Feb. 14, 2013), the court barred a lessor from withholding a security deposit from an active duty service-member who terminated the lease pursuant to the SCRA. The court found that a landlord’s withholding of the service-member’s security deposit and attempted charge of additional rent was unlawful under the SCRA and further stated that the landlord may be charged with the commission of a misdemeanor.

7.  50 U.S.C. app. § 532

Protection under installment contracts for purchase or lease.

Section 532 of the SCRA provides protection from hardships service-members may face under installment contracts while on active duty. The SCRA provides that any contract for the purchase of real or personal property or any leases or bailment of such property, in which installment payments were made, or a deposit received prior to military service, may not be withdrawn, nor repossessed for breach of contract without a court order.

The court may, however, order repayment by the creditor of all or part of the payments made by the service-member prior to the creditor terminating the contract and repossessing the property. The court may also suspend any proceeding against the service-member regarding such property if the service-member shows that they are materially affected by their active service.

The section further provides that any party who knowingly violates this section and attempts to take, or takes, possession of a service-member’s property, will have committed a misdemeanor.

8.  50 U.S.C. app. § 533

Mortgages and trust deeds.

Section 533 of the SCRA provides protection of service-member property secured by mortgage, trust-deed, or other security prior to the service-member entering the service. Specifically, a court may suspend any proceedings against a service-member’s mortgage filed during or within one year of a service-member’s active duty. The court must do so upon the service-member showing that they were materially affected by their military service. A court may also “adjust the obligation to preserve the interests of all parties.”

Sales, foreclosures, or seizures of property for failure of the service-member to meet their mortgage obligations made during or within a year of a service-member’s active duty will be deemed invalid without a court order allowing such action.

The section further provides that any party who knowingly attempt to have a service-member’s property sold, foreclosed upon, or seized without a court order will have committed a misdemeanor.  

(a)  Courts have dismissed mortgagor request for foreclosure when there is no proof that service-member had notice of the foreclosure proceedings.

In United States v. Pilling, 2012 U.S. Dist. LEXIS 111858 (D. Mass. Aug. 9, 2012), the court rejected a mortgagor’s request for a court order authorizing foreclosure. The court found that the SCRA requires the mortgagor to show that the service-member had been put on actual notice of the proceedings against them, and that the mortgagor’s failure to find a valid street address for the service-member barred the court from allowing the foreclosure.

9.  50 U.S.C. app. § 527

Maximum rate of interest on debts incurred before military service.

Section 527 of the SCRA adds a cap on interest rates for the debts of service-members during active duty. Specifically, the provision provides that any debt incurred before the service-member’s active duty shall not charge interest in excess of 6% during their period of active duty. Furthermore, the act provides that this interest cap will extend for one year after the active service for mortgages, trust deeds, and other security “in the nature of a mortgage.”

The act also provides that any interest over the rate of 6% charged during active military service, or the one year period following for securities, is forgiven. Furthermore, the act prevents the acceleration of principal by holding that any payments due through periodic payment plans shall be reduced so to not charge interest in excess of 6%.

(a)  Courts hold that the interest cap goes into effect on the day active service begins.

In Linscott v. Vector Aero., 2007 WL 2220357 (D. Or. July 27, 2007), the court held that financial institutions were prohibited from charging interest in excess of 6% during a service-member’s active military service. The court qualified this ruling with two requirements: 1) the service-member must give the financial institution written notice of their active service; and 2) the service-member must provide a letter from their commanding officer confirming their active service.

(b)  The interest cap does not apply to the debts of service-members’ spouses.

In Rodriguez v. American Express, 2006 WL 908613 (E.D. Cal. 2006), the court held that the SCRA does not place a cap on the interest rates of debts held exclusively by the spouses of service-members. In particular, the court found that the mandatory maximum interest rate was only applicable to debts held by the service-member or jointly by the service-member and their spouse. Accordingly, the court found in favor of a creditor who refused to reduce the interest of two credit cards that were solely in the name of the service-member’s wife.

(c)  The interest cap applies to debts of corporations wholly owned by a service-member.

In Linscott v. Vector Aerospace, 2007 WL 2220357 (D. Or. July 27, 2007), the court held that the SCRA interest cap extends to corporations when they are personally guaranteed by service-members. In particular, the court refused to enforce an 18% interest rate included in a Canadian court-ordered payment against a service-member’s corporation. The court held that the service-member’s corporation was protected under the SCRA while they were on active duty in the air force, and that the corporation was only required to pay at 6% during the period of active duty.

(d)  Courts have been lenient to creditor SCRA violations when they take means to mitigate overcharges.

In Koenig v. Waukesha State Bank, 2006 WL 2334841 (E.D. Wis. 2006), the court entered summary judgment in favor of a bank after finding that it had more than fully mitigated the damages caused by charging an service-member an interest rate in excess of 6% on late fees incurred during active duty. In particular, the court found that by waiving other fees incurred by the service member in excess of the service-member’s overpayment, the bank had gone beyond its obligation to the service member.

10.  50 U.S.C. app. § 523

Fines and penalties on contracts.

Section 523 of the SCRA provides that when any action regarding a service-member’s contract is suspended by a court in pursuance of the SCRA, the creditor is barred from penalizing the service-member for failure to comply with the contract during the suspension period.

The act further provides that a court may wave or reduce any fines for failure of a service-member to meet an obligation. For this waiver, a service-member must show that they were on active duty during the time of the penalty and that the active duty materially affected their ability to perform under the contract.