ABA Section of Business Law

Volume 14, Number 6 July/August 2005

Helping Back Home
Getting up to speed on the Service members Civil Relief Act
    By Patrick D. Dyson

Sgt. Gray, an activated reservist, is standing guard at the gates of a base outside Baghdad protecting fellow soldiers inside the compound. Decked out in protective body armor and armed with an M-16, Gray is the poster child for our men and women in the service today, selflessly defending our nation. Unfortunately, the sergeant's mind appeared to be thousands of miles away, back home, on her catering business and its survival while she is on active duty. Across the road, shielded by nightfall and a ditch, an Iraqi insurgent notices the soldier's inattention, signals to other insurgents and they begin to sneak up on the gate ...

"Dramatic." "Over the top." Are these words that come to mind? Well, maybe. "That could never happen," you say. Congress and the president have sought to ensure that you are correct through the enactment of the Servicemembers Civil Relief Act. The act, referred to as the SCRA, is a comprehensive overhaul of the Soldiers and Sailors Civil Relief Act that clarifies some provisions under the former act and adds new protections.

The purpose and goal of the SCRA is to provide relief and protection to our service members so that they can concentrate on the military mission without being concerned about personal matters back home. The SCRA covers many issues and grants a number of rights — that means this article could never cover the entire act. We will cover a few of the more frequently used provisions — lease terminations, interest-rate cap, installment contracts and court involvement. I encourage you to take a copy of the act with you on your next flight and read up on it.

The purpose of this article is to share some valuable information with my civilian colleagues because you probably have never heard of the SCRA, but it can potentially affect your clients. My hope is to also encourage cooperation between military and civilian lawyers so that our service members can remain focused on their mission.

The most commonly used section of the SCRA allows the service member to terminate a lease on a vehicle or premises. A service member may terminate the lease on a vehicle, whether used for personal or business reasons, if the vehicle was leased by or on behalf of the service member before he entered the service and he subsequently entered the service on active duty. A service member may also terminate his vehicle lease if he is reassigned outside the continental United States or if he is stationed in Alaska or Hawaii and reassigned outside that state.

The service member may also terminate the lease on his car if he is sent on temporary duty for 180 days or longer. This termination provision is applicable regardless of the service member's military status when he entered into the lease. The SCRA also prohibits lessors from charging the service member an early termination fee but does allow reasonable fees for excess wear and tear, excess mileage, and so forth.

While it may seem unfair to auto leasing companies, this provision came about because most lessors do not allow the service member to take the vehicle out of the country and do not allow them to terminate the lease early — without penalty — when the service member is reassigned overseas. Most service members did not have the thousands of dollars charged for early termination and were stuck paying for a vehicle they could not use, which is a financial hardship suffered because of their military service.

To properly terminate the lease, the service member must give the lessor written notice, a copy of their orders and actually return the vehicle within 15 days of the delivery of the written notice. Once the vehicle is returned, the lease is terminated. That is significant because termination marks the end of the lessor's ability to seek relief from any harm that may have been caused by this provision.

The SCRA does allow the leasing company options — but forces them to act quickly. If a lessor wants to seek modification or relief, they must apply to the court before the termination date. Again, while it may seem unfair to leasing companies, requiring them to act before the actual termination gives the service member the peace of mind of knowing that the issue is closed before that service member goes overseas.

Practically speaking, once the leasing company receives the written notice, they set up a vehicle turn-in date with the service member that complies with the 15-day requirement. It normally takes a few days to schedule the turn-in inspection and prepare the paperwork on the part of the leasing company. The SCRA is not designed to provide an unfair advantage for the service member, but I am sure you would agree that we need our service members focused on their tasks and mission rather than on a legal matter back home.

Service members may terminate the lease on their home or office as well under a similar provision. Again, the use of the premises whether personal, professional, business or agricultural — is irrelevant as long as the lease was pre-service, signed by or on behalf of the service member and that service member later entered active duty. In addition, if the service member is already on active duty when she enters a lease but is reassigned or deployed for 90 or more days, she can terminate the lease.

Delivery of written notification and a copy of the service member's orders to the lessor accomplish proper termination of the premises lease, just as with the vehicle lease. However, the effective date of termination is 30 days after the first date on which the next rental payment is due for a lease that provides for monthly rent payments.

For all other leases, it is the last day of the month following the month that the notice was delivered. In other words, if Sgt. Gray has a lease on the building for her catering business that requires $1,000 a month for rent and delivered the notice and her orders to the landlord on April 15, the effective date of termination is May 31. If that lease requires quarterly rent payments of $3,000; the effective date of termination would again be May 31.

As with the vehicle lease, the termination date is a significant event because it tolls the landlord's ability to seek relief from the courts. For premises leases, it also starts the 30-day clock for return of advance rent payments.

What happens if Sgt. Gray's landlord decides that the lease is not terminated and keeps the $10,000 security deposit or changes the locks and will not allow her spouse to retrieve their personal belongings from the building until the remainder of the rent on the lease is paid? The SCRA makes such behavior a misdemeanor and punishable by fines or imprisonment under Title 18 of the U.S. Code. It also allows the service member to seek other remedies that may exist for wrongful conversion or another cause available under the law.

It is no secret that military professionals generally make less money than their civilian counterparts and that many reservists make significantly less money when called to serve on active duty. In recognition of this, an interest rate cap was placed in the SCRA. Any obligation or liability that has an interest rate greater than 6 percent annually and was incurred by the service member or the service member and spouse jointly before the member entered active duty is reduced to 6 percent annually for the entire time the member is on active duty.

This is not a deferral of the additional interest until after military service, but rather a complete forgiveness of any interest above 6 percent for the entire time of service. This section requires that the monthly payment be reduced by the amount of the interest rate forgiveness rather than leaving the monthly payment amount the same and increasing the amount being applied to the principal.

Although this section is most often used to reduce credit card interest rates for service members, it can be applied to many other situations such as mortgages, bank loans or vehicle financing. It is of note that "interest" is defined to include service charges, fees and any other charges excluding bona fide insurance.

Service members may invoke this protection during and up to 180 days after leaving active duty by sending the creditor written notice that they intend to avail themselves of the protection with a copy of the orders calling them to active duty. Once the creditor receives the proper notification, it must apply the limitation retroactively to the date that the service member entered active duty.

The creditor may be granted relief from this section if it can persuade the court that the service member's ability to pay the interest above the 6 percent is not materially affected by the member's military service.

Service members are protected from rescission or termination of an installment contract for real or personal property for a breach of the terms, if the breach happened prior to or during the time they were serving on active duty. The property may not be repossessed, based on the breach, unless the creditor obtains a court order. This protection is very broad and applies whether the contract is for a purchase or lease, covering anything from a building to furniture to the delivery van. This protection is limited to a contract for which the service member paid a deposit or installment prior to active duty.

If Sgt. Gray misses three loan payments on the delivery van while serving in Iraq, the bank may not call the loan or repossess the van without going to court. This will allow the soldier the opportunity to return and work out a solution with the bank and not be without the delivery van, thus ending up in a worse position because of military service.

Any business that ignores this protection is subject to fines or imprisonment under Title 18, U.S. Code. Again, the act allows for other viable remedies. The idea of the legislation and these provisions is to allow both parties to work out an acceptable solution for all involved. To that end, the SCRA prescribes the actions the court may take in a hearing regarding this section.

As Sgt. Gray has shown us in the delivery-van scenario, the courts can be a major factor in the enforcement of and relief from the provisions of the SCRA. While military lawyers would prefer to work out these issues with our counterparts in the civilian world without going to court, we understand that sometimes litigation is the only alternative. It is my belief that Congress tried to limit the litigation under the SCRA by including specific remedies that the courts could provide and adding penalties for noncompliance by businesses and civilians.

Service members are protected against default judgments in any civil action or proceeding under the SCRA. Section 521 places an affidavit requirement on a plaintiff in any case where the defendant does not make an appearance. This affidavit requirement applies in both federal and state courts. The plaintiff must state in the affidavit whether or not the defendant is in the military and support that statement with facts; or state that the plaintiff was unable to determine the defendant's military status.

Without this affidavit, the court cannot enter a judgment for the plaintiff. If the plaintiff is unable to determine the defendant's military status, the court may require the plaintiff to post a bond before entering a judgment. Just to keep plaintiffs honest, a criminal penalty of a fine or imprisonment will be imposed for knowingly using a false affidavit.

If it appears that the defendant is in the military, the court must appoint a lawyer to represent the service member before entering a default judgment. The court must grant a stay of the proceedings for at least 90 days if the defendant requests one. The court may grant a stay if it determines the member may have a defense and it cannot be presented without the member's presence or that the appointed counsel has not been able to locate the member to determine if a defense exists.

Military members who have been notified of a civil court proceeding may be able to get a stay of those proceedings. This provision protects the service member whether he is the plaintiff or defendant in the proceeding. The act includes administrative hearings in the definition of court proceedings, so there is wide coverage. The court may, on its own, grant a stay if the service member is in the service or within 90 days after release from active duty and has received notice of the proceeding. Under the act, the court must stay the proceedings if these conditions exist and the military member requests the stay.

The request for the stay must include a letter or communication from the service member explaining how the current duty materially affects the member's ability to appear and give a date when the member will be available. The application must also include a letter or other communication from the service member's commander stating that the service member's current duty prevents his appearance and that leave is not authorized.

The initial stay must be for at least 90 days. The service member may request an additional stay. If the court denies that additional request, the court must provide the service member with a lawyer to represent him in the proceeding. This communication requesting the stay does not constitute an appearance nor waive any defenses the service member may have.

The bottom line is that your business clients may find it easier, less costly and faster to work out an acceptable solution to the situation rather than taking the service member to court.

The SCRA also allows the court to stay the execution of any judgment or order entered against the service member. It also allows the court to vacate or stay an attachment or garnishment. If the court determines that the service member is materially affected because of military service in complying with a court judgment or order, it may take any of the actions just discussed. The court must take one of the above-listed actions if the service member requests it and the court makes the material effect determination.

This protection protects co-signers and spouses and applies to any action or proceeding started before, during or within 90 days after the end of active duty service.

There are other protections under the SCRA that may interest you, but since I can feel your eyes glossing over, I will stop here. However, so that you'll know the range of possibilities: The act addresses life insurance, protects against adverse credit reporting and future financial decisions based on prior use of the SCRA protections, defines residency for tax and voting purposes as well as protects the service member's rights in public lands. Again, I encourage you to at least glance at the full act and consult with a military lawyer if you have questions about it.

Because of the support of the SCRA, civilian lawyers and Sgt. Gray's military legal-assistance lawyer, any concerns she had about her catering business were put to rest before going to Baghdad. Together, we can all make sure that every Sgt. Gray is able to focus on the military mission.