1. business and industrial
2. company
3. bankruptcy

HOW TO COMMIT MALPRACTICE:
SURPRISING RESULTS EVERYONE SHOULD KNOW
Tuesday, October 20, 2009
2:30 – 4:00 p.m.
Moderator: Hon. John K. Olson
United States Bankruptcy Court
for the Southern District of Florida
Fort Lauderdale, Florida
Panelists: Brooke Schumm III
Daneker, McIntire, Schumm, Prince,
Goldstein, Manning & Widmann, P.C.
Baltimore, Maryland
Laurel Davis
Fennemore Craig
Las Vegas, Nevada
Patricia Rynn
Rynn & Janowsky
Newport Beach, California
Presented by: Claims and Priorities Subcommittee
Professional Ethics in Bankruptcy Cases Subcommittee
Program Chairs: Brett Fallon
Morris James LLP
Wilmington, Delaware
Claude Montgomery
Salans LLP
New York, New York
American Bar Association
Section of Business Law
Business Bankruptcy Committee
2009 Fall Meeting
2296668/1
TABLE OF CONTENTS
1. How to be Unethical and Commit Malpractice at the Same
Time: A Dangerous Cocktail
2. You Did What?! Ethical and Malpractice Considerations when
Signing Affidavits and Drafting
3. Yes, Your Honor, My Client is the Holder of the Note: Ethical
Considerations Every Attorney Should Consider Before
Speaking to the Court.
4. Soldiering and Sailoring Into Big Trouble: The
Servicemember’s Civic Relief Act, 50 U.S.C. App. §§501-596
5. Guard Your Setoffs!
6. Beware of the Strings Attached to the Critical Vendor Payment
7. Get Your Service of Government Agencies Right!
8. The Perishable Agricultural Commodities Act (“PACA”) [7
U.S.C. Section 499e(c)]: Why PACA Is A Dirty, Rotten Four
Letter Word To Some Debtors And Secured Lenders
2296668/1
How To Be Unethical And
Commit Malpractice At The Same Time:
A Dangerous Cocktail
Materials prepared for the
National Conference of Bankruptcy Judges held October 18-21, 2009
Laurel E. Davis
FENNEMORE CRAIG, P.C.1
300 South Fourth Street
Suite 1400
Las Vegas, Nevada 89101
(702) 692-8004
ldavis@fclaw.com
1
Jon T. Pearson, an associate in the Financial Restructuring, Bankruptcy and Creditors’ Rights
practice group of Fennemore Craig, P.C., Las Vegas Office, prepared these materials.
A.
Bankruptcy Court’s Ability to Suspend an Attorney from Practicing in a
Specific Bankruptcy Court.
1.
In the Matter of Lehtinen, 564 F.3d 1052 (9th Cir. 2009).
Brief Summary
The United States Court of Appeals for the Ninth Circuit affirmed an order of the
Bankruptcy Appellate Panel of the Ninth Circuit Bankruptcy (“BAP”) suspending a
lawyer from practice in a specific Bankruptcy Court. In sum, the Ninth Circuit concluded
that the Bankruptcy Court possesses the inherent authority to disbar or suspend and
sanction a lawyer for acting in bad faith and with willful misconduct, although its
authority should be exercised with restraint.
Factual Background
Patricia Ann Lehtinen (the “Debtor”) retained Jim G. Price (“Mr. Price”) to
represent her in a chapter 13 bankruptcy proceeding.
The Debtor was primarily
concerned with selling her house to repay certain debts. The Debtor’s petition was filed
before the United States Bankruptcy Court, Northern District of California. Mr. Price’s
conduct and failure to properly counsel the Debtor throughout her Bankruptcy proceeding
was appalling.
For example, at the initial 341 meeting of creditors, Mr. Price neglected to appear
and, instead, sent a contract attorney. The Debtor alleged that Mr. Price failed to inform
her that he would not attend. Additionally, Mr. Price referred Rene Boisvert (“Boisvert”)
of Boulevard Equity Group to the Debtor so that the Debtor could obtain a home
improvement loan.
Boisvert informed the Debtor that Boulevard Equity Group would
lend her the funds and pay off the first deed of trust on her home, and that it would be
repaid from the proceeds of the sale, but only if the Debtor retained Mr. Price as a broker
for the sale. The Debtor, however, never completed the loan documents, and sold her
home through another realtor without informing Mr. Price.
2
Moreover, the first time the Debtor heard of a confirmation hearing was after she
received notice of confirmation hearing from the trustee. In fact, Mr. Price failed to even
appear at the confirmation hearing and, thus, the Debtor appeared alone. Instead, at the
request of another client, Mr. Price agreed to appear in another court even though he
knew it conflicted with the Debtor’s confirmation hearing.
He did not request a
continuance of either hearing. Despite Mr. Price’s absence at the confirmation hearing,
the Court confirmed the plan with a hundred percent (100%) payout to unsecured
creditors.
The day after the confirmation hearing, and without checking on its outcome, Mr.
Price sent a letter to the Debtor, stating that her case had been dismissed, that he could
refile another case for her or help her sell the house, and that the bank could proceed with
the foreclosure of her home. Mr. Price admitted to the Bankruptcy Court that sending the
letter was a “mistake.” Indeed, he had assumed the case had been dismissed because he
missed the hearing and because the Debtor was behind on her payments to the trustee.
Over the course of two, show cause proceedings, which covered Mr. Price’s
failure to appear at the confirmation hearing and the “mistake” letter, the Debtor also sent
a letter to the court stating that: (1) Mr. Price never informed her of the confirmation
hearing date, which she learned about from the trustee; (2) Mr. Price was a real estate
broker who had pressured her to list her house for sale with his brokerage firm; and (3)
Mr. Price had referred her to a friend for a home improvement loan, who had conditioned
a loan on her engaging Mr. Price as the real estate broker for her house. Based on these
two show cause proceedings, the Bankruptcy Court ordered that Mr. Price disgorge the
balance of the $1,500 fee that he received from the Debtor, and suspended him from
practicing before the Bankruptcy Court for three (3) months. The Bankruptcy Court
concluded that Mr. Price had violated several parts of the California Business and
Professional Code.
3
Mr. Price Appeals
Mr. Price appealed, and the BAP held that the Bankruptcy Court possessed the
authority to issue the sanctions and that Mr. Price had received adequate due process (i.e.,
adequate notice of his alleged misconduct and the basis of the Bankruptcy Court’s
sanction authority). The BAP, however, vacated the suspension and remanded the matter
to the Bankruptcy Court for consideration of the ABA Standards in calibrating the
discipline for Mr. Price.
Mr. Price then appealed the BAP order to the United States Court of Appeals for
the Ninth Circuit. The Ninth Circuit affirmed the BAP order. It held that Mr. Price had
received adequate due process. The Ninth Circuit for the first time affirmatively held that
the Bankruptcy Court possesses the inherent authority to disbar or suspend and sanction a
lawyer for acting in bad faith and with willful misconduct, although its authority should
be exercised with restraint.
2.
In re Bellows-Fairchild, 322 B.R. 675 (Bankr. D. Or. 2005).
Brief Summary
The Office of the United States Trustee (“Plaintiff”) filed an adversary complaint
against M. Elliott Lynn (“Defendant”) seeking to enjoin Defendant from practicing law in
the United States Bankruptcy Court, District of Oregon, a fine or penalty in the amount of
$1,000, and an award of attorneys’ fees. Plaintiff’s complaint was based, among other
things, on Defendant’s failure to accurately and completely prepare the debtors’
schedules, advising debtors to sign the incomplete documents and verify them as correct,
and failing to disclose debtors’ loan to him of funds received from settlement of their
personal injury action. After conducting a trial, the Bankruptcy Court held in favor of
Plaintiff and imposed a permanent injunction prohibiting Defendant from practicing
before the United States Bankruptcy Court, District of Oregon.
4
Factual Summary
Prior to filing a chapter 7 Bankruptcy case for the debtors, Defendant had
represented the debtors in two non-bankruptcy matters. In the first matter, Defendant
represented the debtors in a claim relating to a 1999 car accident in which one of the
debtors was injured. The matter was resolved for the sum of $25,000; however, there
was a dispute with the debtors’ insurance company (“State Farm”) and, thus, $8,707.10
of the $25,000 was held in Defendant’s trust account pending resolution of the dispute.
Before that dispute was resolved, Defendant also represented debtors in a claim
against their State Farm for underinsured damages relating to the same car accident.
State Farm sent a settlement check made payable to one of the debtors and Defendant in
the amount of $14,000, but the settlement check was sent with certain restrictions
regarding disbursement of the $14,000 as well as a settlement of the dispute over the
$8,707.10. Defendant, however, failed to follow the restrictions, and disbursed all of the
funds in his client’s trust account.
Shortly after depositing the $14,000 in his client’s trust account, Defendant
borrowed the sum of $8,500 from the debtors and wrote a check out of his client trust
account for cash.
No promissory note or other writing documenting the loan was
prepared. Defendant did testify that he explained to his clients that they should seek
independent legal advice before loaning him any money. The debtors, however, denied
that Defendant ever told them to seek independent legal advice before loaning him any
money.
The Defendant then filed the debtors’ chapter 7 bankruptcy petition and, among
other things, he failed to confirm the accuracy of the debtors’ schedules.
After
conducting the initial 341 meeting, the chapter 7 trustee took the position that the $8,500
loan from debtors to Defendant was property of the estate, not subject to the claimed
exemptions, and that such money should be repaid to the chapter 7 trustee and not to the
5
debtors. Despite numerous requests by the chapter 7 trustee for repayment of the loan to
the estate, the Defendant chose not to comply with any of the chapter 7 trustee’s requests.
As a result of the Defendant’s appalling conduct, Plaintiff argued that the
Defendant was unfit to represent debtors before the Bankruptcy Court. In support of their
argument, Plaintiff noted to the Defendant’s failure to accurately complete the debtors’
schedules and SOFA, his failure to complete those documents before having his clients
sign them, his failure to provide his clients with copies of the completed Schedules for
their review prior to filing the documents with the Court, and his failure to disclose the
debtors’ loan to Defendant. The Bankruptcy Court agreed with Plaintiff and felt the
appropriate sanction would be entry of a permanent injunction prohibiting him from
appearing before the Court. The Court, however, did not impose any monetary sanctions
against Defendant.
B.
Sanctions for Filing Multiple Bankruptcy Petitions
Brief Summary
The United States Bankruptcy Court, District of Nevada in In re Sanford, 403
B.R. 831 (Bankr. D. Nev. 2009) held that an attorney who filed a second chapter 13
petition while the first petition was still pending before the Court was sanctionable
conduct.
Factual Background
Attorney Randolph Goldberg (“Mr. Goldberg”) filed Raymond Sanford's (“Mr.
Sandford”) chapter 7 Bankruptcy case in 2004. The schedules indicated that Mr. Sanford
had $100,023 in unsecured debts and $159,000 secured by his home worth $200,000.
The $41,000 of equity was claimed exempt. Mr. Goldberg charged Mr. Sanford $791 for
his legal services in the case. At the initial 341 meeting of creditors, the chapter 7 trustee
questioned the valuation of Mr. Sanford’s home. In fact, the chapter 7 trustee raised the
possibility that Mr. Sanford’s home was worth more than listed in the schedules – so
much more that there might be non-exempt equity in the house which could be used to
6
pay Mr. Sanford’s unsecured debts. Although Mr. Goldberg maintained that he was not
able to determine the value of Mr. Sanford’s home at the time he filed the schedules, he
decided it was advisable to convert Mr. Sanford’s case to one under chapter 13. As such,
in chapter 13, Mr. Sanford could avoid a forced sale of his house by paying the value of
his non-exempt equity to his creditors over time through a chapter 13 plan.
Mr. Goldberg did not file a motion to convert Mr. Sanford’s case, however, until
after the discharge had already been entered in the chapter 7 case. In response to Mr.
Goldberg’s motion, counsel for the trustee filed a limited opposition requesting that the
Bankruptcy Court grant conversion provided that Mr. Sanford’s chapter 7 discharge was
vacated. At the hearing, the Bankruptcy Court granted the motion but instructed Mr.
Goldberg to provide in the order that the discharge was revoked. Mr. Goldberg failed to
submit an order. Instead, he filed a second case, also a chapter 13, for the debtor
charging him $2,700 for his legal services. The trustee on the first case eventually
submitted an order converting the first case twenty (20) months after the Bankruptcy
Court granted Mr. Sanford’s motion to convert.
In the second case, Mr. Sanford’s home was listed at $460,000 but still exempt
(equity of $301,000 -- $460,000 less $159,000) because Nevada law had changed the
exemption amount in the interim from $200,000 to $350,000. In the second case, no
creditor filed a proof of claim probably as a result that they had already received notice of
discharge in Mr. Sanford’s first Bankruptcy case. Because no proofs of claims were
filed, Mr. Goldberg amended the plan to pay himself only by selling the home. The
home was then sold $415,000 and the plan completed.
One year later Mr. Goldberg brought a motion seeking an order requiring the
discharge to be entered in the second case. The Bankruptcy Court orally granted the
motion, but again, Mr. Goldberg failed to submit an order regarding this motion.
Approximately two months later, the trustee had figured out what had happened. As a
result, the Bankruptcy Court entered an order to show cause regarding whether Mr.
7
Goldberg should be sanctioned for his conduct in the two Bankruptcy cases filed on
behalf of Mr. Sanford.
The Bankruptcy Court focused on Mr. Goldberg's failure to submit an order after
the conversion motion, given its consequences to the Court and to his client, and Mr.
Goldberg's filing of the second case. Mr. Goldberg argued that Rule 58 absolved him
from the requirement of submitting an order, as the ruling became effective 150 days
after it was orally entered. Mr. Goldberg, however, obviously confused the national rule
which promotes finality for purposes of appeal and the local rule which prevents a
prejudicial lag between a court's oral ruling and the docketing of the order giving that
ruling effect.
As to filing the second case, Mr. Goldberg argued that there was no rule against
filing multiple chapter 13 cases for one debtor. The court disagreed and said that not
only was Mr. Goldberg's conduct objectively unreasonable but was also in bad faith.
Given the oral conversion in the first case, there was no need to file the second case.
Moreover, Mr. Goldberg took unfair advantage of creditor confusion in filing the second
case, effectively eliminating creditor claims while increasing his overall attorney's fee.
For four reasons, the Court found that Mr. Goldberg's actions were made in bad
faith. First, Mr. Goldberg filed the second case, in part, to take advantage of the Nevada
legislative change that increased the homestead exemption. Second, his knowledge of the
prior case is further evidence of bad faith. This is not a situation in which an attorney
was negligent in not investigating and discovering that another lawyer filed an earlier
case. Third, he charged legal fees for both cases. Fourth, the court considered Mr.
Goldberg's experience in making its determination regarding bad faith. Mr. Goldberg
testified that he has filed between 15,000 to 20,000 Bankruptcy cases over the last 12
years of practice. He boldly asserted in advertisements that he could solve almost any
consumer's financial problems.
For these reasons, the Bankruptcy Court ruled as follows for sanctions:
8
1.
Mr. Goldberg received a public reprimand for his conduct in these cases in
the form of the publication of the opinion of these cases in the West Reporter system, and
in any other reporter system generally publishing bankruptcy court opinions.
2.
Mr. Goldberg had to return all fees charged Mr. Sanford.
3.
Mr. Goldberg was directed to submit a copy of the opinion of this case
with every fee application he submits in this district for work done during the two-year
period following the date of entry of this opinion. During such period, he was also
directed to deliver a copy of this opinion to each client that he files a bankruptcy petition
for, once his aggregate billings for that client, for any one case or related matters, exceed
$5,000.
4.
For the two-year period following the date of entry of the opinion of this
case, should Mr. Goldberg be served with a motion or an order to show cause that seeks,
as relief, sanctions for his conduct in a case or proceeding in this court, or in any other
state or federal court in Nevada, he shall deliver a copy of this opinion to the person or
entity serving him with such motion or order, and shall include a copy of such opinion in
any response to such motion or order that is filed with the court.
5.
To the extent that Mr. Sanford still desired his discharge, Mr. Goldberg
should pay all costs and expenses, including attorneys' fees, as may be necessary for Mr.
Sanford to obtain his discharge.
C.
Sanctions for “Ghost Writing” Bankruptcy Petitions and Schedules
The Ninth Circuit Court of Appeals affirmed a Bankruptcy Court’s decision in
which sanctioned an attorney for, among other things, “ghost writing” debtors’ petitions
and schedules.
An attorney provided “Pre-Filing legal services” to debtors pursuant to a signed
disclosure agreement. For a $250 fee, he agreed to analyze debtors’ financial situation
and prepare their Bankruptcy petition and required schedules, but disclaimed representing
them at the initial 341 meeting of creditors. Additionally, the agreement specified that
9
the attorney’s representation did not include the following services:
(1) adversary
proceedings; (2) appeal and/or conversions; (3) non-dischargeability proceedings; or (4)
any other representation. The attorney referred to this practice as providing “unbundled”
legal services to “pro se” debtors.
In 2001, the debtors filed for bankruptcy pro se. The attorney, who provided the
“Pre-Filing legal services,” did not sign the petition. The petition, however, did list the
$250 fee paid to the attorney and explained that the fee covered preparation, assistance,
pro se advice and counsel, pre-filing, to obtain discharge order, or confirmation of plan.
Shortly after the debtors filed their petition, the Bankruptcy Court, sua sponte,
ordered that the attorney account the $250 fee. A few days later, the Office of the United
States Trustee issued a notice of intent to seek sanctions against the attorney for his
failure to sign the petition. The attorney submitted an itemization, but such itemization
was not complete and he was ordered to supplement his itemization. The attorney then
supplemented his itemization, but for the most part, the attorney took issue with the
Bankruptcy Court’s inquiry into his fee. For example, the attorney noted that: “This is
not the first time that I have attempted to protect the debtors and myself from the judicial
tyranny that flows from the chambers of a biased Judge . . . .” The Court determined that
the attorney’s supplemented itemization was still incomplete and ordered him to further
supplement his itemization.
The attorney failed to submit any additional itemization and, instead, he filed a
Motion to Recuse, et al. In his Motion, the attorney accused certain Bankruptcy Court
Judges for being biased against him and of casting the legal system into disrepute. The
Bankruptcy Court denied his motion, and ordered disgorgment of his attorney’s fees and
sanctioned him. The sanctions were the following:
1.
The attorney is not permitted to file, nor prepare or cause to be prepared
for filing by any debtor, any bankruptcy petition unless he signs the petition;
10
2.
The attorney shall not file, nor shall he assist a debtor as counsel in filing,
any bankruptcy petition unless the attorney commits to such debtor to meet the ethical
and professional obligations of a debtor’s attorney and provide the reasonable and
necessary services required to properly represent a debtor in a bankruptcy case. The
required professional obligations include his appearance at the 341 meetings.
The United States District Court for the District of Idaho affirmed the Bankruptcy
Court’s decision. The Ninth Circuit also affirmed the Bankruptcy Court’s decision.
D.
Criminal Penalties
There are criminal penalties which punish lack of disclosure. Section 152 of the
Title 18 of the United States Code imposes fines and imprisonment for up to five (5)
years for knowingly and fraudulently making or verifying a false statement or declaration
under penalty of perjury to the court in connection with a bankruptcy case. In U.S. v.
Gellene, an attorney failed to disclosure that he represented a secured creditor in a case in
which his firm had been employed as debtor’s counsel. 24 F. Supp. 2d 922 (E.D. Wish.
1998). He was sentenced to fifteen (15) months in prison for two counts of knowingly
and fraudulently making false material declarations under penalty of perjury under
Section 152 of Title 18 of the United States Code and one count of using a document
while under oath knowing it contained a materially false declarations under Section 1623
of Title 18 of the United States Code.
74409.1
11
You did what?!--Attorney drafting error-attorney signature on affidavits
A. Attorney signatures on affidavits.
The case reviewed in the materials, Hurley v Deutsche Bank, Case No. 08-361 (W.D.Mich.),
illustrates the perils of being an attorney and lending your signature to a document, in that case a
non-military affidavit. The materials on the Servicemembers Civil Relief Act cover this
adequately.
B. Attorney drafting and opinions
Yet another infamous case is that of Prudential Ins. Co. of America v. S.S. American Lancer, 870
F.2d 867, 1989 A.M.C. 1097, (2nd Cir. 1989). Unfortunately, when the ship financing was
restructured, counsel for the obligor, United States Lines, mis-drafted the instrument of
obligation and instead of the figure of $92,885,000.00, counsel inserted the figure of “$92,885.
00. 870 F. 2d at 870.
No one detected the error until after a bankruptcy was filed, and then General Electric, the
second lienor, discovered the error and sued to take advantage of the error.
The Court reformed the instrument to the actual amount that should have been written:
$92,885,000.00. The “saving grace’ for the first lienor and its counsel probably was the fact that
the restructuring, from other signed contemporaneous documents, had clearly been intended to
result in GE being subordinated to a $92,00,000 indebtedness. There was more than a whiff of
the Court’s distaste for an unjust enrichment or “windfall” of $92,000,000 for the junior lienor.
870 F. 2d at 871.
The Court concluded:
“We therefore find nothing in precedent or in the SMA itself suggesting that the generally
applicable principles of law protecting parties from the effect of clerical mistakes
harmless to others and avoiding unjust windfalls do not apply to the determination of
preferences under the SMA. We hold that where, as here, a party attempts in good faith to
perform each of the procedures required by Section 922, the only error is one that all
parties concede to be clerical, and the only competing claimant had actually negotiated a
subordinated loan with the mortgagee, the mortgagee possesses a valid preferred ship
mortgage in the form the mortgagee and the debtor originally intended.”
870 F. 2d at 874.
That of course was not the end of the story. During the litigation, Prudential paid
$11,200,000 (17.5% of the foreclosure proceeds) to United States Lines, the debtor, “in
settlement of their dispute at the time the validity of the mortgage was in doubt.” Prudential Ins.
Co. v. Dewey, Ballantine, Bushby & Wood, 80 N.Y.2d 377, 605 N.E. 2d 318, 590 N.Y.S.2d 831
1
(1992). Accordingly, Prudential sued for the $11.2 million plus the costs of the action in the
district court and Second Circuit. Fortunately for counsel, there was no contractual privity
between the problems.
On a certified question of law, reviewing an appeal from a trial court’s grant of summary
judgment in favor of counsel, the New York Court of Appeals held that Prudential was owed a
duty of care by counsel who drafted the documents and provided the opinion.
However, because the legal opinion by its terms only gave general assurances as to
enforceability of the preferred ship mortgage, and not assurances as to a dollar amount. Because
Prudential had pre-approved the form of the opinion, and there was no misrepresentation as to
enforceability, the Court held that counsel for the borrower was not liable to the third party
lender. 590 N.Y.S.2d at 836.
C. The lessons here:
If one is drafting, or advising a client to sign, it truly pays to read the amount of the debt,
check the collateral, and check the perfection of any lien. If a subordination is intended, be sure
the limits (or lack thereof) of the subordination are correct. The rest may not be “boilerplate,”
but a last minute safety check on these core terms avoids an argument about the central problem
of an obligation and a security interest. Submitting drafts to clients for their review is also
helpful to minimizing liability.
Legal opinions do carry obligations, but absent contractual privity and duties of professional
care, looking at the issue from the third party beneficiary’s viewpoint, the obligations are limited
to avoiding fraudulent or negligent misrepresentations. For the issuer of the opinion, it is
important to list what information or assumption is being relied on in rendering the opinion, and
obviously, only opine as to conclusions to be drawn form that information or assumption.
© Brooke Schumm III 2009
2
“YES, YOUR HONOR, MY CLIENT IS THE HOLDER OF THE NOTE:
ETHICAL CONSIDERATIONS EVERY ATTORNEY SHOULD
CONSIDER BEFORE SPEAKING TO THE COURT”
Brief Summary
In In re Nosek, 386 B.R. 374 (Bankr.D.Mass.2008), the United States Bankruptcy
Court for the District of Massachusetts imposed sanctions under Rule 9011 against the
original lender, its counsel, and the current holder of the note and mortgage for a total
amount of $650,000. The sanctions were based upon repeated misrepresentations
made to the Court that the original lender held the note and mortgage when, in fact, the
lender who originated the mortgage loan had sold the loan years before. The Court
held that although the original lender had the ability to pursue an action in its own name
under the private pooling and servicing agreement, the lender was obligated to
accurately communicate its current status to the Court.
Factual Background
On November 25, 1997, Jacalyn S. Nosek (the “Debtor”) executed a promissory
note and mortgage in favor of Ameriquest Mortgage Company (“Ameriquest”). Five
days later, on November 30, 1997, Ameriquest assigned the loan to Norwest Bank,
Minnesota, N.A. (“Norwest”). On May 22, 2000, the assignment was recorded.
On October 2, 2002, the Debtor filed a voluntary petition under Chapter 13 of
Title 11 of the United States Code.
On November 1, 2002, the Debtor filed her
schedules and statement of financial affairs. Pursuant to the Debtor’s Schedule D, the
Debtor listed both Norwest and Ameriquest.
{M2844718;1}
During the bankruptcy proceeding, Ameriquest and its attorneys represented to
the Court that the Debtor executed a promissory note and mortgage in favor of
Ameriquest and that Ameriquest was the holder of same.
For example, Ameriquest
filed a proof of claim and an amended claim that attached the note and mortgage but
was silent as to the assignment. The Debtor objected to Ameriquest’s claim and, in its
response, Ameriquest’s counsel stated that Ameriquest was the holder of the mortgage.
In addition, Ameriquest had sent several letters to the Debtor stating that it held the note
and mortgage. Further, Ameriquest represented that it was the holder of the note and
mortgage (i) in a motion for relief from stay dated February 24, 2003, (ii) in its answer to
an adversary complaint dated January 3, 2005; and (iii) throughout an 8 day trial before
the Court.
It was not until several years later, in a separate adversary proceeding that
Ameriquest advised the Court of its true role. On July 27, 2007, the Debtor filed a
complaint against Ameriquest and the standing Chapter 13 Trustees. Ameriquest filed
a response in which it advised the Court for the first time that it did not own the note but
collected the funds for the owners. Subsequently, the complaint was dismissed as to
Ameriquest and the Debtor was allowed to file an amended complaint naming Norwest
as the defendant.
Norwest advised the court (i) that Ameriquest had assigned to
Norwest the note and mortgage on November 30, 1997; (ii) that the assignment was not
recorded until May 22, 2000; and (iii) that Ameriquest assigned to AMC Mortgage
Services the servicing rights with respect to the note and mortgage on March 31, 2005.
The Bankruptcy Court issued an Order to Show Cause why Ameriquest, Norwest
and their attorneys should not be sanctioned for their misrepresentations throughout the
{M2844718;1}
bankruptcy proceeding. The responses to the Order to Show Cause emphasized that
(i) no one intended to mislead the court, (ii) the Debtor and her counsel were not
harmed as they were aware that Ameriquest was not the holder of the note and
mortgage, (iii) it is difficult to determine the holder of a note and mortgage at a particular
time since notes and mortgages are constantly being sold; and (iv) the Pooling and
Servicing Agreement allowed Ameriquest to take action in its own right.
The Court explained that the standard under Rule 9011 is an “’objective standard
of reasonableness under the circumstances.’” Id. at 381 (citing Cruz v. Savage, 896
F.2d 626, 631 (1st Cir. 1990)). Since the intent of the parties is irrelevant, the Court
dismissed the parties’ argument that they did not intend to mislead the court. The Court
also noted that a party who is neither the holder nor the servicer of a note and
mortgage, does not have standing to pursue certain relief related to the mortgage.
Further, the Court had great disdain for the argument that the debtor knew or should
have known that Ameriquest was not the holder or servicer of the note and mortgage
considering Ameriquest and its counsel argued that it was difficult for them to know who
was the holder and servicer. The Court determined that it is the creditor’s responsibility
to inform the court and the borrower as to whom the holder and the servicer of the note
and mortgage are, not the responsibility of the borrower/Debtor.
The Court found that Ameriquest made numerous misrepresentations and that its
actions were not reasonable given these facts. Ameriquest was sanctioned $250,000 to
deter it as well as other parties from such behavior.
The Court also sanctioned
Ameriquest’s local counsel in the amount of $25,0000, Ameriquest’s lead counsel in the
amount of $100,000, and the individual attorney who conducted the trial in the amount
{M2844718;1}
of $25,000. In addition, the Court sanctioned Norwest on the basis that a mortgagee
cannot be permitted to blame the servicer and elude its responsibility to be
straightforward with the Court. Norwest was sanctioned in the amount of $250,000.
{M2844718;1}
Soldiering and Sailoring into Big Trouble:
The Servicemember’s Civil Relief Act,
50 U.S.C. App. §§501-596.
by © Brooke Schumm III, Esq.
Daneker, McIntire, Schumm et al,
Baltimore, Maryland
October, 2009
with contributions by and thanks to
Marc Iverson, Esq.
Wells Fargo Law Department
Charlotte, North Carolina
I.
General Background
First passed in 1918 as section 101 et seq of the Appendix to title 50, U.S.C., the
Servicemember’s Civil Relief Act (referred to as the “SCRA” in many opinions) was enacted on
October 17, 1940 in similar fashion to its present incarnation. The Act is an important protection
for servicemen and servicewomen, and their families, and a serious and complex stumbling
block for an attorney representing a creditor. And for transactional attorneys who are smugly
thinking they are happy they are not litigators, there are provisions that affect transactional work
too, particularly relating to the definition of interest in section 527. To begin, the focus is on
litigation. While there is relief in the act for a creditor, the act is liberally construed to protect
the servicemember.
For instance, for just a couple of flavors of the perils of not focusing on the terms of the
Act, suppose a husband and wife guaranteed a business debt. Under section 596, the assets “not
held in connection with the trade or business may not be available for satisfaction of the
obligation or liability during the service member’s military service.”
Or alternatively, suppose the wife guaranteed the husband’s debt. Under section 513, any
stay with respect to a principal obligor in the military service may be extended “to a surety,
guarantor, endorser, accommodation maker, comaker, or other person who is or may be
primarily or secondarily subject to the obligation or liability the performance or enforcement of
which is stayed, postponed, or suspended.”
The area of most concern relates to default judgments. The primary section is section
521. “If in an action covered by this section it appears that the defendant is in military service,
the court may not enter a judgment until after the court appoints an attorney to represent the
defendant. If an attorney appointed under this section to represent a servicemember cannot locate
the servicemember, actions by the attorney in the case shall not waive any defense of the
servicemember or otherwise bind the servicemember.”
1
The remedy: “If a default judgment is entered in an action covered by this section against
a servicemember during the servicemember’s period of military service (or within 60 days after
termination of or release from such military service), the court entering the judgment shall, upon
application by or on behalf of the servicemember, reopen the judgment for the purpose of
allowing the servicemember to defend the action if it appears that—(A) the servicemember was
materially affected by reason of that military service in making a defense to the action; and (B)
the servicemember has a meritorious or legal defense to the action or some part of it [emphasis
added].”
II. Liberal construction in favor of the servicemember
The Supreme Court had this to say in Boone v. Lightner, 319 U.S. 561, 63 S.Ct. 1223
(1943) (denying a stay to a lawyer/trustee accused of defalcation who delayed a proceeding until
after induction):
“The Soldiers' and Sailors' Civil Relief Act is always to be liberally construed to protect
those who have been obliged to drop their own affairs to take up the burdens of the
nation. The discretion that is vested in trial courts to that end is not to be withheld on nice
calculations as to whether prejudice may result from absence, or absence result from the
service. Absence when one's rights or liabilities are being adjudged is usually prima facie
prejudicial. But in some few cases absence may be a policy, instead of the result of
military service, and discretion is vested in the courts to see that the immunities of the
Act are not put to such unworthy use.” 319 U.S. at 575.
III. Who is covered-all courts and administrative panels
The remedies under the Act are obligatory on all courts, including the bankruptcy courts.
IV. Some scary highlights-interest rate limitations-foreclosures and repossessions a
nullity absent court order
And for those who think that there is not likely to be a meritorious defense—how about
the following which affects both litigators and transactional attorneys: Section 527 relating to
interest abatement for debt incurred prior to service, followed by section 532, relating to
protection under installment contracts and leases, or section 533 for mortgages and trust deeds.
Sec. 527. Maximum rate of interest on debts incurred before military service
(a) Interest rate limitation
(1) Limitation to 6 percent
An obligation or liability bearing interest at a rate in excess of 6 percent per year that is
incurred by a servicemember, or the servicemember and the servicemember's spouse
2
jointly, before the servicemember enters military service shall not bear interest at a rate in
excess of 6 percent-(A) during the period of military service and one year thereafter, in the case of an
obligation or liability consisting of a mortgage, trust deed, or other security in the nature
of a mortgage; or
(B) during the period of military service, in the case of any other obligation or liability.
(2) Forgiveness of interest in excess of 6 percent
Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for
the prohibition in paragraph (1) is forgiven.
(3) Prevention of acceleration of principal
The amount of any periodic payment due from a servicemember under the terms of the
instrument that created an obligation or liability covered by this section shall be reduced
by the amount of the interest forgiven under paragraph (2) that is allocable to the period
for which such payment is made.
(b) Implementation of limitation
(1) Written notice to creditor
In order for an obligation or liability of a servicemember to be subject to the interest rate
limitation in subsection (a), the servicemember shall provide to the creditor written notice
and a copy of the military orders calling the servicemember to military service and any
orders further extending military service, not later than 180 days after the date of the
servicemember's termination or release from military service.
(2) Limitation effective as of date of order to active duty
Upon receipt of written notice and a copy of orders calling a servicemember to military
service, the creditor shall treat the debt in accordance with subsection (a), effective as of
the date on which the servicemember is called to military service.
(c) Creditor protection
A court may grant a creditor relief from the limitations of this section if, in the opinion of
the court, the ability of the servicemember to pay interest upon the obligation or liability
at a rate in excess of 6 percent per year is not materially affected by reason of the
servicemember's military service.
(d) Definitions
In this section:
3
(1) Interest
The term "interest" includes service charges, renewal charges, fees, or any other charges
(except bona fide insurance) with respect to an obligation or liability.
(2) Obligation or liability
The term "obligation or liability" includes an obligation or liability consisting of a
mortgage, trust deed, or other security in the nature of a mortgage.
(e) Penalty
Whoever knowingly violates subsection (a) shall be fined as provided in title 18, United
States Code, imprisoned for not more than one year, or both.
(f) Preservation of other remedies
The penalties provided under subsection (e) are in addition to and do not preclude any
other remedy available under law to a person claiming relief under this section, including
any award for consequential or punitive damages. [emphasis added]”
Sec. 532. Protection under installment contracts for purchase or
lease
(a) Protection upon breach of contract
(1) Protection after entering military service
After a servicemember enters military service, a contract by the servicemember
for-(A) the purchase of real or personal property (including a motor vehicle); or
(B) the lease or bailment of such property,
may not be rescinded or terminated for a breach of terms of the contract occurring
before or during that person's military service, nor may the property be
repossessed for such breach without a court order.
(2) Applicability
This section applies only to a contract for which a deposit or installment has been
paid by the servicemember before the servicemember enters military service.
(b) Penalties
(1) Misdemeanor
A person who knowingly resumes possession of property in violation of
subsection (a), or in violation of section 107 of this Act [section 517 of this
Appendix], or who knowingly attempts to do so, shall be fined as provided in title
18, United States Code, or imprisoned for not more than one year, or both.
4
(2) Preservation of other remedies and rights
The remedies and rights provided under this section are in addition to and do not
preclude any remedy for wrongful conversion otherwise available under law to
the person claiming relief under this section, including any award for
consequential and punitive damages.
(c) Authority of court
In a hearing based on this section, the court-(1) may order repayment to the servicemember of all or part of the prior
installments or deposits as a condition of terminating the contract and resuming
possession of the property;
(2) may, on its own motion, and shall on application by a servicemember when
the servicemember's ability to comply with the contract is materially affected by
military service, stay the proceedings for a period of time as, in the opinion of the
court, justice and equity require; or
(3) may make other disposition as is equitable to preserve the interests of all
parties.”
Sec. 533. Mortgages and trust deeds
(a) Mortgage as security
This section applies only to an obligation on real or personal property owned by a
servicemember that-(1) originated before the period of the servicemember's military service and for
which the servicemember is still obligated; and
(2) is secured by a mortgage, trust deed, or other security in the nature of a
mortgage.
(b) Stay of proceedings and adjustment of obligation
In an action filed during, or within 9 months after, a servicemember's period of
military service to enforce an obligation described in subsection (a), the court may
after a hearing and on its own motion and shall upon application by a
servicemember when the servicemember's ability to comply with the obligation is
materially affected by military service-(1) stay the proceedings for a period of time as justice and equity require, or
(2) adjust the obligation to preserve the interests of all parties.
(c) Sale or foreclosure
5
A sale, foreclosure, or seizure of property for a breach of an obligation described
in subsection (a) shall not be valid if made during, or within 9 months after, the
period of the servicemember's military service except-(1) upon a court order granted before such sale, foreclosure, or seizure with a
return made and approved by the court; or
(2) if made pursuant to an agreement as provided in section 107 [section 517 of
this Appendix].
(d) Penalties
(1) Misdemeanor
A person who knowingly makes or causes to be made a sale, foreclosure, or
seizure of property that is prohibited by subsection (c), or who knowingly
attempts to do so, shall be fined as provided in title 18, United States Code, or
imprisoned for not more than one year, or both.
(2) Preservation of other remedies
The remedies and rights provided under this section are in addition to and do not
preclude any remedy for wrongful conversion otherwise available under law to
the person claiming relief under this section, including consequential and punitive
damages. [emphasis supplied].
as amended through Pub.L. 110-389, Title VIII, § 807, Oct. 10, 2008, 122 Stat. 4189, 50 U.S.C.
A App. §§527, 532 ( changing among other items, the abatement to 6% in section 527 to one
year, and the limit on foreclosure in section 533 to nine months, and broadening the definition of
interest in section 527(d)(1) so as to limit fees, charges, etc. because interest includes all of those
items).
V. Applications in Bankruptcy and some situations that seem oh-so simple.
If applying for a lift stay against a servicemember, even with the possible waiver of
defenses in hand available in certain circumstances under the statute, this is a serious trap for the
unwary.
And if you are operating a self-storage warehouse, and learn of military service, it would
be a mistake to conduct the usual “quickie” sale of the servicemember’s goods. That action
would be a misdemeanor and open yourself up to consequential and punitive damages under
section 532.
Repossessing a servicemember’s car, assuming the interest was calculated correctly,
would have its perils- like “don’t” without a court order and without prior appointed counsel for
the servicemember or dependent.
There is a protection for a bonafide purchaser. However, a bank bidding in its debt at a
foreclosure where some part of the debt was miscalculated does not sound like a bona fide
6
purchaser. Note that a military person who files a case under title 11 receives the same benefits
under the statute.
Very embarrassing and expensive would be a suit or repossession against a co-obligor to
a chapter 7 debtor, where your client had received notice of the bankruptcy, and told you their
attorney, but you did not bother to read the entire petition package, and did not notice the Form
B202. That said, you signed the non-military affidavit. After all it was just a small collection
case anyway, and your client is trying to save cost in these troubled times and you are handling
the cases on a flat fee or contingent fee as cheaply as possible spending as little time as possible.
You have the message; a gnawing fear persists in your chest.
VI.
So who is covered:
Section 511:
“For the purposes of this Act [sections 501 to 515 and 516 to 596 of this Appendix]:
(1) Servicemember
The term "servicemember" means a member of the uniformed services, as that term
is defined in section 101(a)(5) of title 10, United States Code.
(2) Military service
The term "military service" means (A) in the case of a servicemember who is a member of the Army, Navy, Air
Force, Marine Corps, or Coast Guard (i) active duty, as defined in section 101(d)(1) of title 10, United States Code, and
(ii) in the case of a member of the National Guard, includes service under a call to
active service authorized by the President or the Secretary of Defense for a period of
more than 30 consecutive days under section 502(f) of title 32, United States Code, for
purposes of responding to a national emergency declared by the President and supported
by Federal funds;
(B) in the case of a servicemember who is a commissioned officer of the Public
Health Service or the National Oceanic and Atmospheric Administration, active service;
and
(C) any period during which a servicemember is absent from duty on account of
sickness, wounds, leave, or other lawful cause.
(3) Period of military service
The term "period of military service" means the period beginning on the date on
which a servicemember enters military service and ending on the date on which the
servicemember is released from military service or dies while in military service.
(4) Dependent
The term "dependent", with respect to a servicemember, means (A) the servicemember's spouse;
(B) the servicemember's child (as defined in section 101(4) of title 38, United
States Code); or
7
(C) an individual for whom the servicemember provided more than one-half of the
individual's support for 180 days immediately preceding an application for relief under
this Act.”
The uniformed services are defined in section 101(a) as:
“(5) The term "uniformed services" means (A) the armed forces;
(B) the commissioned corps of the National Oceanic and Atmospheric
Administration; and
(C) the commissioned corps of the Public Health Service.”
Note the spouse, the child, and probably the servicemember’s “’deadbeat’ college kid”
for whom Dad or Mom Servicemember co-signed the educational loan or the credit card are all
covered under section 511 in certain circumstances.
Note that a service member is not necessarily a member of the armed forces: check out
the provision in §511(2)(B): members of the Public Health Service and the National Oceanic
and Atmospheric Administration are often covered.
And Congress, loathe to put things in one place, has one more addition: section 516
which reads:
“Sec. 516. Extension of rights and protections to reserves ordered to report for military
service and to persons ordered to report for induction
(a) Reserves ordered to report for military service
A member of a reserve component who is ordered to report for military service is
entitled to the rights and protections of this title and titles II and III [sections 511 to 515,
516 to 519, 521 to 527, and 531 to 538 of this Appendix] during the period beginning on
the date of the member's receipt of the order and ending on the date on which the member
reports for military service (or, if the order is revoked before the member so reports, or
the date on which the order is revoked).
(b) Persons ordered to report for induction
A person who has been ordered to report for induction under the Military Selective
Service Act (50 U.S.C. App. 451 et seq.) is entitled to the rights and protections provided
a servicemember under this title and titles II and III [sections 511 to 515, 516 to 519, 521
to 527, and 531 to 538 of this Appendix] during the period beginning on the date of
8
receipt of the order for induction and ending on the date on which the person reports for
induction (or, if the order to report for induction is revoked before the date on which the
person reports for induction, on the date on which the order is revoked).”
VII.
Darn those affidavits-the case of Hurley v. Deutsche Bank and the lawyers
(W.D. Mich.)
Now I confess that the standard affidavit in support of default judgment reads as follows:
“Defendants are not in military service or otherwise exempt under the Soldiers’ and Sailors’
Civil Relief Act of 1940.”
The full flavor of a fiasco under the SCRA can be found in the opinions of March 13, 2009
and April 21, 2009 by the Honorable Gordon J. Quist, U.S.D.J. (W. Dist. Mich) in James and
Brandi [his wife] Hurley v. Deutsche Bank Trust Company Americas, Saxon Mortgage Services,
Inc. and David C. Lohr and Orlans Associates, P.C. [the latter being the affiant and his firm who
signed the “non-military affidavit] , Case No. 1:08-CV-361 (W. D. Mich.).
After a somewhat convoluted procedural history, including a change of venue, the meat of
the case is found in the above opinions. The facts involve a sergeant in the Michigan National
Guard whose unit received a 2-year call-up to duty on September 9, 2004, and which orders he
received on approximately September 11. It is undisputed that Deutsche Bank received some notice
of his active duty prior to a foreclosure sale which was held on October 13, 2004. Deutsche Bank
had in its file a fax dated October 12, 2004 from Sgt. Hurley’s commander advising the Bank of his
military status with a copy of the unit order and other information pertaining to the deployment.
Foreclosing counsel in the case signed an affidavit in conjunction with the non-judicial
foreclosure as follows:
“that upon investigation he is informed and believes that none of the persons named in the
notice attached to the sheriff’s deed of mortgage foreclosure, nor any person upon whom
they or any of them were dependent, were in the military service of the United States at the
time of sale or for six months prior thereto.” [The Court found] there is no evidence that he
[the attorney] actually checked with Deutsche Bank or with the Hurleys before signing the
affidavit, which was necessary to facilitate the foreclosure.” Slip. Op. 3/13/3009 at 11.
Apparently, on the day the affidavit was signed, counsel did not pick up the phone and
directly interrogate his client as to the representations which counsel would be making and make an
appropriate notation. And even if that had happened, counsel did not re-check the issue on the day
of the foreclosure.
9
At the sale, the Bank bid in $70,000 of its debt leaving a deficiency of at least some
$25,000. On October 14, 2004, the Bank “changed Sgt. Hurley’s account status to VIP, indicating
that he was entitled to SCRA protection.” Slip. Op. 3/13/2009 at 9. Thereafter, when Ms. Brandi
Hurley complained about being evicted, a default judgment for eviction was entered and the now
owner, the Bank, forced her out in June, 2005, even after Sgt. Hurley’s mother told the state court
on May 13, 2005 that Sgt. Hurley was in the military.
Compounding the problems of the Bank and the attorney, but not even yet reached as an
issue, the state court had not appointed counsel as required under section 521. On November 16,
2005, Deutsche Bank sold the property on which it had bid in its debt for $76,000 to a bona fide
purchaser. Plaintiff sued for violation of the SCRA and damages, conversion with punitive
damages, and torts in the nature of intentional infliction of emotional distress. There was also an
interest rate limitation violation.
Initially, in a now-reconsidered opinion of Sept. 30, 2008, the Court found there was no
private right of action under the SCRA for Sgt. Hurley. This earlier opinion is complicated by the
fact that apparently plaintiff’s counsel had not effectively cited cases in which a private right of
action under the SCRA was implied, and cited the repealed sections of the statute which have been
recodified from section 101 et seq. to section 501 et seq. And, somewhat foolishly in hindsight,
Deutsche Bank failed to bring to the Court’s attention adverse authority in other districts.
By now, however, on reconsideration, in the two opinions of March 13 and April 21, 2009,
the Court has determined there is an implied right of action under the SCRA. The Court held the
sale to be void. Adding insult to injury, though never mentioned, since the loan was made in
2003and Sgt. Hurley had been in the Guard since 1984, it is highly unlikely that there was not a
reference in the loan application in 2003 as to his military affiliation, raising the bar of investigation
considerably. Continuing with an eviction action after the notice of orders and deployment, bidding
in the debt and then selling the property all were ignorant, to put it politely, in light of the policies
underlying the SCRA. The process server on the affidavit of service of the eviction even noted a
military status, likely saving him from the fate of the Bank and its counsel.
The Bank filed a motion for reconsideration or in the alternative for interlocutory appeal,
both of which were denied on April 21, 2009.
The opinions’ most important lessons are a) there can be a private right of action for a
servicemember, b) the servicemember is not under any more than an obligation to mention his
military status, and even that modest duty is unclear in a default situation, c) the foreclosure action
and sale taken without court order are void, d) affidavits can be taken literally, and e) just because
you get a court order by default that you don’t deserve (the eviction order), that is not necessarily
protection.
10
And lesson (f), as an officer of the court charged with advising the court of controlling law,
there is a strong argument that you, the lawyer, with a duty of candor, once aware of military status,
must disclose section 521 to the court, and must disclose the obligation of the court to appoint
counsel for the affected person before the court can enter any order. Who pays for this appointed
lawyer is left open, but if you are a creditor seeking expedited relief, you probably will have to
“volunteer” to cover the cost of appointed counsel in these difficult economic times.
At this point, the Bank and counsel have likely paid more in fees than the entire debt in the
case, with no end in sight. The fact the cases appeared to proceed by default did not impress the
U.S. District Court in Hurley; the Court stated that might be important to mitigation of damages, but
did not obviate the cause of action. The argument that some effort was made to obtain a court order
seems like a weak argument given that section 521 specifically requires the appointment of counsel.
An interlocutory appeal by the defendant law firm and attorney is pending in the Court of
Appeals for the Sixth Circuit as Case No. 09-1964, filed July 22, 2009.
VIII.
Pretty easy for a judge who doesn’t like foreclosures to tie you up.
Reviewing the statute’s requirements carefully, it does take too much thinking to realize that
if you were a bankruptcy judge examining a default lift stay to allow a foreclosure, or a state court
judge in a default foreclosure proceeding, you have a lot to work with as far as a certification you
could demand under the Servicemember’s Civil Relief Act.
IX. Is there safety someplace?
One new item that is available is a website at https://www.dmdc.osd.mil/scra/owa/home.
One needs a name and a) social security number or b) birthdate. Without a birthdate or social
security number, the site will not look up the name entered. With a complete first name, middle
initial and last name and either birthdate or social security number, there does seem to be a safe
harbor for counsel, and probably for the institution.
Another source to which to write for information is:
Defense Manpower Data Center [Attn: Military Verification]
1600 Wilson Blvd., Suite 400
Arlington, VA 22209-2593
[Telephone 703-696-6762 or -5790/ fax 703-696-4156]
11
X. Don’t tell me there are state acts too! And how come Congress keeps changing the
sections
Another point to keep in mind is that many states have their own laws to protect active
duty servicemembers. Marc Iversen has been kind enough to share list of statutes he has which I
commend to your attention. The list predates the more recent SCRA Amendments and not
intended to be complete, but gives you the flavor for further research.
Another unpleasant problem is that, in our lifetimes, the Act was initially the Soldiers’
and Sailors’ Civil Relief Act of 1940. That Act repealed or superseded sections of the 1918
statute and recodified section 101 et seq. to section 501 et seq. Even some of the new sections
beginning with section 501 have been renumbered by subsequent actions of Congress. When
reading the SCRA cases, it is important to be sure that you are examining the section referred to by
the Court as it was in force as of the date of the opinion or case.
XI. Advice to a servicemember’s counsel-If I was counsel to a servicemember, I would notify every potential creditor upon
deployment.
XII.
For Judges
There is an American Bar Association guide for judges available at
http://www.abanet.org/family/military/scrajudgesguidecklist.pdf
Brooke Schumm III
Daneker, McIntire, Schumm, Prince,
Goldstein, Manning & Widmann, P.C.
One N. Charles St., Suite 2450
Baltimore, MD 21201
Ph: (410) 649-4761
Fax: (410) 649-4758
E-mail: schummb (at) danmclaw.com
12
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
_______________________________
JAMES B. HURLEY and BRANDI HURLEY,
Plaintiffs,
and
JAMES B. HURLEY,
Counter-Defendant,
v.
Case No. 1:08-CV-361
DEUTSCHE BANK TRUST COMPANY
AMERICAS f/k/a Banker’s Trust Company,
as Trustee and Custodian by: SAXON
MORTGAGE SERVICES, INC., f/k/a/
Meritech Mortgage Services, Inc.,
HON. GORDON J. QUIST
Defendants/Counter-Plaintiffs,
and
DAVID C. LOHR and ORLANS
ASSOCIATES, P.C.,
Defendants.
______________________________________/
OPINION
The Court has before it Plaintiff James B. Hurley’s Motion for Certification of Order and
Memorandum Opinion and Order for Interlocutory Appeal Pursuant to 28 U.S.C. § 1292(b).1 On
September 30, 2008, the Court issued an Opinion and Order addressing various motions, including
Plaintiffs’ motion for summary judgment and Defendants’ motions for summary judgment. With
regard to Plaintiffs’ claim under the Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. App.
§ 501, et seq., Plaintiffs’ only federal claim, the Court concluded that Plaintiffs do not have a private
1
Plaintiff Brandie Hurley has filed a concurrence in the motion. Thus, the Court will treat the motion as filed
by both James and Brandi Hurley.
right of action for the alleged violations of the SCRA. The Court thus dismissed that claim,
however, it denied Defendants’ motions for summary judgment on Plaintiffs’ state law conversion
claim. Subsequently, Plaintiffs filed a motion for reconsideration, arguing, among other things, that
Batie v. Subway Real Estate Corp., No. 3:07-CV-1415-M, 2008 WL 413627 (N.D. Tex. Feb. 15,
2008), which this Court cited in concluding that there is no implied right of action under the SCRA,
had reconsidered its own conclusion that the SCRA does not provide a private right of action. The
Court denied the motion in a Memorandum Opinion and Order issued on November 14, 2008.
Plaintiffs now request that the Court issue a certification under 28 U.S.C. § 1292(b) to allow
them to appeal the ruling that the SCRA does not provide a private right of action. In considering
the instant motion, the Court has reexamined its prior ruling in light of several cases holding that
a private right of action exists under various sections of the SCRA and now concludes, for the
reasons set forth below, that its initial conclusion was wrong. The Court will thus deny the instant
motion. However, the Court will set forth its reasons for reconsideration and address the additional
summary judgment issues the parties raised in their respective motions.
I. FACTS AND PROCEDURAL BACKGROUND
The facts pertinent to the Court’s analysis and the procedural history are fully set forth in the
Court’s September 30, 2008, Opinion (docket no. 140), as well as the Honorable Nancy G.
Edmunds’ February 12, 2008, Opinion and Order (docket no. 52), and it is unnecessary to repeat
them here. Facts necessary to the resolution of a particular issue will be discussed in the context of
that issue.
II. DISCUSSION
A.
Private Right of Action Under the SCRA – Reconsideration
At the outset, it is worth noting the well established rule that “[d]istrict courts possess the
authority and discretion to reconsider and modify interlocutory judgments any time before final
2
judgment.” Rodriguez v. Tenn. Laborers Health & Welfare Fund, 89 F. App’x 949, 952 (6th Cir.
2004). See also Mallory v. Eyrich, 922 F.2d 1273, 1282 (6th Cir. 1991) (“District courts have
inherent power to reconsider interlocutory orders and reopen any part of a case before entry of a
final judgment. A district court may modify, or even rescind, such interlocutory orders.”) (internal
citations omitted). Because the September 30, 2008, Order was interlocutory, the Court possesses
discretion to reconsider or modify it.
In its previous analysis, the Court applied the four-part test in Cort v. Ash, 422 U.S. 66, 95
S Ct. 2080 (1975), to determine whether an implied right of action exists under the SCRA sections
Plaintiffs claim were violated and concluded that no such action exists. As part of that analysis, the
Court cited Batie, supra. In a rather cursory analysis, the Batie court initially said that the SCRA
does not afford a “private cause of action to remedy violations of the statute.” Batie, 2998 WL
413627, at *7. That court subsequently reconsidered its decision in a brief order, in which it
concluded, based upon “the precedent cited,” that the SCRA creates a private right of action. Batie
v. Subway Real Estate Corp., No. 3:07-CV-1415-M, 2008 WL 5136636 (N.D. Tex. Mar. 12, 2008).
While the court did not cite the authority, a review of the plaintiff’s motion for reconsideration in
that case discloses that the plaintiff relied upon several cases, including Moll v. Ford Consumer
Finance Company, No. 97 C 5044, 1998 WL 142411 (N.D. Ill. Mar. 23, 1998), and Marin v.
Armstrong, No. 3:97-CV-2784-D, 1998 WL 1765716 (N.D. Tex. Sept. 21, 1998). Batie v. Subway
Real Estate Corp., No. 3:07-CV-1415-M (N.D. Tex. ECF docket no. 30).
In Moll, the plaintiff brought a putative class action suit alleging that the defendant violated
§ 526 of the Sailor and Soldiers Civil Relief Act (“SSCRA”), the predecessor to the SCRA, by
failing to reduce interest rates for the plaintiff and other military members to 6% during their period
of service in the Persian Gulf War, as required by that section.2 Citing § 510 of the SSCRA, the
2
The interest reduction section is now codified as § 527 of the SCRA.
3
creditor argued that § 526 did not create a private right of action for a plaintiff to enforce, but rather
provided only “defensive relief” that a military member could raise to limit the amount of interest
that may be recovered by a creditor in a suit to enforce the underlying obligation. The court rejected
the argument, noting that § 510 provided “‘for the temporary suspension of legal proceedings and
transactions’ while a military person is on active duty.” Id. at *2 (quoting § 510). Thus, the court
concluded, § 526 requires the suspension of interest obligations at a rate higher than 6% apart from
any legal proceeding by the creditor. Id. at *2. Turning to the issue of whether the SSCRA provided
a private right of action, the court first acknowledged that the SSCRA is to be construed liberally
in favor of military personnel and to accomplish substantial justice. Id. (citing Le Maistre v. Leffers,
333 U.S. 1, 6, 68 S. Ct. 371, 373 (1948)). Given the absence of any provision authorizing an express
right of action for violations of §526 or any other section the court applied the four-part Cort test.3
The court found ample basis for concluding that the most important Cort consideration was met –
that Congress intended to provide relief to military personnel. The court cited the legislative history
of the SSCRA, as well as the specific language of § 526, which granted military personnel an
“undeniable benefit not enjoyed by other citizens,” id. at *4, because § 526 and § 518 combined
to effectively reduce the interest rate that military personnel paid on their obligations while on active
duty. Id. The court observed:
It follows, therefore, that Congress must have intended that a private right of action
be available under § 526, “because otherwise the relief would [be] of no value at all.”
88 Cong. Rec. 5366 (1942). That is, if no private cause of action is implied,
creditors could simply ignore the mandate of § 526 and then claim that they cannot
be held responsible. Congress could not have intended such a result.
Id. Finally, the court noted that the remaining three Cort factors were satisfied because § 526 was
only available to a person in military service; limiting the amount of interest that a creditor could
charge was consistent with the SSCRA’s purpose of providing relief to military personnel; and the
3
This Court cited the Cort factors in its earlier Opinion, thus, there is need to repeat them here.
4
SSCRA does not provide relief typically afforded under state law because “it is grounded in
Congress’ right to raise and maintain armed forces of the United States.” Id.
The court in Marin, supra, likewise concluded that the SSCRA provided an implied private
right of action. The plaintiff in that case alleged that the defendant violated § 531 of the SSCRA,
which precluded a creditor from taking any action on a contract except pursuant to an order by a
court of competent jurisdiction, and § 518, which precluded a creditor from taking certain actions
based upon a military member’s exercise of rights under the SSCRA. The plaintiff claimed that the
defendant violated these two sections because he notified the defendant of his inability to fulfill his
obligations due to illness resulting from his military service, but instead of initiating a court action,
the defendant took other actions to enforce the contract such as harassing him and distributing
adverse credit reports. Applying the Moll court’s reasoning, the court rejected the defendant’s
assertion that the SSCRA did not create a private right of action. The court observed that Congress
must have intended to provide a right of action for a creditor’s violation of § 531. The Court noted
that without a private cause of action, “creditors could simply ignore the provisions of § 531" by
taking extrajudicial actions against the service member. Marin, 1998 WL 1765716, at *3. The court
also said that the criminal penalties provided in § 531(2) would be of little use because they would
“provide no relief to the service member on behalf of whom the statute was enacted.” Id. Finally,
the court reached the same conclusion with regard to § 518 because it confers a right upon service
members not enjoyed by the public at large and absent a private cause of action “there would be no
way for a service member to ensure that his rights were protected under this section.” Id. at 4.
Linscott v. Vector Aerospace, No. CV-05-682-HU, 2006 WL 240529 (D. Or. Jan. 31, 2006),
a case arising under the SCRA, held that a private right of action existed under § 537 of the SCRA.4
4
Deutsche B ank is wrong in its assertion that Linscott involved § 527 of the SCRA – the interest reduction
provision at issue in Moll. (Deutsche Bank’s Reply in Supp. Mot. Summ. J. at 2.) The Linscott court made clear that
it was considering whether § 537 provides a private right of action.
5
Section 537 prohibits the foreclosure or enforcement of liens during any period of military service,
except by a court order granted prior to foreclosure or enforcement. The defendants argued that §
537 does not create a private right of action for damages, but only prohibits a creditor from
proceeding without a court order. The defendants also pointed to § 537 (c)(2) as suggesting that no
damages remedy was intended. That section states: “The remedy and rights provided under this
section are in addition to and do not preclude any remedy for wrongful conversion otherwise
available under law to the person claiming relief under this section, including consequential or
punitive damages.” Following Moll and Marin, the Linscott court concluded an implied right of
action under § 537 was amply supported because “[t]here is no indication that in enacting and
renewing the Act, Congress intended to create rights without remedies.” Id. at *7. Further, the court
observed that subsection (c)(2) further supported its conclusion because it shows that “Congress did
not intend to explicitly deny servicemembers the remedy of damages for violation of this
provision.” Id.
In this case the Hurleys contend that Defendants violated sections 533(c), 526(b), 531, and
521(h) of the SCRA.
Section 533(c) states, in pertinent part:
A sale, foreclosure, or seizure of property for a breach of [an obligation on real
property owned by a servicemember that is secured by a mortgage] shall not be valid
if made during, or within 90 days after, the period of the servicemember’s military
service except–
(1) upon a court order granted before such sale, foreclosure, or seizure with
a return made and approved by the court;...
Section 526(b) provides: “A period of military service may not be included in computing any
period provided by law for the redemption of real property sold or forfeited to enforce an obligation,
tax, or assessment.” Next, § 531 provides, in pertinent part:
(a) Court-Ordered eviction.
(1) In general. Except by court order, a landlord (or another person with
paramount title) may not–
(A) evict a servicemember, or the dependents of a servicemember,
during a period of military service of the servicemember, from
premises–
6
(i) that are occupied or intended to be occupied primarily as
a residence;...
Finally, § 521(h) provides, “If a court vacates, sets aside, or reverses a default judgment against a
servicemember and the vacating, setting aside, or reversing is because of a provision of [the SCRA],
that action shall not impair a right or title acquired by a bona fide purchaser for value under the
default judgment.”
Following the reasoning of Moll, Marin, and Linscott, which the Court finds persuasive, the
Court concludes that Congress intended to confer a private right of action for a violation of § 533(c).
As those courts observed, the statute and legislative history strongly support the conclusion that
Congress must have intended to provide a means of enforcing the special rights it created in favor
of servicemenbers, otherwise, rights granted by the SCRA would essentially be illusory. In addition,
the right conferred upon servicemembers under § 533(c) – to have a mortgagee foreclose a mortgage
only through a court action – is a right not available to the public at large. Finally, the rights granted
under § 533 are very similar to those at issue in Marin and Linscott under § 531 and § 537,
respectively. The Court reaches the same conclusion with regard to § 526, which excludes a period
of military service from any period of redemption of real property. The right or benefit granted
under this section is also not available to the public, and a servicemember would be unable to obtain
relief for a violation of this provision absent an implied right of action.
Regarding § 531, requiring a court order to evict, the Court concludes that a private right of
action also exists for violations of this section. While it is true that in Michigan self-help is
prohibited and landlords are required to resort to eviction proceedings under the summary
proceedings act, see Mier v. Zimmerman, No. 273312, 2008 WL 681158, at *3 (Mich. Ct. App. Mar.
13, 2008), § 531(b) grants servicemembers a right to obtain a stay of execution during a period of
military service under certain circumstances. This right is unavailable to ordinary citizens.
7
Finally, the Court concludes that no private right of action exists under § 521(h). That
provision provides no specific protection to a servicemember. Rather, it protects a bona fide
purchaser for value in the event that a default judgment is vacated or set aside because of a provision
of the SCRA. Thus, a private cause of action would serve no purpose.
B.
Sgt. Hurley’s Entitlement to SCRA Protections
Section 516(a) of the SCRA provides:
A member of a reserve component who is ordered to report for military service is
entitled to the rights and protections of this title and titles II and III [of the SCRA]
during the period beginning on the date of the member’s receipt of the order and
ending on the date on which the member reports for military service (or, if the order
is revoked before the member so reports, or the date on which the order is revoked).
50 U.S.C. App. § 516(a) (italics added). As is evident from the language of the statute, the point at
which a reservist, such as Sgt. Hurley, becomes entitled to the protections of titles II and III of the
SCRA is determined on the date he or she receives the order to report for military service. Deutsche
Bank makes much of the fact that Sgt. Hurley never provided it copies of his active duty orders,
even though Deutsche Bank sent Sgt. Hurley a Soldiers & Sailors Act Requirements letter
informing him he needed to furnish such copies. However, the operative event for the protections
is the servicemember’s, not the mortgagee’s, receipt of the orders.5
The issue, then, is the date Sgt. Hurley received his active duty orders. Although Sgt.
Hurley’s individual orders are dated October 12, 2004, there is no evidence showing when Sgt.
Hurley received them. On the other hand, Sgt. Hurley’s National Guard Unit was “ordered to active
duty” in support of Operation Iraqi Freedom for an initial period of 18 months beginning October
1, 2004, pursuant to U.S. Army orders dated September 9, 2004. This order ordered the unit “and
5
W hile § 516(a) conditions the extension of protections upon the member’s receipt of active duty orders, § 527,
providing for the interest rate reduction to 6% , does require the member to provide a copy of his or her orders to the
creditor in order to receive the interest rate reduction. See 50 U.S.C. App. § 527(b)(1). However, that section is not at
issue here.
8
its member(s)” to active service. It appears undisputed that Sgt. Hurley received his unit orders on
or around September 11, 2004. In their arguments Defendants focus upon Sgt. Hurley’s receipt of
his individual orders. However, contrary to Deutsche Bank’s suggestion, § 516(a) does not draw a
distinction between unit and individual orders, but simply refers to “the member’s receipt of the
order.” Because the Supreme Court has said that the SSCRA “is always to be liberally construed
to protect those who have been obliged to drop their own affairs to take up the burdens of the
nation,” Boone v. Lightner, 319 U.S. 561, 575, 63 S. Ct. 1223, 1231 (1943), the Court concludes
that a servicemember’s receipt of unit orders ordering the unit and its members to active service
invokes the extended protections under titles II and III of the SCRA. Thus, Sgt. Hurley was entitled
to SCRA protections as of September 11, 2004.
Even though Sgt. Hurley was not required to provide Defendants copies of his orders to
invoke his SCRA protections, there is plenty of evidence that Deutsche Bank was aware that Sgt.
Hurley was ordered to active duty. For example, Deutsche Bank’s call log shows that Sgt. Hurley’s
mother had several conversations with Deutsche Bank’s representative about Sgt. Hurley’s
upcoming period of service. In addition, Deutsche Bank produced from its own files a copy of a fax
that Captain James Jennette, Sgt. Hurley’s commander, sent to Deutsche Bank on October 12, 2004,
that included a copy of the unit order and other information pertaining to the deployment. Finally,
Deutsche Bank admits that on October 14, 2004 – one day after the foreclosure sale – it changed Sgt.
Hurley’s account status to VIP, indicating that he was entitled to SCRA protection.
C.
SCRA Violations
1.
Non-Judicial Foreclosure in Violation of § 533(c)
On October 14, 2004, Deutsche Bank, through Orlans, held a sheriff’s sale of the Property.
Section 533(c) provides that a sale, foreclosure, or seizure of property made during the
servicemember’s period of service or within 90 days thereafter is invalid unless done pursuant to
a court order. It is undisputed that Defendants foreclosed without a court order.
9
Deutsche Bank contends that the October 14 foreclosure did not violate § 533(c) because Sgt.
Hurley’s period of active duty began on October 25, 2004; therefore, the foreclosure occurred before
the period of active duty. This argument ignores the clear language of § 516(a), quoted above,
which extends SCRA protections to members of reserve components from the time they receive their
active duty orders through the date on which the servicemember reports for military service.
Because Sgt. Hurley received his orders in September 2004, he was entitled to SCRA protections
as of that time. Therefore, the non-judicial foreclosure violated the SCRA.
Deutsche Bank contends that it is entitled to summary judgment on this aspect of Plaintiffs’
claim and, conversely, Plaintiffs are not entitled to summary judgment, because neither Sgt. Hurley
nor his mother, who had a power of attorney, took any action during this period of time to stop the
sale. In addition, Deutsche Bank points out that it has presented evidence showing that Sgt. Hurley
had a positive bank account balance during this time. Deutsche Bank asserts that if it had filed a
judicial foreclosure action and Sgt. Hurley had moved for a stay under § 533(b), he could not have
shown that his military service materially affected his ability to make his mortgage payments, as is
required for a stay under that section, and it would have proceeded with the foreclosure in any event.
Both arguments fail. First, Deutsche Bank fails to cite any provision of the SCRA that
obligated Sgt. Hurley or his mother to take action to stop a non-judicial foreclosure that was invalid
and thus violated the SCRA. Sgt. Hurley’s protection from a non-judicial foreclosure extended from
the date he received his orders until ninety days after the termination of his period of military
service. Second, while Deutsche Bank may be correct in its assertion that Sgt. Hurley’s military
service did not materially affect his ability to meet his mortgage obligation, that point is irrelevant.
The violation is foreclosing without a court order. Because Deutsche Bank never initiated a judicial
foreclosure, Sgt. Hurley never had the opportunity to move for a stay, regardless of whether it would
have been granted. While evidence of Sgt. Hurley’s ability to meet his obligations may have some
10
bearing on the issue of damages, it is irrelevant to the determination of whether the non-judicial
foreclosure violated § 533(c).
Defendants Orlans and Lohr contend that Plaintiffs are not entitled to summary judgment
against them on this violation because there is no evidence that they did anything wrong. However,
as Plaintiffs correctly note, it is undisputed that in order to conduct the foreclosure sale, Defendant
Lohr, acting on behalf of Orlans, signed a non-military affidavit stating “that upon investigation he
is informed and believes that none of the persons named in the notice attached to the sheriff’s deed
of mortgage foreclosure, nor any person upon whom they or any of them were dependent, were in
the military service of the United States at the time of sale or for six months prior thereto.”
Defendants Orlans and Lohr argue that there is a question of fact as to whether Sgt. Hurley or
anyone in his family notified these Defendants that Sgt. Hurley was on active military duty.
However, Lohr represented in the affidavit that he “investigat[ed]” Sgt. Hurley’s status, but there
is no evidence that he actually checked with Deutsche Bank or with the Hurleys before signing the
affidavit, which was necessary to facilitate the foreclosure.
2.
Failure to Toll the Redemption Period in Violation of § 526(b)
Pursuant to § 526(b), the time to redeem real property is tolled during a period of military
service. Had the foreclosure been valid, the redemption period would have been tolled until
December 2005, when Sgt. Hurley returned home from Iraq. Because the foreclosure was not valid,
however, the redemption period never commenced. Thus, contrary to Deutsche Bank’s assertion,
Sgt. Hurley did not have until April 14, 2005, to cure the default and redeem the property. In
addition, Deutsche Bank had notice of Sgt. Hurley’s status, as evidenced by its designation of his
account status to VIP as of October 15, 2004. Given the information that Deutsche Bank possessed,
there was no need for Sgt. Hurley to provide a copy of his orders to substantiate his military service.
Moreover, Lohr and Orlans should have learned of Sgt. Hurley’s status through their client,
Deutsche Bank. Therefore, Plaintiffs are entitled to summary judgment on this violation as well.
11
3.
Eviction in Violation of § 531
Plaintiffs claim that Defendants violated § 531 by evicting them from the Property in June
of 2005 while Sgt. Hurley was on active duty in Iraq. As set forth above, that section states, in
relevant part: “Except by court order, a landlord (or another person with paramount title) may not
– (A) evict a servicemember, or the dependents of a servicemember, during a period of military
service of the servicemember.” By its own terms, this section does not prohibit an eviction during
a servicemember’s period of service, but only an eviction without a court order. In this case, it is
undisputed that Defendants initiated a judicial proceeding to evict Plaintiffs and obtained a court
order – a default judgment awarding Deutsche Bank possession. Deutsche Bank also obtained a writ
of restitution. Moreover, it is undisputed that the state district court judge who presided over the
eviction proceeding was aware that Sgt. Hurley was in Iraq. (Clarke Aff. ¶ 3.)
The basis for Plaintiffs’ claim that Defendants violated § 531 is not entirely clear. To the
extent Plaintiffs assert that the judgment of possession is void because Deutsche Bank had no right
to the property in light of the invalid foreclosure, the argument fails because “‘[j]udgments entered
in violation of the [SCRA] are only voidable and do not violate due process.’” Longmire v.
Longmire, No. 199CV206-P-A, 2000 WL 796435, at *2 (N.D. Miss. June 1, 2000) (quoting Sarfaty
v. Sarfaty, 534 F. Supp. 701 (E.D. Pa. 1982)). Therefore, Defendants are entitled to summary
judgment on this portion of Plaintiffs’ claim.
4.
Conveyance to Bona Fide Purchaser – § 521(h)
Plaintiffs’ final claim is that Defendants violated § 521(h). As noted above, that section
protects a bona fide purchaser: “If a court vacates, sets aside, or reverses a default judgment against
a servicemember and the vacating, setting aside, or reversing is because of a provision of [the
SCRA], that action shall not impair a right or title acquired by a bona fide purchaser for value under
the default judgment.” 50 UCS App. § 521(h). This section provides no protection to a
12
servicemember, and Plaintiffs thus have no claim for a violation. Therefore, Defendants are also
entitled to summary judgment on this portion of Plaintiffs’ claim.
5.
Plaintiffs’ Failure to Utilize § 521(g)
Defendants contend that Plaintiffs’ claims are barred by their failure to pursue their remedies
under § 521(g). That provision states:
(g)
Vacation or setting aside of default judgments. (1) Authority for court to
vacate or set aside judgment. If a default judgment is entered in an action
covered by this section against a servicemember during the servicemember’s
period of military service (or within 60 days after termination of or release
from such military service), the court entering the judgment shall, upon
application by or on behalf of the servicemember, reopen the judgment for
the purpose of allowing the servicemember to defend the action if it appears
that –
(A) the servicemember was materially affected by reason of that
military service in making a defense to the action; and
(B) the servicemember has a meritorious or legal defense to the
action or some part of it.
(2) Time for filing application. An application under this subsection must
be filed not later than 90 days after the date of the termination or release from
military service.
50 U.S.C. App. § 521(g).
Defendants contend that § 521(g) is Plaintiffs’ exclusive remedy under the SCRA and that
their failure to have the default judgment set aside bars their claims for damages because all of their
claims for damages arise out of the state court eviction judgment. The Court agrees with Defendants
insofar as Plaintiffs seek damages arising out of the eviction, but it rejects Defendants’ contention
that the eviction judgment bars Plaintiffs’ claims arising out of Defendants’ improper foreclosure,
permitting the redemption period to expire, and subsequent sale to a bona fide purchaser. While the
eviction ultimately enabled Deutsche Bank to sell the Property to the bona fide purchase, the harm
caused by the sale was legally distinct from the eviction. Likewise, the improper foreclosure was
a legally separate harm. Finally, as Plaintiffs note, by the time Sgt. Hurley returned home from Iraq,
Deutsche Bank had sold the Property to the bona fide purchaser. Moving to set aside the default
judgment would have thus served no purpose.
13
In a related argument, Defendants Lohr and Orlans contend that the Rooker-Feldman
doctrine also precludes this Court from even considering that the state court judgment may be
invalid. That doctrine prohibits federal courts below the United States Supreme Court from
exercising “appellate jurisdiction over the decisions and/or proceedings of state courts, including
claims that are ‘inextricably intertwined’ with issues decided in state court proceedings.” Executive
Arts Studio, Inc. v. City of Grand Rapids, 391 F.2d 783, 793 (6th Cir. 2004) (citations omitted). It
“is confined to . . . cases brought by state-court losers complaining of injuries caused by state-court
judgments rendered before the district court proceedings commenced and inviting district court
review and rejection of those judgments.” See Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544
U.S. 280, 284, 125 S. Ct. 1517, 1521-22 (2005). Finally, the doctrine is applicable only where the
injury alleged arises from the state court judgment itself. See Coles v. Granville, 448 F.3d 853, 858
(6th Cir. 2006). “If the source of the injury is the state court decision, then the Rooker-Feldman
doctrine would prevent the district court from asserting jurisdiction. If there is some other source
of injury, such as a third party’s actions, then the plaintiff asserts an independent claim.”
McCormick v. Braverman, 451 F.3d 382, 393 (6th Cir. 2006). For example, in Coles, a prior state
court judgment determined that Erie County Metropolitan Metroparks possessed a valid leasehold
interest in certain property along an old canal. After Metroparks began to develop the property as
a trail, the plaintiffs filed an action in federal court alleging that the defendants were encroaching
upon property beyond that found by the state court to be included within the Metroparks’ leasehold
interest. The Sixth Circuit rejected the defendants’ argument that the plaintiffs’ claims were barred
by Rooker-Feldman, because the plaintiffs were not seeking to throw out the state court judgment
but, rather, to enforce it. See Coles, 448 F.3d at 859. The court noted that “Rooker-Feldman applies
only when a plaintiff asserts injury from the state court judgment,” id. at 859, and the plaintiffs were
alleging that the defendants were the one injuring them. See id. In its analysis, the court discussed
14
another case, Todd v. Weltman, Weinbert & Reis Co., 434 F.3d 432 (6th Cir. 2006), where RookerFeldman did not preclude jurisdiction. In that case, the court rejected the defendant’s argument that
Rooker-Feldman barred the plaintiff’s federal claim that the defendant had lied in an affidavit
submitted in support of a prior state court garnishment proceeding. The court concluded that the
doctrine did not apply because the defendant was alleging injuries from the defendant’s deception
and not from the state court judgment. See id. at 437.
Similarly, in this case, Plaintiffs are asserting injuries arising out of sources other than the
state court judgment. Accordingly, the Rooker-Feldman doctrine does not bar Plaintiffs’ claims
unrelated to the eviction.
D.
Laches
Deutsche Bank also contends that Plaintiffs’ claims are barred by the equitable doctrine of
laches. The Sixth Circuit has said that “[l]aches is a negligent and unintentional failure to protect
one’s rights.” Elvis Presley Enters., Inc. v. Elvisly Yours, Inc., 936 F.2d 889, 894 (6th Cir. 1991).
The Sixth Circuit recognizes “a strong presumption that a plaintiff’s delay is reasonable so long as
the analogous statute of limitations has not elapsed.” Id. A defense of laches is viable only where
the party asserting it can “(1) show prejudice or hardship resulting from the plaintiff’s delay in
bringing suit, and (2) demonstrate that the delay induced the defendant to adversely change his
position.” Hinds v. Titan Wheel Int’l, Inc., 45 F. App’x 490, 495 (6th Cir. 2002).
Deutsche Bank has failed to show that it is entitled to the defense of laches. First, it has not
argued that Plaintiffs failed to bring their claim within the applicable limitations period. The
presumption that any delay was reasonable therefore applies. Moreover, Deutsche Bank’s argument
focuses not upon Plaintiffs’ delay in bringing suit, but rather upon Sgt. Hurley’s failure to take any
action to stop the foreclosure proceedings or to redeem the property. But as the Court has already
discussed, the non-judicial foreclosure proceeding was improper, and Sgt. Hurley was thus not
15
required to take any action to stop the foreclosure or cure his default. Finally, Deutsche Bank cannot
show prejudice. Given that Deutsche Bank treated the foreclosure as valid, considered the
redemption period as having expired, and sold the Property to a bona fide purchaser, all before Sgt.
Hurley’s period of military service ended, there is no basis for concluding that his inaction caused
Deutsche bank any prejudice.6
E.
Punitive Damages
The final issue is whether punitive damages are allowed under the SCRA. Predictably,
Defendants cite Michigan law, which does not allow punitive damages. Plaintiffs, on the other
hand, contend that Texas law should control, apparently because that is where Deutsche Bank’s
headquarters are located. The Court need not chose between the two, because both parties are
wrong. The SCRA is a federal law, and therefore, federal law should control the determination of
the issue.
Where a private right of action is judicially implied, the court has “a measure of latitude to
shape a sensible remedial scheme that best comports with the statute.” Gebser v. Lago Vista Indep.
Sch. Dist., 524 U.S. 274, 284, 118 S. Ct. 1989, 1996 (1998). Determining a proper remedy
“inherently entails a degree of speculation, since it addresses an issue on which Congress has not
specifically spoken.” Id. The statute at issue should guide the issue, to ensure that the remedy is
not at odds with the statutory structure and purpose. Id.
The Court thus begins with the statute. According to § 502, the purposes of the SCRA are:
(1) to provide for, strengthen, and expedite the national defense through protection
extended by [the SCRA] to servicemembers of the United States to enable such
persons to devote their entire energy to the defense needs of the Nation; and
(2) to provide for the temporary suspension of judicial and administrative
proceedings and transactions that may adversely affect the civil rights of
servicemembers during their military service.
6
Conceivably, such failures by Sgt. Hurley and/or his mother, who had a power of attorney for handling his
affairs, could be relevant to the issue of mitigation of damages.
16
50 U.S.C. App. § 502. While the SCRA is to be construed liberally in favor of servicemembers, “it
is not to be used as a sword against persons with legitimate claims.” Engstrom v. First Nat’l Bank
of Eagle Lake, 47 F.3d 1459, 1462 (5th Cir. 1995).
Apart from the stated purpose of the act, Congress included provisions concerning
preservation of other remedies in various sections of the SCRA providing specific rights to
servicemembers. For example, § 533(d)(2) provides:
(2) Preservation of other remedies. The remedies and rights provided under this
section are in addition to and do not preclude any remedy for wrongful conversion
otherwise available under law to the person claiming relief under this section,
including consequential and punitive damages.
50 U.S.C. App. § 533(d)(2). As noted above, the court in Linscott concluded that a similar provision
under § 537(c) indicated that Congress did not intend to deny the remedy of damages to
servicemembers. Linscott, 2006 WL 240529, at *7.
While the question is not free from doubt, this Court concludes that punitive damages may
be recovered for SCRA violations. In Franklin v. Gwinnett County Public Schools, 503 U.S. 60, 112
S. Ct. 1028 (1992), the Supreme Court said that in implying a right of action, “we presume the
availability of all appropriate remedies unless Congress has expressly indicated otherwise.” Id. at
66, 112 S. Ct. at 1033. Because there is no indication in the statute that Congress intended to
exclude punitive damages as a remedy, the Court finds no basis to conclude that such damages are
unavailable.
III. CONCLUSION
Because the Court concludes that Plaintiffs have a private right of action under certain
sections of the SCRA, the Court will deny Plaintiffs’ motion for certification to take an interlocutory
appeal. However, the Court will vacate that portion of its September 30, 2008, Opinion concluding
that Plaintiffs have no implied right of action under the SCRA and the portions of its September 30,
2008, Order granting Defendants’ motions for summary judgment on Count I of Plaintiffs’ Second
17
Amended Complaint and denying Plaintiffs’ motion for summary judgment on Count I. The Court
will also vacate its November 14, 2008, Memorandum Opinion and Order denying reconsideration.
Finally, the Court will enter an Order consistent with this Opinion granting Plaintiffs’ motion
for summary judgment with regard to violations of §§ 533(c) and 526(b) of the SCRA alleged in
Count I of Plaintiffs’ Second Amended Complaint but denying summary judgment on the violations
of §§ 531 and 521(h), and granting Defendants summary judgment on the violations of §§ 531 and
521(h) but denying summary judgment on the violations of §§ 533(c) and 526(b), as well as the
issue of punitive damages.
Dated: March 13, 2009
/s/ Gordon J. Quist
GORDON J. QUIST
UNITED STATES DISTRICT JUDGE
18
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
__________________________
JAMES B. HURLEY and BRANDI HURLEY,
Plaintiffs,
and
JAMES B. HURLEY,
Counter-Defendant,
HON. GORDON J. QUIST
v.
Case No. 1:08-CV-361
DEUTSCHE BANK TRUST COMPANY
AMERICAS f/k/a Banker’s Trust Company,
as Trustee and Custodian by: SAXON
MORTGAGE SERVICES, INC., f/k/a/
Meritech Mortgage Services, Inc.,
Defendants/Counter-Plaintiffs,
and
DAVID C. LOHR and ORLANS
ASSOCIATES, P.C.,
Defendants.
______________________________________/
MEMORANDUM OPINION AND ORDER
The Court has before it Defendant Deutsche Bank Trust Company American f/k/a Banker’s
Trust Company, as Trustee and Custodian by: Saxon Mortgage Services, Inc.’s (“Deutsche Bank”)
Motion for Reconsideration, or in the Alternative Certification for Interlocutory Appeal of the
Court’s March 13, 2009 Opinion and Subsequent Order. For the reasons set forth below, the Court
will deny both motions.
MOTION FOR RECONSIDERATION
To prevail on a motion for reconsideration, the movant must "not only demonstrate a
palpable defect by which the Court and the parties have been mislead, but [must] also show that a
different disposition of the case must result from a correction thereof." LCivR 7.4(a). A motion for
reconsideration may not be used to simply rehash rejected arguments or to introduce new arguments.
See Westbrook v. Comm’r, 68 F.3d 868, 879 (5th Cir. 1995).
Initially, Deutsche Bank devotes several pages of its brief to questioning the Court’s reasons
for reconsidering its initial conclusion that there is no implied right of action under the SCRA. The
Court fully set forth its reasons for reconsideration in its March 13, 2009, Opinion. It thus declines
to repeat them here.
Deutsche Bank first argues that the Court lacked jurisdiction to reconsider its prior ruling.
It argues that because the Court initially dismissed Plaintiffs’ SCRA claim after concluding that the
SCRA does not afford Plaintiffs a private right of action, it lost federal question jurisdiction over
this claim. Deutsche Bank’s argument is patently frivolous. While the Court did dismiss Plaintiffs’
only federal claim, it exercised supplemental jurisdiction over the remaining state law claim. The
Court thus retained jurisdiction over the case, including the authority to reconsider any of its prior
rulings. The September 30, 2008, Order and the November 14, 2008, Memorandum Order were
both interlocutory in nature, and any appeal by Plaintiffs would have been premature. Plaintiffs
recognized this and thus filed a motion for certification for an interlocutory appeal pursuant to 28
U.S.C. § 1292(b).
Next, Deutsche Bank contends that the Court erred in concluding that an implied right of
action exists under the SCRA. Deutsche Bank’s arguments on this point essentially repeat its
previous arguments and thus, presents nothing new. Calkins v. Midland Funding NCC-2 Corp., 412
F. Supp. 2d 699 (W.D. Mich. 2006), upon which Deutsche Bank relies, is distinguishable in that it
2
concerned a Michigan statute, not the SCRA or some other federal statute, and applied the test under
Michigan law for determining whether a statute creates a private cause of action.
Deutsche Bank next contends that the Court erred in granting summary judgment to
Plaintiffs because it intruded on the jury’s function in concluding that Sgt. Hurley received his unit
orders on September 11, 2004, and that the unit order could serve as an order under 50 U.S.C. App.
§ 516(a). As the Court understands it, Deutsche Bank argues that whether a unit order satisfies the
requirement of an order under § 516(a) is a question of fact for the jury. The Court disagrees. As
the Court noted in its March 13, 2009, Opinion, the unit order stated that Sgt. Hurley’s unit “and its
members” were ordered to active service. Contrary to Deutsche Bank’s suggestion, § 516(a) does
not refer to individual orders. Rather, it simply refers to a member of a reserve component “who
is ordered to report for military service” and states that such person is entitled to the benefits of titles
II and III of the SCRA upon receipt of such order. Because the unit order applied to both the unit
and its members, this satisfied the plain meaning of the statute. Moreover, in reaching this
conclusion, the Court gave the statute a liberal construction, as the Supreme Court directed in Boone
v. Lightner, 319 U.S. 561, 63 S. Ct. 1223 (1943). Finally, Deutsche Bank contends that the Court
erred in concluding that Sgt. Hurley was not required to actually provide a copy of his orders to
Deutsche Bank in order to invoke his SCRA protections because “‘no provision of the SCRA
permits the court to excuse the service member from providing a copy of his orders to a creditor on
the basis of “substantial compliance.”’” (Def.’s Br. Supp. at 8 (quoting Linscott v. Vector
Aerospace, No. CV05-682-HU, 2007 WL 220357, at *4 (D. Or. July 27, 2007).) However, a review
of the cited Linscott opinion reveals that Deutsche Bank cherry-picked the quoted language without
actually reviewing the opinion. This Court, in its March 13, 2009, Opinion, cited the Linscott
court’s January 31, 2006, decision considering whether a private right of action exists under § 537
of the SCRA. In the subsequent opinion that Deutsche Bank now cites, the court was addressing
3
the plaintiffs’ claim under § 527 of the SCRA, which provides for a reduction of the interest rate on
a servicemember’s obligation to 6%. Section 527, unlike the sections at issue in this case, actually
requires the servicemember to provide a copy of the order to the lender “not later than 180 days after
the date of the servicemember’s termination or release from military service.” 50 U.S.C. App. §
527(b)(1). There is no comparable requirement in § 533(c) or § 526(b).
Deutsche Bank next contends that the Court erred in failing to consider the issue of whether
Plaintiffs complied with the applicable statute of limitations. This argument is baffling because the
Court has reviewed Deutsche Bank’s summary judgment briefs and failed to locate any mention of
a statute of limitations argument. The Court did address Deutsche Bank’s laches argument, but that
did not concern the limitations period. Deutsche Bank suggests that its argument concerning
Plaintiffs’ failure to pursue their remedies under § 521(g) was a statute of limitations argument, but
it was not presented as such. The Court rejected this argument, as well as Defendants Lohr and
Orlans’ Rooker-Feldman doctrine. This Court could not have erred in failing to address an argument
that was never raised.
Deutsche Bank inquires about the statute of limitations that would apply to SCRA claims and
asserts that this Court’s rulings would essentially allow an SCRA claim to run indefinitely, in light
of the absence of an express limitations period. “This court is not obligated to raise and investigate
possible legal arguments for the parties in a case.” Pranckeviciute v. Carroll, No. 91-1586, 1992
WL 55737, at *1 (7th Cir. Mar. 20, 1992). Had Deutsche Bank perceived that the statute of
limitations was an issue, it could have raised it and the Court would have addressed it. That
argument, however, is now waived.1
1
Although the Court will not examine the issue, Deutsche Bank may want to consider how Wilson v. Garcia,
471 U.S. 261, 105 S. Ct. 1938 (1985), in which the Supreme Court held that statutes of limitations for § 1983 actions
are borrowed from state law, might affect its assertion that claims under the SCRA would run indefinitely in light of the
Court’s rulings in its March 13, 2009, Opinion.
4
Deutsche Bank next contends that the Court erred in concluding that the SCRA provides for
punitive damages. However, its argument is largely the same as that presented in its summary
judgment motion. Moreover, Deutsche Bank fails to cite any authority or persuasive reason why
the Court’s analysis was incorrect.
Finally, Deutsche Bank references an ABA Committee Recommendation & Report to the
Standing Committee on Legal Assistance for Military Personnel, issued in February 2009, for which
Plaintiffs’ proposed expert, John Odom, was listed as a primary contact person. Deutsche Bank cites
the report apparently for the proposition that even Plaintiffs’ expert (much of whose opinion the
Court excluded as improperly offering conclusions of law) realizes that the SCRA does not provide
a private right of action because the report recommends that the SCRA be amended to remedy the
result created by the Court’s prior ruling in this case. It is interesting that Deutsche Bank previously
sought to preclude Odom’s opinions and conclusions but now suggests that the Court take its
direction from what Odom said or endorsed in the report.
Apart from Deutsche Bank’s
mischaracterization of the report and its recommendations, the Court finds it improper to consider
the report for the same reasons Deutsche Bank cited in its previous Daubert motion.
Motion for Certification for Interlocutory Appeal
Deutsche Bank moves in the alternative for an order certifying certain of the Court’s rulings
in its March 13, 2009, Order for an interlocutory appeal pursuant to 28 U.S.C. § 1292(b). A district
court may certify an order for an interlocutory appeal as follows:
When a district judge, in making in a civil action an order not otherwise
appealable under this section, shall be of the opinion that such order involves a
controlling question of law as to which there is substantial ground for difference of
opinion and that an immediate appeal from the order may materially advance the
ultimate termination of the litigation, he shall so state in writing in such order. The
Court of Appeals which would have jurisdiction of an appeal of such action may
thereupon, in its discretion, permit an appeal to be taken from such order, if
application is made to it within ten days after the entry of the order . . . .
5
28 U.S.C. § 1292(b). A party seeking an interlocutory appeal must show that: “(1) the question
involved is one of law; (2) the question is controlling; (3) there is substantial ground for difference
of opinion respecting the correctness of the district court's decision; and (4) an immediate appeal
would materially advance the ultimate termination of the litigation.” Vitols v. Citizens Banking Co.,
984 F.2d 168, 170 (6th Cir. 1993) (citing Cardwell v. Chesapeake & Ohio Ry. Co., 504 F.2d 444,
446 (6th Cir. 1974)). The Sixth Circuit has said that review under § 1292(b) should be sparingly
granted and then only in exceptional cases. Kraus v. Bd. of County Road Comm’rs, 364 F.2d 919,
922 (6th Cir. 1966).
Turning to the first two requirements, that the question be one of law that is controlling, the
Sixth Circuit has said that “[a] legal issue is controlling if it could materially affect the outcome of
the case.” In re City of Memphis, 293 F.3d 345, 350 (6th Cir. 2002). However, the resolution of the
issue need not terminate the case. In re Baker & Getty Fin. Servs., 954 F.2d 1169, 1172 n.8 (6th Cir.
1992); In re Fascella Enters., Inc., 2008 WL 4155676, at *2 (E.D. Pa. Sept. 10, 2008) (“The issue
need not be one that would terminate the litigation, nor need it be determinative of the claims on
their merits.”). Here, several issues may be considered controlling issues of law. First, whether an
implied right of action exists under the SCRA, or the specific sections of the SCRA at issue in this
case, is a question of law that is controlling; the answer to this question determines whether
Plaintiffs may maintain any SCRA claim at all. Second, the issue of whether a unit order may
suffice to trigger a servicemember’s SCRA protections pursuant to § 516(a) is a question of law that
may also be controlling, at least with regard to the alleged violation of § 533(c) prohibiting nonjudicial foreclosures.2 Related to this issue is whether a servicemember is required to provide a copy
of his orders to the lender in order to trigger § 516(a). Finally, the issue of whether punitive
2
The issue may not be controlling regarding the alleged violation of § 526(b), which tolls the time to redeem
property during any period of military service, because Deutsche Bank does not dispute that Sgt. Hurley received his
individual orders prior to the expiration of the six-month redemption period.
6
damages are available under the SCRA may properly be characterized as a “controlling issue of
law.”
Next, there must be a substantial ground for difference of opinion. The “substantial ground”
requirement has been characterized as “a genuine doubt or conflicting precedent as to the correct
legal standard.” Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 161 F. Supp. 2d 355, 360 (D.N.J.
2001). A district court within the Sixth Circuit has stated: “Substantial grounds for a difference of
opinion exist when (1) the issue is difficult and of first impression; (2) a difference of opinion exists
within the controlling circuit; or (3) the circuits are split on the issue.” West Tenn. Chapter of Assoc.
Builders & Contractors, Inc. v. City of Memphis, 138 F. Supp. 2d 1015, 1019 (W.D. Tenn. 2000)
(internal quotations omitted).
Although Deutsche Bank presents no argument on whether
“substantial ground” for a difference of opinion exists, there is no conflict within the Sixth Circuit
on any of the issues identified above, nor is there a circuit split on any of those issues. As far as the
Court can discern, whether an implied right of action exists under the SCRA is an issue of first
impression within the Sixth Circuit. The fact that this Court, as well as the Batie court in the
Northern District of Texas, reconsidered initial rulings that there is no private right of action under
the SCRA might suggest that the issue is difficult. However, at this juncture, all courts that have
considered whether an implied right of action exists under the SCRA or the SSCRA under Cort v.
Ash 422 U.S. 66, 95 S. Ct. 2080 (1975), have concluded that a private right of action should be
implied. Thus, there are no conflicting decisions, and no grounds for certification of an interlocutory
appeal.3 At most, Deutsche Bank simply disagrees with the Court’s rulings, which is insufficient
3
Deutsche Bank points out that this Court cited Hufstetler v. Davies, 309 F. Supp. 1372 (N.D. Ga. 1970), in its
September 30, 2008, Opinion. W hile it is true that the court in that case said that the SSCRA did not create a private
right of action, that court did not consider whether a private right of action should be implied. Moreover, that case was
decided several years prior to Cort. Similarly, while the court in McMurtry v. City of Largo, 837 F. Supp. 1155 (M.D.
Fla. 1993), said that “[t]here is no provision in the Act which expressly provides for a private cause of action to be
bestowed upon a military plaintiff,” id. at 1157, that court did not consider whether a private right of action should be
implied under Cort.
7
to create a difference of opinion. Stanley v. St. Croix Basic Servs., Inc., 2008 WL 4861448, at *3
(D. V.I. Nov. 3, 2008).
The final consideration is whether an interlocutory appeal may materially advance the
termination of the litigation. An appeal may satisfy this requirement if it “save[s] judicial resources
and litigant expense.” W. Tenn. Chapter, 138 F. Supp. 2d at 1026. Here it is not apparent that an
interlocutory appeal would save judicial resources and litigant expenses. First, while the parties
would undoubtedly prefer a ruling from the Sixth Circuit on the various SCRA issues, an appeal
would not end the litigation because, even if the Sixth Circuit reversed this Court’s rulings, the state
law conversion claim would remain for trial. Second, if an appeal is permitted, “[m]any months
would be required before the case would be reached for argument” on the Sixth Circuit’s docket.
Kraus, 364 F.2d at 922. On the other hand, a settlement conference is presently set for May 21,
2009, and, failing a settlement, the matter will be set for trial at the earliest date. The parties may
appeal all issues to the Sixth Circuit after trial, which by all indications would last no longer than
a few days. Finally, there is no indication that an interlocutory appeal would save either side
significant expense, because a trial would be likely even if Deutsche Bank obtained a favorable
ruling from the Sixth Circuit.
Therefore, for the foregoing reasons,
IT IS HEREBY ORDERED that Deutsche Bank’s Motion For Reconsideration, Or In The
Alternative Certification For Interlocutory Appeal Of The Court’s March 13, 2009 Opinion And
Subsequent Order (docket no. 157) is DENIED.
Dated: April 21, 2009
/s/ Gordon J. Quist
GORDON J. QUIST
UNITED STATES DISTRICT JUDGE
8
LEGAL SUMMARY OF APPLICABLE CREDIT PROVISIONS OF
SERVICEMEMBERS CIVIL RELIEF ACT (SCRA) & STATE COUNTERPARTS
SUBSTANTIVE CREDIT RELATED PROTECTIONS
No.
#1
PROTECTION
6% Interest Cap (Fed) – General Requirements
DETAILS
50 USC app §527 provides:
(a) Interest rate limitation.
(1) Limitation to 6 percent. An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the
servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent –
(A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other
security in the nature of a mortgage; or
(B) during the period of military service, in the case of any other obligation or liability.
(2) Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the
prohibition in paragraph (1) is forgiven.
(3) Prevention of acceleration of principal. The amount of any periodic payment due from a servicemember under the terms of the instrument that
created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that allocable to the period
for which such payment is made.
(b) Implementation of limitation.
(1) Written notice to creditor. In order for an obligation or liability of a servicemember to be subject to the interest rate limitation in subsection (a), the
servicemember shall provide to the creditor written notice and a copy of the military orders calling the servicemember to military service and any orders further
extending military service, not later than 180 days after the date of the servicemember’s termination or release from military service.
(2) Limitation effective as of date of order to active duty. Upon receipt of written notice and a copy of orders calling a servicemember to military
service, the creditor shall treat the debt in accordance with subsection (a), effective as of the date on which the servicemember is called to military service.
(c) Creditor protection. A court may grant a creditor relief from the limitations of this section if, in the opinion of the court, the ability of the servicemember to
pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military service.
6% Interest Cap (AR) – General Requirements
Similar to NY, PA, UT and WI provisions
6% Interest Cap (IL) – General Requirements
(d) Definitions. In this section:
(1) Interest. The term “interest” includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an
obligation or liability.
(2) Obligation or liability. The term “obligation or liability” includes an obligation or liability consisting of a mortgage, trust deed, or other security in
the nature of a mortgage.
Ark. Code Ann. § 12-62-713. Maximum rate of interest for state active military service.
(a) An obligation or liability bearing interest at a rate in excess of six percent (6%) per year incurred by a service member in military service before his or her
entry into state active military service may not bear interest at a rate in excess of six percent (6%) per year during any part of the period of military service
unless, in the opinion of the court and upon application to the court by the obligee, the ability of the service member to pay interest on the obligation or liability
at a rate in excess of six percent (6%) per year is not materially affected by reason of his or her service.
(b) The court may make any order in the action that, in its opinion, is just.
§ 815 ILCS 205/4.05. Military personnel on active duty; limitation on interest rate
*Similar to LA/OH. Note difference relative to
which debts though.
Sec. 4.05. Military personnel on active duty; limitation on interest rate.
(a) In this Section:
"Active duty" means active duty pursuant to an executive order of the President of the United States, an act of the Congress of the United States, or an order of
the Governor.
"Obligation" means any retail installment sales contract, other contract for the purchase of goods or services, or bond, bill, note, or other instrument of writing
for the payment of money arising out of a contract or other transaction for the purchase of goods or services.
"Service member" means a member of the armed services or reserve forces of the United States or a member of the Illinois National Guard.
(b) Notwithstanding any contrary provision of State law, but subject to the federal Servicemembers Civil Relief Act, no creditor in connection with an
obligation entered into on or after the effective date [8/22/2005] of this amendatory Act of the 94th General Assembly [P.A. 94-635], but prior to a service
member's deployment on active duty, shall charge or collect from a service member who is deployed on active duty, or the spouse of that service member,
interest or finance charges exceeding 6% per annum during the period that the service member is deployed on active duty.
(c) Notwithstanding any contrary provision of law, interest or finance charges in excess of 6% per annum that otherwise would be incurred but for the
prohibition in subsection (b) are forgiven.
(d) The amount of any periodic payment due from a service member who is deployed on active duty, or the spouse of that service member, under the terms of
the obligation shall be reduced by the amount of the interest and finance charges forgiven under subsection (c) that is allocable to the period for which the
periodic payment is made.
(e) In order for an obligation to be subject to the interest and finance charges limitation of this Section, the service member deployed on active duty, or the
spouse of that service member, shall provide the creditor with written notice of and a copy of the military or gubernatorial orders calling the service member
to active duty and of any orders further extending the service member's period of active duty, not later than 180 days after the date of the service member's
termination of or release from active duty.
(f) Upon receipt of the written notice and a copy of the orders referred to in subsection (e), the creditor shall treat the obligation in accordance with subsection
(b), effective as of the date on which the service member is deployed to active duty.
(g) A court may grant a creditor relief from the interest and finance charges limitation of this Section, if, in the opinion of the court, the ability of the service
member deployed on active duty, or the spouse of that service member, to pay interest or finance charges with respect to the obligation at a rate in excess of 6%
per annum is not materially affected by reason of the service member's deployment on active duty.
(h) A violation of this Section constitutes a civil rights violation under the Illinois Human Rights Act [775 ILCS 5/1-101 et seq.].
6% Interest Cap (LA) – General Requirements
* Tracks OH, also similar to IL. But for IL note
difference relative to which debts.
All proceeds from the collection of any civil penalty imposed under this subsection shall be deposited into the Illinois Military Family Relief Fund.
La. Rev. Stat. Ann. §29:311 provides in part:
As used in this Part:
(1) "Active duty" means active duty pursuant to an executive order of the president of the United States, an act of the Congress of the United States, or the
provisions of R.S. 29.7.
...
(3)"Obligation" means any retail installment sales contract, other contract for the purchase of goods or services, or bond, bill, note, or other instrument of
writing for the payment of money arising out of the contract or other transaction for the purchase of goods or services.
La. Rev. Stat. Ann. §29:312 provides:
A. Notwithstanding any provision of law to the contrary, no creditor in connection with an obligation entered into on or after June 29, 2005, shall charge or
collect from a person, or spouse of a person, who is on active duty interest or finance charges exceeding six percent per annum during the period that the
person is deployed on active duty.
B. Notwithstanding any provision of law to the contrary, interest or finance charges in excess of six percent per annum that otherwise would be incurred but for
the prohibition in Subsection (A) of this Section are forgiven.
C. The amount of any periodic payment due from a person, or spouse of a person, who is on active duty under the terms of the obligation shall be reduced by
the amount of the interest and finance charges forgiven under Subsection (B) of this Section that is allocable to the period for which the periodic payment is
made.
D. In order for an obligation to be subject to the interest and finance charges limitation of this Section, the person, or spouse of the person on active duty,
shall provide the creditor with written notice and a copy of the military or gubernatorial orders calling the person to active duty and of any orders further
extending active duty, not later than one hundred eighty days after the date of the person's termination of or release from active duty.
E. Upon receipt of the written notice and a copy of the orders referred to in Subsection (D) of this Section, the creditor shall treat the obligation in accordance
with Subsection (A) of this Section, effective as of the date on which the person is on active duty.
6% Interest Cap (NY) – General Requirements
Similar to AR, PA, UT and WI provisions.
6% Interest Cap (OH) – General Requirements
* Tracks LA, also similar to IL. But for IL note
difference relative to which debts.
F. A court may grant a creditor relief from the interest and finance charges limitation of this Section, if, in the opinion of the court, the ability of the person, or
spouse of the person, on active duty to pay interest or finance charges with respect to the obligation at a rate in excess of six percent per annum is not materially
affected by reason of the person's service on active duty.
N.Y. Mil § 323-a. Maximum rate of interest
No obligation or liability bearing interest at a rate in excess of six percent per year incurred by a person in active military service in the armed forces of the
United States or in active military service of the organized militia of the state before that person's entry into such service shall, during any part of the period
active military service, bear interest at a rate in excess of six 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 six 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 and any other charges (except bona fide insurance) with respect to such obligation or liability.
Ohio Rev. Code § 1343.031. Interest and finance charge limitations where person or spouse is deployed on active duty
(A) As used in this section:
(1) "Active duty" means active duty pursuant to an executive order of the president of the United States, an act of the congress of the United States, or
section 5919.29 or 5923.21 of the Revised Code..
(2) "Obligation" means any retail installment sales contract, other contract for the purchase of goods or services, or bond, bill, note, or other instrument of
writing for the payment of money arising out of a contract or other transaction for the purchase of goods or services.
(B) Notwithstanding any contrary provision of the Revised Code, no creditor in connection with an obligation entered into on or after the effective date of this
section [May 18, 2005] shall charge or collect from a person, or spouse of a person, who is deployed on active duty interest or finance charges exceeding six
per cent per annum during the period that the person is deployed on active duty.
(C) Notwithstanding any contrary provision of the Revised Code, interest or finance charges in excess of six per cent per annum that otherwise would be
incurred but for the prohibition in division (B) of this section are forgiven.
(D) The amount of any periodic payment due from a person, or spouse of a person, who is deployed on active duty under the terms of the obligation shall be
reduced by the amount of the interest and finance charges forgiven under division (C) of this section that is allocable to the period for which the periodic
payment is made.
(E) In order for an obligation to be subject to the interest and finance charges limitation of this section, the person, or spouse of the person, deployed on active
duty shall provide the creditor with written notice of and a copy of the military or gubernatorial orders calling the person to active duty and of any orders further
extending active duty, not later than one hundred eighty days after the date of the person's termination of or release from active duty.
(F) Upon receipt of the written notice and a copy of the orders referred to in division (E) of this section, the creditor shall treat the obligation in accordance with
division (B) of this section, effective as of the date on which the person is deployed to active duty.
6% Interest Cap (PA) – General Requirements
Similar to AR, NY, UT and WI provisions
(G) A court may grant a creditor relief from the interest and finance charges limitation of this section, if, in the opinion of the court, the ability of the person, or
spouse of the person, deployed on active duty to pay interest or finance charges with respect to the obligation at a rate in excess of six per cent per annum is not
materially affected by reason of the person's deployment on active duty.
51 Pa. Stat. § 7316. Maximum rates of interest and scheduling of debts
(a) APPLICABILITY.-- This section shall apply to members of the Pennsylvania National Guard who are called or ordered to active duty with the armed forces
of the United States, other than active duty for training, or to State active duty under this title, and members of other reserve components who are called or
ordered to active duty with the armed forces of the United States, other than active duty for training, when the period of active duty or State active duty is 30
consecutive days or more.
(b) MAXIMUM RATES OF INTEREST.-- No obligation or liability bearing interest at a rate in excess of the rate established under section 206 of the Soldiers'
and Sailors' Civil Relief Act of 1940 (54 Stat. 1178, 50 U.S.C. App. § 526), as may be amended from time to time, incurred by a person in military service, as
described in subsection (a), shall, during any part of the period of service which occurs after the enactment of this section, bear interest at a rate in excess of the
rate under section 206, calculated as an annual percentage rate in accordance with applicable laws and regulations, unless, in the opinion of the court, upon
application thereto by the obligee, the ability of the person in the military service to pay interest upon the obligation or liability at a rate in excess of the rate
under section 206 is not materially affected by reason of service, in which case the court may make the order as in its opinion may be just.
(c) RECALCULATION OF REPAYMENT SCHEDULE.-- Upon the reduction of the annual rate of interest pursuant to this section, there shall be a
corresponding and proportionate reduction of the amount of any periodic payments made to satisfy the obligation based on a recalculation of the repayment
schedule with the same repayment frequency and an interest rate equal to the rate established under section 206 of the Soldiers' and Sailors' Civil Relief Act of
1940, amortized over the original term of the loan.
(d) RESCHEDULING OF DEBT PAYMENTS.-- When a member's income is materially reduced as a result of his being called or ordered to active duty, the
member, his spouse or his agent or attorney-in-fact may apply to his creditors for a rescheduling of his debt payments to take into account the material
reduction in his income. The member, his spouse or his agent or attorney-in-fact shall provide the creditor with a statement of his income prior to being called
or ordered to active duty and his income thereafter. Based on proof of a material reduction in income, the creditor shall thereafter adjust or reschedule the
monthly or other periodic payments of the member. Nothing in this subsection shall be construed to relieve a member of the obligation to repay the principal of
his debt after his release or discharge from active duty and restoration of his income at periodic payments equal to those in effect prior to activation.
6% Interest Cap (UT) – General Requirements
Similar to AR, NY, PA and WI provisions
(e) INTEREST.-- As used in this section, the term "interest" includes service charges, renewal fees, fees or any other charges, except bona fide insurance, in
respect of the obligation or liability.
Utah Code Ann. § 39-7-111. Maximum rate of interest
An obligation or liability bearing interest at a rate in excess of six percent per year incurred by a service member in military service before his entry into
military service may not, during any part of the period of military service, bear interest at a rate in excess of six percent per year unless, in the opinion of the
court and upon application to the court by the obligee, the ability of the service member to pay interest upon the obligation or liability at a rate in excess of six
percent per year is not materially affected by reason of his service. The court may make any order in the action that, in its opinion, is just.
Utah Code Ann. § 39-7-102. Definitions
6% Interest Cap (WA) – General Requirements
*Extends Fed. SCRA protection to “qualifying
business loans”
(1) "Dependent" means the spouse and children of a service member or any other person dependent upon the service member for support.
(2) "Interest" includes service charges, renewal charges, fees, or any other charges in respect to any obligation or liability.
(3) "Military service" means active, full-time service with a recognized military unit called into service by the governor for at least 30 days.
(4) "Service member" means any member of the National Guard serving on active military service in an organized military unit.
Wash. Rev. Code § 38.42.010. Definitions
The definitions in this section apply throughout this chapter.
(1) "Business loan" means a loan or extension of credit granted to a business entity that: (a) Is owned and operated by a service member, in which the service
member is either (i) a sole proprietor, or (ii) the owner of at least fifty percent of the entity; and (b) experiences a material reduction in revenue due to the
service member's military service.
...
(5) "Military service" means a service member under a call to active service authorized by the president of the United States or the secretary of defense for a
period of more than thirty consecutive days.
...
(7) "Service member" means any resident of Washington state that is a member of the national guard or member of a military reserve component.
Wash. Rev. Code § 38.42.110. Restructure of business loan interest rate
(1) Upon the request of a service member with a qualifying business loan, the financial institution must restructure the interest rate of the loan to the equivalent
provisions in the federal servicemembers civil relief act (50 USC App. 501 et seq.). The service member must notify the institution at least five days prior to the
beginning of military service and submit official documentation that substantiates their eligibility for the protections of this chapter.
(2) This section applies only to loans with an outstanding balance of less than one hundred thousand dollars at the time the service member is called to military
service.
Req.
1.a
6% Interest Cap (WI) – General Requirements
(3) This section applies only to business loans executed on or after January 1, 2007.
Wis. Stat. Ann. § 321.62. Service members civil relief; state active duty.
Similar to AR, NY, PA, and UT provisions
(1) DEFINITIONS. In this section:
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA &WI) – Required Actions by
Servicemember
...
(b) "Period of state active duty" means the period beginning on the date on which the service member receives an order to enter state active duty and ending
on the date of the service members release from state active duty or death while on state active duty.
(c) "Service member" means a member of the national guard or state defense force who is ordered into state active duty for 30 days or more.
...
(10) MAXIMUM INTEREST RATE. No obligation or liability bearing interest at a rate in excess of 6 percent per year incurred by a service member in state
active duty before his or her entry into that duty may, during any part of the period of state active duty, bear interest in excess of 6 percent per year except by
court order. If, upon application by an obligee, a court determines that the ability of the service member to pay interest upon the obligation or liability at a rate
in excess of 6 percent per year is not materially affected by reason of his or her state active duty, the court may make any order that is just. In this subsection,
"interest" includes service charges, renewal charges, fees, or other charges, other than insurance, in respect to the obligation or liability.
Federal. Prior to implementing interest rate cap on an eligible debt, servicemember must provide to the creditor: (1) written notice; and (2) a copy of the
military orders calling the servicemember to military service and any orders further extending military service, not later than 180 days after the date of the
servicemember’s termination or release from military service.
IL, LA & OH: Servicemember OR spouse of the servicemember may provide written notice and military/gubernatorial orders, not later than 180 days after the
date of the servicemember’s termination or release from military service. Applies to IL/LA/OH defined “servicemembers” who are IL/LA/OH residents.
AR, NY, PA, UT & WI: Not addressed – as a practical matter follow Federal.
Req.
1.c.
6% Interest Cap (Fed & All States)– Available to
Who?
WA: Service member must request relief and notify the financial institution at least 5 days prior to the beginning of military service and submit official
documentation that substantiates their eligibility. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Federal. Available to “servicemembers” in “military service”. Defined below.
All States. As noted below, many states extend this protection and/or their own to state national guard when ordered to “state active duty” by governor in
certain circumstances. Expands parties covered of SCRA. Some states provide unique protections not only for “state active duty” but also those on federal
“active duty.”
Req.
1.d
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Whose Debts?
Options: (1) Just follow federal law regarding availability – risk: subject ourselves to reputational and litigation risk. Not really an option; (2) Review orders
provided via 1.a and determine whether provided by governor vs. President/Secretary of Defense, determine whether particular state provides additional
coverage, and apply if applicable; or (3) Provide additional coverage to national guard/reserves called up to “state active duty” across the board. Still require
written request and copy of orders. From an implantation/risk perspective - #3 may be easiest option, and my recommendation.
Federal. Debt must have been incurred by: (1) the servicemember; OR (2) the servicemember AND the servicemember’s spouse jointly. Other debts are
NOT entitled to protection – for example, debts incurred by a dependent or debts incurred by a corporation where servicemember is an officer would NOT be
covered. While some question whether SCRA applies to loans where joint borrowers (servicemember and 3rd other than spouse), suggest that we apply SCRA
coverage if ANY borrower is a servicemember. Question – guarantors (primarily vs. secondarily liable)?
IL, LA & OH. Extend protections to both those on active duty pursuant to SCRA AND state active duty. Provisions also extend coverage to debts incurred
solely by spouse of “servicemember” as defined by state law (see above) to extent IL/LA/OH residents.
NY: Debt must have been incurred by “servicemember” (state/federal). Note however that unlike Federal law (see below – where have to go to court) under
NY Mil § 301-b, a dependent of a servicemember is entitled and may apply directly to us for benefit under this section for their debts, and we are obligated to
grant such request unless the ability of the such dependent to comply with the debts terms has not been materially impaired by servicemembers active duty
service. N.Y. Mil. § 301-b.
AR, PA, UT & WI Debt must have been incurred by person in military service. Applies to AR/PA/UT/WI defined “service members” who are AR/PA/UT/WI
residents..
Req.
1.e.
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Which Debts?
WA: Service member (federal) must have qualifying business loan. Applies to WA defined “service members” who are WA residents for applicable
loans/lines.
Federal. Debt must have been incurred prior to entry into “military service” (defined below. i.e., active duty date). For lines – any advances post active duty
date can receive normal rates. Applies to consumer, business, and agricultural purpose loans/lines. Issues relative to student loans and whether SCRA rate cap
or other provisions applicable . . . WEF should look at this issue and handle separately. See, Memorandum, Department of Education, subject: GSL Borrowers
Adversely Affected by the Recent U.S. Military Mobilizations (August 29, 1990) and Higher Education Act relative to Guaranteed Student Loan Program.
IL. Illinois provisions limited to debts incurred after August 22, 2005 and prior to deployment to active duty. See definition of “Obligations” - only loans/retail
contracts for purchase of goods/services NOT real estate. Applies to IL defined “servicemembers” and their spouses who are IL residents.
LA, OH: Provisions apply to debts incurred after [LA - June 29, 2005] [OH – May 18, 2005], even if incurred while on active duty. See definition of
“Obligations” – only loans/retail contracts for purchase of goods/services NOT real estate. Applies to LA/OH defined “servicemembers” and their spouses who
are LA/OH residents.
AR, NY, UT, WI: Debt must have been incurred prior to entry into active military service. Applies to AR/NY/UT/WI defined “service members” who are
AR/NY/UT/WI residents.
PA: Unclear. I would argue all debts incurred after April 16, 1992, even if incurred while on active duty. Applies to PA defined “servicemembers” who are
PA residents.
Req.
1.f
6% Interest Cap (Fed, AR, IL, LA, NY OH, PA,
UT, WA & WI) – Interest Rate
WA: Extends Fed protections to “qualifying business loans” with an outstanding balance of < $100,000 at time service member called to military service and
executed after 1/1/07. Qualifying business loan is credit to a business entity that: (a) is owned and operated by the service member, in which the service
member is either a sole proprietor or the owner of at least 50% of the entity, and (b) experiences a material reduction in revenue due to the servicemember’s
military service. Debt must have been incurred prior to military service. Applies to WA defined “service members” who are WA residents for applicable
loans/lines.
Variable Rate transactions. Interest rate on loan/line must be allowed to fall below 6% if that is what standard index + margin would do. Hence interest rate
cap/ceiling must be added to the transaction of 6% for applicable period.
Fixed Rate transactions. If fixed interest rate higher than 6%, reduce to 6% for applicable period.
AR, IL, LA, NY OH, PA, UT & WI: Track Federal. Applies to AR/IL/LA/NY/OH/PA/WI defined “servicemembers” who are AR/IL/LA/NY/OH/PA/WI
residents. Note – PA is referencing old SSCRA provisions.
Req.
1.g
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Interest Rate - Waive Fees
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Federal. Given definition of “interest” – waive ALL fees/charges/costs on the loan/line including late fees, deferral fees, extension fees, overlimit fees and
other charges (except bona fide insurance – e.g., credit life) for applicable period (see below) on all applicable loans/lines. There is some authority that if fee
can be traced to a post-active duty advance on a line (e.g., advance fee) it could be charged . . . but given difficulty making this distinction - waive ALL fees.
AR, IL, LA & OH: IL, LA & OH use “interest” and “finance charge” terminology but don’t define – track federal. Applies to IL/LA/OH defined
“servicemembers” who are IL/LA/OH residents.
NY, PA & WI: “Interest” definition same as Federal – track Federal. Applies to NY/PA/WI defined “servicemembers” who are NY/PA/WI residents.
UT: UT doesn’t have “(except bona fide insurance)” exception language. Despite this recommend track federal. Applies to UT defined service members who
are UT residents.
Req.
1.h.
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Reduced Interest Rate Start Date
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Federal: Reduced interest rate effective as of the date on which the servicemember is called to “military service” (defined below. i.e., active duty date). Note,
however that this protection is expanded for reserve component personnel (50 USC app §516(a)) to date they receive their active duty orders. Protections can
also be extended in advance of any actual active duty report date for draftees. 50 USC app §516(b). As such, unless we are going to make these
determinations/distinctions any reduced rate should be started/implemented on the earlier of: (1) date of active duty orders; or (2) active duty date. Interest
accrual should be backdated to start date if necessary, and any overpaid interest applied to principal reduction. *Note that OCC Bulletin 2008-30, dated
October 24, 2008, indicates that “[i]f feasible, the servicemember should be given an opportunity to direct how such funds should be applied.” [i.e., future
payments vs. principal reduction, etc.].
IL, LA & OH: Upon receipt of required documentation, reduced rate effective as of the date on which the person is on active duty. Applies to IL/LA/OH
defined “servicemembers” who are IL/LA/OH residents.
NY & PA: N/A. Track federal.
AR, UT: Reduced interest rate applicable during period of military service. Applies to AR/UT defined “service members” who are AR/UT residents.
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
WI: Reduced interest rate effective for “period of state active duty” – which is defined as beginning on the date on which the service member receives an order
to enter state active duty and ending on the date of the service members release from state active duty or death while on state active duty. Same issues as
Req.
1.i.
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Reduced Interest Rate End Date
federal so track federal. Applies to WI defined “service members” who are WI residents for applicable loans/lines.
Federal: Secured Loans/Lines. Reduced interest rate stays in effect during period of military service and 1 year thereafter. Unless informed otherwise use
discharge date in orders + 1 year as end date and reinstate contract rate/fees after such date. Unsecured Loans/Lines. Reduced interest rate stays in effect
during period of military service. Unless informed otherwise use discharge date in orders as end date and reinstate contract rate/fees after such date.
AR, IL, LA, NY, OH, PA, UT & WI: During active duty period. Applies to IL/LA/NY/OH/PA/UT/WI defined “servicemembers” who are
IL/LA/NY/OH/PA/UT/WI residents.
Req.
1.j
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Forgiveness of Interest
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Federal: Interest that would otherwise be incurred but for the 6% cap provided in 1.a. must be forgiven. It cannot be deferred, added to the outstanding
balance, etc.
IL, LA & OH: Tracks Federal. Applies to IL/LA/OH defined “servicemembers” who are IL/LA/OH residents.
AR, NY, PA, UT & WI: N/A – Track federal.
Req.
1.k
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT, WA & WI) – Periodic Payments
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Federal: Payments must be reduced to reflect any reduction in the interest rate.
IL, LA & OH: Track Federal. Applies to IL/LA/OH defined “servicemembers” who are IL/LA/OH residents
AR, NY, UT & WI: N/A – Track federal.
PA: Upon reduction of interest rate, there shall be a corresponding and proportionate reduction of the amount of any periodic payments made to satisfy the
obligation based on a recalculation of the repayment scheduled with the same repayment frequency and the reduced interest rate amortized over the original
term. Track federal. Applies to PA defined “servicemembers” who are PA residents.
Req.
1.
FYI
6% Interest Cap (Fed) – Rate Change Notices
6% Interest Cap (Fed, AR, IL, LA, NY, OH, PA,
UT & WI) – Creditor Protection
WA: Track SCRA for qualifying business loans. Applies to WA defined “service members” who are WA residents for applicable loans/lines.
Open-End Lines subject to TILA/Reg. Z. When/if rates reinstated/increased this triggers the notice requirements of 12 CFR § 226.9(c). SCRA rate decrease
excluded from change in terms notice provisions.
Closed-End Loans subject to 12 CFR § 226.19(b). Variable rate, secured by principal-dwelling with term greater than 1 year increase/decrease in interest rate
as a result of SCRA triggers notice provisions of 12 CFR § 226.20(c).
Federal: Ct. may grant creditor relief from this section if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or
liability at a rate in excess of 6% per year is not materially affected by reason of the servicemember’s military service.
AR, IL, LA, NY, OH, PA, UT & WI: Tracks Federal. Applies to IL/LA/NY/OH/PA/UT/WI defined “servicemembers” who are IL/LA/NY/OH/PA/UT/WI
residents
CA MFFRA (CA) – General Requirements
Req
CA MFFRA (CA) – Deferral Protections Available
To Who?
Req
CA MFFRA (CA) – Required Actions by Reservist
For California Military Families Financial Relief Act (MFFRA) See Cal. Mil. & Vet. Code §§800 et seq.
**Note. Presumably someone could get the benefits of both the CA and SCRA . . . defer for 6 months (CA) and request rate cap of 6%, etc. Comply with both
if such a request arises.
Protections available only to “Reservists” which is defined as a member of the United States Military Reserve or National Guard of California called to active
duty as a result of the Iraq conflict pursuant to the Authorization for Use of Military Force Against Iraq Resolution of 2002 (Public Law 107-243) or the
Afghanistan conflict pursuant to Presidential Order No. 13229. Cal. Mil. & Vet. Code §803. Must be a CA resident , member of CA National Guard, etc.
To be eligible Reservist (or their designee) must deliver: (1) a letter signed by the reservist, under penalty of perjury, requesting deferment of financial
obligations; and (2) if required by the financial institution, proof that the reservist’s employer does not provide continuing income to the reservist while the
Req
Req
Req
Req.
Req.
CA MFFRA (CA) – Deferral Available for Whose
Debts?
CA MFFRA (CA) – Deferral Available for What
Types of Debt?
CA MFFRA (CA) – Deferral Available for Which
Debts?
CA MFFRA (CA) – Period of Deferral
CA MFFRA (CA) – Payments/Interest Accrual
reservist is on active military duty, including the reservist’s military pay, or more than 90 % of the reservist’s monthly salary and wage income earned before
the call to active duty. Cal. Mil. & Vet. Code §800(b).
While unfortunately this doesn’t appear to be explicitly stated, it must be the Reservist’s debt.
Reservist may request deferral on the following types of obligations: (1) obligations secured by a mortgage/deed of trust on the servicemember’s principal
dwelling as of the date the reservist was called to active duty; (2) credit card obligations; (3) retail installment contracts, retail installment accounts,
installment accounts, and revolving accounts under UNRUH Act; (4) up to two loans subject to the Automobile Sales Finance Act; and (5) leased “vehicles”
as defined in Section 670 of the Vehicle Code. Cal. Mil. & Vet. Code §§800 & 808.
Note – these requirements do not apply to direct, non-real estate loans/lines (other than credit card).
Obligation must have been incurred prior to the date the Reservist was called to active duty. Cal. Mil. & Vet. Code §811.
Deferment shall be the lesser of: (1) 180 days; or (2) the period of active duty plus 60 calendar days. Cal. Mil. & Vet. Code §800(d).
No payments (principal or interest) during period of deferral. Only applies to those payments due subsequent to the notice provided to lender noted above.
No penalties may be imposed for non-payment. No interest can be charged or accrue during deferral period. Cal. Mil. & Vet. Code §§800(d) & 804.
Notwithstanding the above, any deferred “mortgage” (i.e., obligation secured by principal dwelling) payments will be due and payable upon the earlier of: (1)
the sale of the property or other event specified in the documents permitting the lender to accelerate the loan (other than a deferral); (2) further encumbrance of
the property; or (3) the maturity of the obligation as defined under the loan documents, or (if applicable) as extended by the deferral. Cal. Mil. & Vet. Code
§802(a).
Escrow – Nothing herein, relieves a reservist with a “mortgage” obligation subject to an impound/escrow account for the payment of property taxes, special
assessments, mortgage insurance, and hazard insurance from making monthly payments of an amount sufficient to at least cover these amounts during the
period of deferral, unless the borrower and lender agree to a lesser amount. Cal. Mil. & Vet. Code §802(b).
Req.
CA MFFRA (CA) – Loan Term
Req.
Req.
Req.
CA MFFRA (CA) – Advances
CA MFFRA (CA) – Foreclosure/Repossession
CA MFFRA (CA) – Credit Disability Insurance
Nothing prevents a reservist from making voluntary payments during period of deferral. See, Cal. Mil. & Vet. Code §802(c).
If payments deferred on a closed-end obligation, lease or an open-end obligation with a maturity date, the term of the obligation must be extended by the
number of months the obligation was deferred. Cal. Mil. & Vet. Code §800(e)
For open-end obligations, lender may restrict the availability of additional credit during term of deferral. Cal. Mil. & Vet. Code §800(f)
No foreclosure or repossession during deferral period. Cal. Mil. & Vet. Code §804.
Prepaid Credit Disability Insurance. Holder of a loan or retail installment contract with respect to which debtor has purchased prepaid credit disability
insurance shall give notice to the debtor not less than 30 days before the expiration date of the insurance that the debtor will not be protected during the period
between the expiration date and the deferred maturity date unless the insurance is extended. The debtor may, at his/her option, direct the holder to add the
amount of the additional premium to the unpaid balance of the loan or contract. Cal. Mil. & Vet. Code §807(a).
Monthly Pay Credit Disability Insurance. The holder of an open-ended loan or retail installment account with respect to which the debtor has purchased
credit disability insurance with premiums payable monthly together with the installment payments on the loan or the account shall give notice to the debtor that
the debtor will not be protected by the insurance during the deferral period unless the debtor elects to continue payment of premiums during that period. The
debtor may at his/her option, direct the holder to add the amount of those premiums to the unpaid balance. Cal. Mil. & Vet. Code §807(b).
** Note, from a retail perspective we do MOB on our closed-end loans today . . . as such, neither of these sections are really pertinent, but with that said
probably best to follow monthly pay option.
Hudson Cook: “Federal and State Laws Impacting Lessor’s and Motor Vehicles of Leases of Military Servicemembers” memo indicates that while this
section applies only to loans and retail installment sales, “it is being reported as ‘best practices’ in connection with credit disability insurance obtained with a
vehicle lease.”
PA Deferral Provision (PA) – General
Requirements
51 Pa. Stat. § 7316. Maximum rates of interest and scheduling of debts
...
d) RESCHEDULING OF DEBT PAYMENTS.-- When a member's income is materially reduced as a result of his being called or ordered to active duty, the
member, his spouse or his agent or attorney-in-fact may apply to his creditors for a rescheduling of his debt payments to take into account the material
reduction in his income. The member, his spouse or his agent or attorney-in-fact shall provide the creditor with a statement of his income prior to being called
or ordered to active duty and his income thereafter. Based on proof of a material reduction in income, the creditor shall thereafter adjust or reschedule the
monthly or other periodic payments of the member. Nothing in this subsection shall be construed to relieve a member of the obligation to repay the principal of
his debt after his release or discharge from active duty and restoration of his income at periodic payments equal to those in effect prior to activation.”
Comment: Not sure exactly what this section means, but it appears to require a deferral of debt payments upon request and proof of income reduction. Applies
to PA defined “servicemembers” who are PA residents.
2.
Credit Reporting (Fed) – General Requirements
50 USC app §518 provides in part:
Application by a servicemember for, or receipt by a servicemember of, a stay, postponement, or suspension pursuant to this Act [50 USC Appx §§ 501et seq.]
in the payment of a tax, fine, penalty, insurance premium, or other civil obligation or liability of that servicemember shall not itself (without regard to other
considerations) provide the basis for any of the following:
...
(3) An adverse report relating to the creditworthiness of the servicemember by or to a person engaged in the practice of assembling or evaluating
consumer credit information.
...
Credit Reporting (AR) – General Requirements
(5) An annotation in a servicemember's record by a creditor or a person engaged in the practice of assembling or evaluating consumer credit information,
identifying the servicemember as a member of the National Guard or a reserve component.
Ark. Code Ann. § 12-62-709. Exercise of rights not to affect future financial transactions.
Application by a service member in military service for, or receipt of, a stay, postponement, or suspension under this subchapter in the payment of any fine,
penalty, insurance premium, or other civil obligation or liability may not be used for any of the following:
...
Credit Reporting (CA) – General Requirements
(3) An adverse report relating to the creditworthiness of the service member by or to any person or entity engaged in the practice of assembling or evaluating
consumer credit information.
Cal. Mil. & Vet. Code §805 provides:
Credit Reporting (NY) – General Requirements
Subject to subdivisions (e) and (f) of Section 800, a stay, postponement, or suspension under this chapter of the payment of any tax, fine, penalty, insurance
premium, or other civil obligation or liability of a person in military service shall not provide the basis for affecting credit ratings, denial or revocation of credit,
or a change by the lender in the terms of an existing credit arrangement.
N.Y. Mil. § 313-a. Exercise of rights under this article not to affect certain future financial transactions
Application by a person in military service for, or receipt by a person in military service of, a stay, postponement or suspension pursuant to the provisions of
this article in the payment of any tax, fine, penalty, insurance premium, or other civil obligation or liability of that person shall not itself, without regard to other
considerations, provide the basis for any of the following:
...
Credit Reporting (UT) – General Requirements
3. An adverse report relating to the creditworthiness of such person in military service by or to any person or entity engaged in the practice of assembling or
evaluating consumer credit information.
Utah Code Ann. § 39-7-107. Exercise of rights not to affect future financial transactions
Application by a service member in military service for, or receipt of, a stay, postponement, or suspension under the provisions of this chapter in the payment of
any fine, penalty, insurance premium, or other civil obligation or liability may not be used for any of the following:
...
Credit Reporting (WI) – General Requirements
(3) an adverse report relating to the creditworthiness of the service member by or to any person or entity engaged in the practice of assembling or evaluating
consumer credit information.
Wis. Stat. Ann. § 321.62. Service members civil relief; state active duty.
...
Req.
2.a.
Credit Reporting (Fed, AR, CA, NY, UT & WI) –
Reporting Negative Info
Req.
2.b
Credit Reporting (Fed) – Reporting Potentially
Discriminatory Info
Default/Change In Terms (Fed) – General
Requirements
(4) EXERCISE OF RIGHTS. No person may use the fact that a service member has applied for, or received, a stay, postponement, or suspension in the
payment of a tax, fine, penalty, insurance premium, or other civil obligation or liability as the basis for doing any of the following:
...
(c) If the person is in the business of assembling or evaluating consumer credit information, making an adverse report on the creditworthiness of the service
member.
Must NOT report negative information on a servicemember solely because they have availed themselves of the SCRA or CA provisions. However, we
can/will report information relative to a servicemember’s compliance with the terms of obligations that have been adjusted by reason of the Act and/or CA law
(e.g., late payments). Note that while CA/UT/WI statutory provisions do not include specific language (“without regard to other considerations”) it can be
implied – recommend track federal.
Must NOT report/note in servicemember’s record that they are a member of National Guard or a reserve component.
50 USC app §518 provides in part:
Application by a servicemember for, or receipt by a servicemember of, a stay, postponement, or suspension pursuant to this Act [50 USC Appx §§ 501et seq.]
in the payment of a tax, fine, penalty, insurance premium, or other civil obligation or liability of that servicemember shall not itself (without regard to other
considerations) provide the basis for any of the following:
(1) A determination by a lender or other person that the servicemember is unable to pay the civil obligation or liability in accordance with its terms.
(2) With respect to a credit transaction between a creditor and the servicemember—
...
Default/Change In Terms (AR) – General
Requirements
(B) a change by the creditor in the terms of an existing credit arrangement;
Ark. Code Ann. § 12-62-709. Exercise of rights not to affect future financial transactions.
Application by a service member in military service for, or receipt of, a stay, postponement, or suspension under this subchapter in the payment of any fine,
penalty, insurance premium, or other civil obligation or liability may not be used for any of the following:
(1) A determination by any lender or other person that the service member is unable to pay any civil obligation or liability in accordance with its terms;
Default/Change In Terms (CA) – General
Requirements
Default/Change In Terms (NY) – General
Requirements
(2) With respect to a credit transaction between a creditor and a service member: . . . (B) A change by the creditor in the terms of an existing credit
arrangement;
Cal. Mil. & Vet. Code §805 provides:
Subject to subdivisions (e) and (f) of Section 800, a stay, postponement, or suspension under this chapter of the payment of any tax, fine, penalty, insurance
premium, or other civil obligation or liability of a person in military service shall not provide the basis for affecting credit ratings, denial or revocation of credit,
or a change by the lender in the terms of an existing credit arrangement.
N.Y. Mil. § 313-a. Exercise of rights under this article not to affect certain future financial transactions
Application by a person in military service for, or receipt by a person in military service of, a stay, postponement or suspension pursuant to the provisions of
this article in the payment of any tax, fine, penalty, insurance premium, or other civil obligation or liability of that person shall not itself, without regard to other
considerations, provide the basis for any of the following:
Default/Change In Terms (UT) – General
Requirements
1. A determination by any lender or other person that such person in military service is unable to pay such civil obligation or liability in accordance with its
terms.
2. With respect to a credit transaction between a creditor and such person in military service: . . . (b) a change by the creditor in the terms of an existing credit
arrangement;
Utah Code Ann. § 39-7-107. Exercise of rights not to affect future financial transactions
Application by a service member in military service for, or receipt of, a stay, postponement or suspension under the provisions of this chapter in the payment of
any fine, penalty, insurance premium, or other civil obligation or liability may not be used for any of the following:
Default/Change In Terms (WA) – General
Requirements
(1) A determination by any lender or other person that the service member is unable to pay any civil obligation or liability in accordance with its terms;
(2) With respect to a credit transaction between a creditor and a service member: . . . (b) a change by the creditor in the terms of an existing credit arrangement;
Wash. Rev. Code. § 49.60.176. Unfair practices with respect to credit transactions
(1) It is an unfair practice for any person whether acting for himself, herself, or another in connection with any credit transaction because of race, creed, color,
national origin, sex, marital status, honorably discharged veteran or military status, sexual orientation, or the presence of any sensory, mental, or physical
disability or the use of a trained dog guide or service animal by a person with a disability:
...
(b) To increase the charges or fees for or collateral required to secure any credit extended to any person;
(c) To restrict the amount or use of credit extended or to impose different terms or conditions with respect to the credit extended to any person or any item
or service related thereto;
...
(2) Nothing in this section shall prohibit any party to a credit transaction from considering the credit history of any individual applicant.
Default/Change In Terms (WI) – General
Requirements
(3) Further, nothing in this section shall prohibit any party to a credit transaction from considering the application of the community property law to the
individual case or from taking reasonable action thereon.
Wis. Stat. Ann. § 321.62. Service members civil relief; state active duty.
...
(4) EXERCISE OF RIGHTS. No person may use the fact that a service member has applied for, or received, a stay, postponement, or suspension in the
payment of a tax, fine, penalty, insurance premium, or other civil obligation or liability as the basis for doing any of the following:
(a) If the person is a lender, determining that the service member is unable to pay any such civil obligation or liability in accordance with the terms of the
obligation or liability.
Req.
3.a
Req.
3.b
Default/Change In Terms (Fed, AR, CA, NY, UT,
WA & WI) – Default Prohibition
Default/Change In Terms (Fed, AR, CA, NY, UT,
WA & WI) – Change in Terms Prohibition
4.
Fair Lending (Fed & State) -- General
Requirements
(b) If the person is a creditor, denying or revoking any credit extended to the service member, changing the terms of a credit agreement to which the service
member is a party, or refusing to grant credit to the service member in substantially the amount or on substantially the terms requested by the service member.”
A debt must not be put into default status solely because a servicemember has availed themselves of the protections of the SCRA or CA law. However, we
can/may consider a debt to be in default if the obligors fail to comply with the terms of the obligation as adjusted by the Act and/or CA law, if applicable.
The terms of a servicemember’s debt must not be changed solely because the servicemember has availed themselves of the protections of the SCRA or CA
law.
50 USC app §518 provides in part:
Application by a servicemember for, or receipt by a servicemember of, a stay, postponement, or suspension pursuant to this Act [50 USC Appx §§ 501et seq.]
in the payment of a tax, fine, penalty, insurance premium, or other civil obligation or liability of that servicemember shall not itself (without regard to other
considerations) provide the basis for any of the following:
...
(2) With respect to a credit transaction between a creditor and the servicemember-(A) a denial or revocation of credit by the creditor;
...
(C) a refusal by the creditor to grant credit to the servicemember in substantially the amount or on substantially the terms requested.
Cal. Mil. & Vet. Code §805 provides:
Subject to subdivisions (e) and (f) of Section 800, a stay, postponement, or suspension under this chapter of the payment of any tax, fine, penalty, insurance
premium, or other civil obligation or liability of a person in military service shall not provide the basis for affecting credit ratings, denial or revocation of credit,
or a change by the lender in the terms of an existing credit arrangement.
N.Y. Mil 313-a tracks above SCRA provision. Ark. Code Ann. § 12-62-709; Utah Code. Ann. § 39-7-107. Wash. Rev. Code § 49.60.176. Wis. Stat. Ann. §
321.21(4)(b). Also N.Y. Exec. Law. § 296-a – discrimination in credit provisions includes military status (includes service in state and federal services).
Req.
4.a
Fair Lending (Fed & State) – Discrimination
Prohibition
Termination of MV* Leases (Fed) – General
Requirements
See definition of MV below. Includes more than
just autos.
**Note** There are other federal and state laws that prohibit discrimination against persons based on membership in military service generally. See,
Uniformed Services Employment and Reemployment Rights Act of 1994 (USEERA) 38 USC §§ 4301 et seq. and for example Cal. Mil & Vet Code § 394(f).
Must not discriminate in granting of credit against a servicemember because they have availed themselves of SCRA protections OR against persons based on
membership in military service generally.
50 USC app §535 provides in part:
(a) Termination by lessee.
(1) In general. The lessee on a lease described in subsection (b) may, at the lessee's option, terminate the lease at any time after-(A) the lessee's entry into military service; or
(B) the date of the lessee's military orders described in paragraph (1)(B) or (2)(B) of subsection (b), as the case may be.
(2) Joint leases. A lessee's termination of a lease pursuant to this subsection shall terminate any obligation a dependent of the lessee may have under the
lease.
(b) Covered leases. This section applies to the following leases:
...
(2) Leases of motor vehicles. A lease of a motor vehicle used, or intended to be used, by a servicemember or a servicemember's dependents for personal or
business transportation if-(A) the lease is executed by or on behalf of a person who thereafter and during the term of the lease enters military service under a call or order
specifying a period of not less than 180 days (or who enters military service under a call or order specifying a period of 180 days or less and who,
without a break in service, receives orders extending the period of military service to a period of not less than 180 days); or
(B) the servicemember, while in military service, executes the lease and thereafter receives military orders-(i) for a change of permanent station-(I) from a location in the continental United States to a location outside the continental United States; or
(II) from a location in a State outside the continental United States to any location outside that State; or
(ii) to deploy with a military unit, or as an individual in support of a military operation, for a period of not less than 180 days.
(c) Manner of termination.
(1) In general. Termination of a lease under subsection (a) is made-(A) by delivery by the lessee of written notice of such termination, and a copy of the servicemember's military orders, to the lessor (or the lessor's
grantee), or to the lessor's agent (or the agent's grantee); and
(B) in the case of a lease of a motor vehicle, by return of the motor vehicle by the lessee to the lessor (or the lessor's grantee), or to the lessor's agent (or
the agent's grantee), not later than 15 days after the date of the delivery of written notice under subparagraph (A).
(2) Delivery of notice. Delivery of notice under paragraph (1)(A) may be accomplished-(A) by hand delivery;
(B) by private business carrier; or
(C) by placing the written notice in an envelope with sufficient postage and with return receipt requested, and addressed as designated by the lessor (or
the lessor's grantee) or to the lessor's agent (or the agent's grantee), and depositing the written notice in the United States mails.
(d) Effective date of lease termination.
...
(2) Lease of motor vehicles. In the case of a lease described in subsection (b)(2), termination of the lease under subsection (a) is effective on the day on
which the requirements of subsection (c) are met for such termination.
(e) Arrearages and other obligations and liabilities. Rents or lease amounts unpaid for the period preceding the effective date of the lease termination shall be
paid on a prorated basis. In the case of the lease of a motor vehicle, the lessor may not impose an early termination charge, but any taxes, summonses, and title
and registration fees and any other obligation and liability of the lessee in accordance with the terms of the lease, including reasonable charges to the lessee for
excess wear, use and mileage, that are due and unpaid at the time of termination of the lease shall be paid by the lessee.
(f) Rent paid in advance. Rents or lease amounts paid in advance for a period after the effective date of the termination of the lease shall be refunded to the
lessee by the lessor (or the lessor's assignee or the assignee's agent) within 30 days of the effective date of the termination of the lease.
(g) Relief to lessor. Upon application by the lessor to a court before the termination date provided in the written notice, relief granted by this section to a
servicemember may be modified as justice and equity require.
(h) Penalties.
(1) Misdemeanor. Any person who knowingly seizes, holds, or detains the personal effects, security deposit, or other property of a servicemember or a
servicemember's dependent who lawfully terminates a lease covered by this section, or who knowingly interferes with the removal of such property from
premises covered by such lease, for the purpose of subjecting or attempting to subject any of such property to a claim for rent accruing subsequent to the date of
termination of such lease, or attempts to do so, shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both.
(2) Preservation of other remedies. The remedy and rights provided under this section are in addition to and do not preclude any remedy for wrongful
conversion otherwise available under law to the person claiming relief under this section, including any award for consequential or punitive damages.
Termination of MV Leases (FL) – General
Requirements
While these FL provisions are different/more
restrictive than SCRA in certain respects, based
on info noted by Hudson Cook noted below I am
not including any specific FL requirements at
this time.
(i) Definitions.
(1) Military orders. The term "military orders", with respect to a servicemember, means official military orders, or any notification, certification, or
verification from the servicemember's commanding officer, with respect to the servicemember's current or future military duty status.
(2) CONUS. The term "continental United States" means the 48 contiguous States and the District of Columbia.
Fla. Stat. Ann. § 520.14. Termination of retail installment contract for leasing a motor vehicle by a servicemember
(1) Any servicemember, as defined in s. 250.01, may terminate his or her retail installment contract for leasing a motor vehicle by providing the sales finance
company with a written notice of termination, effective on the date specified in the notice, which date shall be at least 30 days after the receipt of the notice by
the sales finance company, if any of the following criteria are met:
(a) The servicemember is required, pursuant to a permanent change of station, to move outside the continental United States; or
(b) The servicemember receives temporary duty orders, temporary change of station orders, or active duty orders outside the continental United States,
provided such orders are for a period exceeding 60 days.
(2) The written notice to the sales finance company under subsection (1) must be accompanied by either a copy of the official military orders or a written
verification signed by the servicemember's commanding officer.
(3) Upon termination of a contract under this section, the lessee is liable for the amount due under the contract, prorated to the effective date of the termination,
payable at such time as would have otherwise been required by the terms of the contract. The lessee is not liable for any other fees due to the early termination
of the contract as provided for in this section.
(4)The provisions of this section may not be waived or modified by the agreement of the parties under any circumstances.
For purposes of the Florida the following definitions in §250.01 are applicable:
(1) "Active duty" means full-time duty in active military service of the United States. The term includes federal duty such as full-time training, annual training,
and attendance while a person is in active military service or in a school designated as a service school by law or by the secretary of the applicable military
department. The term does not mean full-time duty in the National Guard. The term shall also include the period during which a person in active military
service is absent from duty as a result of illness, being wounded, being on leave, or other lawful cause.
(19) "Servicemember" means any person serving as a member of the United States Armed Forces on active duty or state active duty and all members of the
Florida National Guard and United States Reserve Forces.
(21) "State active duty" means full-time duty in active military service of the State of Florida when ordered by the Governor or Adjutant General in accordance
with s. 250.06, s. 250.10, or s. 250.28 to preserve the public peace, execute the laws of the state, suppress insurrection, repel invasion, enhance security and
respond to terrorist threats or attacks, respond to an emergency as defined in s. 252.34 or to imminent danger of an emergency, enforce the law, carry out
counter-drug operations, provide training, provide for the security of the rights or lives of the public, protect property, or conduct ceremonies. The term includes
the duties of officers or enlisted personnel who are employed under the order of the Governor in recruiting; making tours of instruction; inspecting troops,
armories, storehouses, campsites, rifle ranges, or military property; sitting on general or special courts-martial, boards of examination, courts of inquiry, or
boards of officers; or making or assisting in physical examinations. The term shall also include the period during which a person in active military service is
absent from duty as a result of illness, being wounded, being on leave, or other lawful cause.
Hudson Cook: “Federal and State Laws Impacting Lessor’s and Motor Vehicles of Leases of Military Servicemembers” memo provides: “Unfortunately,
this attempt to protect servicemembers who are lessees under true lease contracts does not appear to achieve its goal, especially because it was placed in the
Motor Vehicle Retail Sales Finance Act. Specifically, a true lease is not subject to the Motor Vehicle Retail Sales Finance Act. ‘Retail installment contract’ is
defined to include leases that provide for repayment of substantially the value of the vehicle and the possibility of purchase for a nominal amount at the end of
the ‘lease’. Therefore, true leases are not contemplated by the term ‘retail installment contract’. Morever, the servicemember is directed to correspond with the
‘sales finance company’ that holds the lease. ‘Sales Finance Companies’ are persons who purchase retail installment contracts from retail sellers. Accordingly,
the holder of a true lease may very well not be a ‘sales finance company,’ unless the holder also buys retail installment contracts. In any even, no license is
required to hold true leases in Florida. Accordingly, the section should only apply to leases that meet the definition of a retail installment contract’ in Fla. Stat.
Ann. section 520.02(13).
Termination of MV Leases (IL) – General
Requirements
The Department of Financial Services has not yet had an opportunity to interpret the new statute. Although it was added to the Motor Vehicle Retail
Installment Sales Finance Act, the section clearly contemplates some sort of lease contract, and not a traditional retail installment contact for the purchase of a
motor vehicle.”
§ 815 ILCS 636/37. Military personnel on active duty; termination of lease
Sec. 37. Military personnel on active duty; termination of lease.
See definition of MV at right, different then SCRA
– SCRA would cover trailers, etc. Provision
similar to LA & OH.
(a) In this Act:
"Active duty" means active duty pursuant to an executive order of the President of the United States, an act of the Congress of the United States, or an order of
the Governor.
"Motor vehicle" means any automobile, car minivan, passenger van, sport utility vehicle, pickup truck, or other self-propelled vehicle not operated or driven on
fixed rails or track.
"Service member" means a member of the armed services or reserve forces of the United States or a member of the Illinois National Guard.
(b) Any service member who is deployed on active duty for a period of not less than 180 days, or the spouse of that service member, may terminate any
motor vehicle lease that meets both of the following requirements:
(1) The lease is entered into on or after the effective date [August 22, 2005] of this amendatory Act of the 94th General Assembly [P.A. 94-635].
(2) The lease is executed by or on behalf of the service member who is deployed on active duty.
(c) Termination of the motor vehicle lease shall not be effective until:
(1) the service member who is deployed on active duty, or the service member's spouse, gives the lessor by certified mail, return receipt requested, a
notice of the intention to terminate the lease together with a copy of the military or gubernatorial orders calling the service member to active duty and of any
orders further extending the service member's period of active duty; and
(2) the motor vehicle subject to the lease is returned to the custody or control of the lessor not later than 15 days after the delivery of the written notice.
(d) Lease amounts unpaid for the period preceding the effective date of the lease's termination shall be paid on a prorated basis. The lessor may not impose an
early termination charge, but any taxes, costs of summons, and title or registration fees and any other obligation and liability of the lessee under the terms of the
lease, including reasonable charges to the lessee for excess wear, use, and mileage, that are due and unpaid at the time of the lease's termination shall be paid by
the lessee.
(e) The lessor shall refund to the lessee lease amounts paid in advance for a period after the effective date of the lease's termination within 30 days after the
effective date of the lease's termination.
(f) Upon application by the lessor to a court before the effective date of the lease's termination, relief granted by this Section may be modified as justice and
equity require.
(g) A violation of this Section constitutes a civil rights violation under the Illinois Human Rights Act [775 ILCS 5/1-101 et seq.].
Termination of MV Leases (IA) – General
Requirements
All proceeds from the collection of any civil penalty imposed under this subsection shall be deposited into the Illinois Military Family Relief Fund.
29A.101A Termination of lease by service member -- penalty.
1. For purposes of this section, unless the context otherwise requires:
...
b. "Vehicle lease" means a lease of a motor vehicle used, or intended to be used, by a service member or a service member's dependents for personal or
business transportation if either of the following applies:
(1) The lease is executed by or on behalf of a person who thereafter and during the term of the lease enters military service under a call or order
specifying a period of service of not less than ninety days, or who enters military service under a call or order specifying a period of ninety days of service or
less and who, without a break in service, receives orders extending the period of military service to a period of not less than ninety days.
(2) The service member, while in military service, executes the lease and thereafter receives military orders to deploy with a military unit, or as an
individual in support of a military operation, for a period of not less than ninety days.
2. A service member may terminate a premises lease or vehicle lease pursuant to the requirements of this section. Termination of a premises lease or vehicle
lease shall be made as follows:
a. By delivery by the lessee of written notice of such termination, and a copy of the service member's military orders, to the lessor or the lessor's grantee, or
to the lessor's agent or the agent's grantee. A lessee's termination of a lease pursuant to this subsection shall terminate any obligation a dependent of the lessee
may have under the lease. For purposes of this paragraph, written notice may be accomplished by hand delivery, by private business carrier, or by placing the
written notice in an envelope with sufficient postage and with return receipt requested, and addressed as designated by the lessor or the lessor's grantee or to the
lessor's agent or the agent's grantee, and depositing the written notice in the United States mail.
b. In the case of a vehicle lease, by return of the motor vehicle by the lessee to the lessor or the lessor's grantee, or to the lessor's agent or the agent's grantee,
not later than fifteen days after the date of the delivery of written notice under paragraph "a". A lessee's termination of a lease pursuant to this subsection shall
terminate any obligation a dependent of the lessee may have under the lease.
...
4. In the case of a vehicle lease, termination of the lease is effective on the day on which the vehicle is delivered to the lessor or the lessor's grantee.
5. Rents or lease amounts unpaid for the period preceding the effective date of the lease termination shall be paid on a prorated basis. In the case of a vehicle
lease, the lessor shall not impose an early termination charge, but any summonses, title and registration fees, including the fee for new registration and any
other obligation and liability of the lessee in accordance with the terms of the lease, including reasonable charges to the lessee for excess wear, use, and
mileage, that are due and unpaid at the time of termination of the lease shall be paid by the lessee.
6. Rents or lease amounts paid in advance for a period after the effective date of the termination of the lease shall be refunded to the lessee by the lessor or the
lessor's assignee or the assignee's agent within thirty days of the effective date of the termination of the lease.
7. Upon application by the lessor to a court before the termination date provided in the written notice, relief granted by this section to a service member may be
modified as justice and equity require.
Termination of MV Leases (LA) – General
Requirements
8. a. Any person who knowingly seizes, holds, or detains the personal effects, security deposit, or other property of a service member or a service member's
dependent who lawfully terminates a lease covered by this section, or who knowingly interferes with the removal of such property from premises covered by
such lease, for the purpose of subjecting or attempting to subject any of such property to a claim for rent accruing subsequent to the date of termination of such
lease, or attempts to do so, commits a simple misdemeanor.
b. The remedy and rights provided under this section are in addition to and do not preclude any remedy for wrongful conversion otherwise available under
law to the person claiming relief under this section.
La. Rev. Stat. Ann. §29:311 provides in part:
As used in this Part:
See definition of MV at right, different then SCRA
– SCRA would cover trailers, etc. Provision
similar to IL & OH.
(1) "Active duty" means active duty pursuant to an executive order of the president of the United States, an act of the Congress of the United States, or the
provisions of R.S. 29:7.
(2) "Motor vehicle" means any automobile, car, minivan, passenger van, sport utility vehicle, pickup truck, or other self-propelled vehicle not operated or
driven on fixed rails or track.
La. Rev. Stat. Ann. §29:313 provides:
A. Any person, or spouse of a person, who is on active duty as defined by this Part may terminate any motor vehicle lease if it is executed by or on behalf of
the person who is on active duty.
B. Termination of the motor vehicle lease shall not be effective until:
(1) The person who is on active duty or the person's spouse gives the lessor by certified mail, return receipt requested, a notice of the intention to terminate
the lease together with a copy of the military or gubernatorial orders calling the person to active duty; and
(2) The motor vehicle subject to the lease is returned to the custody or control of the lessor not later than fifteen days after the delivery of the written notice.
C. Lease amounts unpaid for the period preceding the effective date of the lease's termination shall be paid on a prorated basis. The lessor may not impose an
early termination charge, but any taxes, costs of summons, and title or registration fees and any other obligation and liability of the lessee under the terms of the
lease, including reasonable charges to the lessee for excess wear, use, and mileage, that are due and unpaid at the time of the lease's termination shall be paid by
the lessee.
D. The lessor shall refund to the lessee lease amounts paid in advance for a period after the effective date of the lease's termination within thirty days of the
effective date of the lease's termination.
Termination of MV Leases (MI) – General
Requirements
E. Upon application by the lessor to a court before the effective date of the lease's termination, relief granted by this Section may be modified as justice and
equity require.
MCL § 445.1012. Definitions.
Sec. 2. As used in this act:
(a) "Active duty" means active duty pursuant to an executive order of the president of the United States, an act of congress, or an order of the governor.
(b) "Armed forces" means that term as defined in section 2 of the veteran right to employment services act, 1994 PA 39, MCL 35.1092.
(c) "Lessee" means that term as defined in section 1 of 1990 PA 169, MCL 445.991.
(d) "Lessor" means that term as defined in section 1 of 1990 PA 169, MCL 445.991.
(e) "Michigan national guard" means that term as defined in section 105 of the Michigan military act, 1967 PA 150, MCL 32.505.
(f) "Motor vehicle" means that term as defined in section 1 of 1990 PA 169, MCL 445.991.
(g) "Motor vehicle lease" means a lease contract as that term is defined in section 1 of 1990 PA 169, MCL 445.991.
(h) "Service member" means a member of the armed forces, a reserve branch of the armed forces, or the Michigan national guard.
§ 445.1013. Termination of motor lease by service member or spouse; requirements.
Sec. 3. A service member who is deployed on active duty for a period of 180 days or more, or the spouse of that service member, may terminate any motor
vehicle lease that meets all of the following requirements:
(a) The motor vehicle lease is entered into on or after the effective date of this act.
(b) The motor vehicle lease is executed by or on behalf of the service member as a lessee.
(c) The motor vehicle lease is executed before the service member is deployed on active duty.
§ 445.1014. Termination of motor vehicle lease; effectiveness.
Sec. 4. A termination of the motor vehicle lease under section 3 is effective on the date all of the following are met:
(a) The service member who is deployed on active duty, or the service member's spouse, provides the lessor by certified mail, return receipt requested, a written
notice of the service member's intention to terminate the lease, a copy of the military or gubernatorial orders calling the service member to active duty, and a
copy of any orders further extending the service member's period of active duty.
(b) The motor vehicle subject to the motor vehicle lease is returned to the custody or control of the lessor within 15 days after the delivery of the written notice
under subdivision (a).
Termination of MV Leases (NJ) – General
Requirements
§ 445.1015. Termination of motor vehicle lease; payments; charges; refund of advance payments.
Sec. 5. (1) If a motor vehicle lease is terminated under this act, the lessee shall pay any past due lease payments owed to the lessor as of the effective date of the
termination and a pro rata share of any current lease payments owed as of that effective date. (2) If a motor vehicle lease is terminated under this act, the lessor
may not impose an early termination charge for that termination. However, the lessee shall pay any taxes, court costs, title or registration fees, and any other
obligation and liability of the lessee under the terms of the lease, including, but not limited to, reasonable charges to the lessee for excess wear, use, and
mileage, that are due and unpaid as of the effective date of the termination. (3) If a motor vehicle lease is terminated under this act, the lessor shall refund to the
lessee any lease amounts paid in advance for a period after the effective date of the termination of that motor vehicle lease, within 30 days after the effective
date of the lease's termination.
N.J. Rev. Stat. § 38:23C-15. Contract for purchase of property, recission, termination; cancellation of auto lease, due to certain military service
a. . . . (2) Any person who has entered military service for a period of more than 90 consecutive days, who prior to such entry leased a non-commercial motor
vehicle for personal use whether with or without a view to purchase, may cancel the lease by giving written notice of cancellation to the lessor or the lessor's
Termination of MV Leases (NY) – General
Requirements
assignor at any time following the date of receipt of the order to enter such military service. Cancellation of a lease providing for monthly lease payments shall
not be effective (1) until the last day of the month following the month in which notice of cancellation is made, or (2) when the leased motor vehicle is returned
to the lessor or the lessor's assignor, whichever is later. Upon cancellation of the lease, the former lessee and any co-signer shall have no further liability to the
lessor or the lessor's assignor, except that the lessee and any co-signer shall be obligated to the lessor or assignor for any damages to the motor vehicle and
excess mileage over the pro rata amount permitted as of the date of cancellation of the lease. The lessor or lessor's assignor shall not impose any penalty or
charge upon the lessee or any co-signer on the lease for early cancellation of the lease. This paragraph shall apply whether or not the person is the sole signatory
of the lease.
N.Y. Mil. § 311-a. Termination of motor vehicle lease contracts
1. The provisions of this section shall apply to every lease of a motor vehicle for personal, professional, business, agricultural or similar purposes in any case in
which (a) such lease was executed by or on behalf of a person who, after the execution of such lease, entered active military service, and (b) the motor vehicle
so leased has been used for such purposes, or for a combination of such purposes by such person or his or her legal dependents.
The provision of this section shall also apply to any lease covering a motor vehicle used for personal purposes where such lease was executed by or on the
behalf of a person, who, after the execution of such lease, entered active military service where such lease was also executed by or on the behalf of the spouse
of such a person.
Termination of MV Leases (OH) – General
Requirements
See definition of MV at right, different then SCRA
– SCRA would cover trailers, etc. Provision
similar to IL & LA
2.All leases described in subdivision one of this section may be terminated by notice in writing delivered to the lessor or to the lessor's agent by a lessee at any
time following the date of the beginning of such active military service. Delivery of such notice shall be accomplished by certified mail duly addressed to the
lessor or to the lessor's agent. Termination of any such lease providing for monthly lease payments shall not be effective until: (a) thirty days after the first date
on which the next lease payment is due and payable subsequent to the date when such notice is delivered; or (b) the motor vehicle subject to the lease is
returned to the custody or the control of the lessor, whichever is later. In the case of all motor vehicle leases, any unpaid lease payments for a period preceding
termination shall be proratably computed and any lease payments made in advance for a period succeeding termination shall be refunded by the lessor. Upon
application by the lessor to a court of competent jurisdiction prior to the termination period provided for in the notice, any relief granted in this subdivision shall
be subject to such modifications or restrictions as in the opinion of such court may be appropriate in the interest of justice.
Ohio Rev. Code § 1349.02. Termination of motor vehicle lease where person or spouse is deployed on active duty
(A) As used in this section:
(1) "Active duty" means active duty pursuant to an executive order of the president of the United States, an act of the congress of the United States, or
section 5919.29 or 5923.21 of the Revised Code.
(2) "Motor vehicle" means any automobile, car minivan, passenger van, sport utility vehicle, pickup truck, or other self-propelled vehicle not operated or
driven on fixed rails or track.
(B) Any person, or spouse of a person, who is deployed on active duty for a period of not less than one hundred eighty days may terminate any motor vehicle
lease that meets both of the following requirements:
(1)It is entered into on or after the effective date [May 18, 2005] of this section.
(2) It is executed by or on behalf of the person who is deployed on active duty.
(C) Termination of the motor vehicle lease shall not be effective until:
(1) The person who is deployed on active duty or the person's spouse gives the lessor by certified mail, return receipt requested, a notice of the intention to
terminate the lease together with a copy of the military or gubernatorial orders calling the person to active duty; and
(2) The motor vehicle subject to the lease is returned to the custody or control of the lessor not later than fifteen days after the delivery of the written notice.
(D) Lease amounts unpaid for the period preceding the effective date of the lease's termination shall be paid on a prorated basis. The lessor may not impose an
early termination charge, but any taxes, costs of summons, and title or registration fees and any other obligation and liability of the lessee under the terms of the
lease, including reasonable charges to the lessee for excess wear, use, and mileage, that are due and unpaid at the time of the lease's termination shall be paid by
the lessee.
(E)The lessor shall refund to the lessee lease amounts paid in advance for a period after the effective date of the lease's termination within thirty days of the
effective date of the lease's termination.
Termination of MV Leases (PA) – General
Requirements
**Not limited to MVs, applies to all tangible
personal property leases.
(F) Upon application by the lessor to a court before the effective date of the lease's termination, relief granted by this section may be modified as justice and
equity require.
51 Pa. Stat. § 7315. Termination of leases and similar obligations by military personnel
(a) APPLICABILITY.-- This section shall apply to members of the Pennsylvania National Guard who are called or ordered to active duty with the armed forces
of the United States, other than active duty for training, or to State active duty under this title, and members of other reserve components who are called or
ordered to active duty with the armed forces of the United States, other than active duty for training, when the period of active duty or State active duty is 30
consecutive days or more.
(b) LEASES WHICH MAY BE TERMINATED.-- A member of the Pennsylvania National Guard or other reserve component of the armed forces of the
United States, as described in subsection (a), or his agent or attorney-in-fact may terminate or cancel without cost, payment or penalty any lease for premises
occupied or used by the member for dwelling, professional, business or agricultural purposes and any lease for an automobile, other motor vehicle, boat,
aircraft, furniture, appliances, fixtures or other tangible personal property used by the member for personal, business, agricultural or other private use, provided
the lease was executed by or on behalf of the member prior to the commencement of the period of active duty or State active duty and provided the lease was
not intended as security under the definition of "security interest" in 13 Pa.C.S. § 1201 (relating to general definitions).
(c) PROCEDURES FOR TERMINATION.-- The member may terminate or cancel the lease by notice in writing delivered to the lessor or to the lessor's agent
at any time following the beginning of the member's active duty or State active duty. Delivery of the notice may be accomplished by placing it in an envelope
properly stamped and duly addressed to the lessor or the lessor's agent and depositing the notice in the United States mail. In the case of leases of premises or
tangible personal property providing for monthly payments, termination of the lease shall be effective 30 days after the first date on which the next rental or
lease payment is due and payable subsequent to the date when the notice is mailed or delivered. In the case of all other leases, termination shall be effective on
the last day of the month following the month in which the notice is delivered or mailed, and, in such case, any rental paid in advance for a period after
termination shall be refunded to the member by the lessor or his agent.
Req.
Termination of MV Leases (Fed, IL IA, LA, MI
NJ, NY, OH & PA) – General Requirements –
Required Actions by Lessee
(d) RELIEF GRANTED TO LESSOR.-- Upon application by the lessor to the appropriate court of common pleas prior to the termination provided for in this
section, any relief granted by this section shall be subject to such modifications or restrictions as, in the opinion of the court, justice and equity may require in
the circumstances. This section does not prohibit the forfeiture, in whole or in part, of a security or damage deposit paid by the member when the forfeiture is
authorized by law and the lessor demonstrates that the forfeiture of the deposit is necessary to pay for actual damages to the premises or tangible personal
property arising during the period prior to termination of the lease when the premises or tangible personal property were under the care, custody and control of
the member or his family.”
Federal: To terminate MV lease, lessee must: (1) deliver written notice of such termination to lessor/lessor’s grantee/lessor’s agent; (2) provide a copy of the
military orders (see definition above in §535(i)) to lessor/lessor’s grantee/lessor’s agent; and (3) return of the MV to lessor/lessor’s grantee/lessor’s agent not
later than 15 days after delivery of written notice.
Delivery of notice may be accomplished by hand, private business carrier (e.g., UPS, FedEx, etc.), or via US mail postage paid with return receipt requested addressed to lessor/lessor’s grantee/lessor’s agent at address provided.
IA: Tracks SCRA. Applies to IA defined “servicemembers” (covers “state active duty” only) who are IA residents
IL, LA, MI & OH: To terminate: (1) servicemember, or the servicemember’s spouse, must give the lessor a notice via certified mail, return receipt requested,
of the intention to terminate the lease together with a copy of the military or gubernatorial orders; AND (2) return the MV to the custody or control of the lessor
not later than 15 days after the delivery of the written notice.. Applies to IL/LA/MI/OH defined “servicemembers” (covers both state and federal active duty)
who are IL/LA/MI/OH residents.
NJ: Written notice of cancellation AND return of the MV. Drafting raises question whether delivery of vehicle required for non-monthly pay leases.
NY: Notice in writing delivered via certified mail duly addressed to the lessor or lessor’s agent AND return of the MV to custody/control of the lessor.
Req.
Termination of MV Leases (Fed , All States, IL,
IA, LA, MI, NJ, NY, OH & PA) – Available to
Who?
PA: Written notice delivered to the lessor or to the lessor’s agent at any time following the beginning of the member’s active duty period. Delivery of the
notice may be accomplished by placing it in an envelope properly stamped and duly addressed to the lessor or the lessor’s agent and depositing the notice in the
US mail.
Federal. Servicemembers who have executed lease (i.e., servicemember lessees) OR servicemember’s dependents who have executed lease with the
servicemember. Note - upon application to a court a dependent (defined below) of a servicemember is entitled to the protections of this section if the
dependent’s ability to comply with the MV lease is materially affected by reason of the servicemember’s military service. In this scenario, servicemember need
NOT be lessee. 50 USC app §538. Per case law may apply to debts incurred by dependent prior to marriage to servicemember or after divorce from
servicemember.
In addition, – “on behalf of” language below – unclear but possible that a lessee who executed lease for benefit of or on behalf of servicemember also entitled to
protections of section (e.g., parent who executed lease “on behalf of” child). Not also – definition of servicemember includes legal representatives (POA, etc.)
All States. As noted below, many states extend this protection to state national guard when ordered to “state active duty” by governor in certain circumstances.
Expands parties covered of SCRA. Some states provide unique protections not only for “state active duty” but also those on federal “active duty.”
Options: (1) Just follow federal law regarding availability – risk: subject ourselves to reputational and litigation risk. Not really an option; (2) Review orders
provided via 1.a and determine whether provided by governor vs. President/Secretary of Defense, determine whether particular state provides additional
coverage, and apply if applicable; or (3) Provide additional coverage to national guard/reserves called up to “state active duty” across the board and their
dependents per above. Still require written request and copy of orders. From an implantation/risk perspective - #3 may be easiest option, and my
recommendation.
IL, LA, MI & OH: Servicemember OR the servicemember’s spouse (whether executed lease or not) may terminate eligible leases. Different than federal law.
Applies to IL/LA/MI/OH defined “servicemembers” (includes both state/federal active duty) and spouses who are IL/LA/MI/Oh residents.
IA: Servicemembers. Applies to IA defined “service members” who are IA residents.
NJ: Under NJ law, “persons” who have entered “military service”. Applies to NJ residents.
NY: No limitation on who may request termination in statute. Note however that unlike Federal law (see below – where have to go to court) under NY Mil §
301-b, a dependent of a servicemember is entitled and may apply directly to us for benefit under this section for their debts, and we are obligated to grant such
request unless the ability of the such dependent to comply with the debts terms has not been materially impaired by servicemembers active duty service. N.Y.
Mil. § 301-b.
Req.
Termination of MV Leases (Fed, IL, IA, LA, MI,
NJ, NY, OH & PA) – What Leases?
PA: The servicemember, their agent, or their attorney in fact.t
Federal. A lease of a MV used, or intended to be used, by a servicemember or a servicemember's dependents for personal or business transportation if Either:
(1) the lease is executed by or on behalf of a person who after lease execution and during the term of the lease enters military service under a call or order
specifying a period of not less than 180 days (or who enters military service under a call or order specifying a period of 180 days or less and who, without a
break in service, receives orders extending the period of military service to a period of not less than 180 days); OR (2) the servicemember, while in military
service, executes the lease and thereafter receives military orders: (A) for a change of permanent station from a location in the continental US to a location
outside the continental US, or from a location in a State outside the continental US to any location outside that State; or (B) to deploy with a military unit, or as
an individual in support of a military operation, for a period of not less than 180 days.
IL: Servicemember who is deployed on active duty for a period of not less than 180 days, or the spouse of that servicemember, may terminate any motor
vehicle lease that meets both of the following requirements: (1) the lease was entered into after August 22, 2005; AND (2) the lease was executed by or on
behalf of the servicemember who is deployed on active duty. Applies to IL defined “servicemembers” and spouses who are IL residents.
IA: A lease of a MV used, or intended to be used, by a service member or a service member’s dependents for personal or business transportation if either of the
following applies: (1) The lease is executed by or on behalf of a person who after lease execution and during the term of the lease enters military service under
a call or order specifying a period of service of not less than 90 days, or who enters military service under a call or order specifying a period of 90 days of
service or less and who, without a break in service, receives orders extending the period of military service to a period of not less than 90 days; or (2) the
service member, while in military service, executes the lease and thereafter receives military orders to deploy with a military unit, or as an individual in support
of a military operation, for a period of not less than 90 days. Applies to IA defined “service members” who are IA residents.
LA: Any person, or spouse of a person, who is on “active duty” may terminate any MV lease if it is executed by or on behalf of the person who is on active
duty. Applies to LA defined “servicemembers” and spouses who are LA residents.
MI: Servicemember who is deployed on active duty for a period of 180 days or more, or the spouse of that servicemember, may terminate any motor vehicle
lease that meets all of the following requirements: (1) the lease was entered into after May 28, 2008; (2) the lease was executed by or on behalf of the
servicemember; AND (3) The lease was executed before the servicemember was deployed on active duty.. Applies to MI defined “servicemembers” and
spouses who are MI residents.
NJ: Any person who has entered military service for a period of more than 90 consecutive days, who prior to such entry leased a non-commercial motor
vehicle for personal use whether with or without a view to purchase.
NY: (1) Lease was for personal, professional, business, agricultural or similar purposes; was executed by or on behalf of a person who, after the execution of
the lease, entered active military service; AND the motor vehicle so leased has been used for such purposes, or for a combination of such purposes by such
person or his/her legal dependents; OR (2) the lease was for personal purposes; was executed by or on the behalf of the person who entered military service
after the execution of the lease; AND the lease was also executed by or on behalf of the spouse of such a person. Note also notation above relative to
dependents being able to avail themselves of these provisions.
OH: Any person, or spouse of a person, who is deployed on “active duty” for a period of not less than 180 days may terminate any MV lease that meets both of
the following requirements: (1) It is entered into on or after May 18, 2005; and (2) It is executed by or on behalf of the person who is deployed on active duty.
Applies to OH defined “servicemembers” and spouses who are OH residents.
Req.
Termination of MV Leases (Fed, IL, IA LA MI,
NJ, NY, OH & PA) – When?
PA: Servicemember who is deployed on “active duty” for a period of 30 consecutive days or more, their agent, or their attorney in fact may terminate or cancel
without cost, payment or penalty any lease for an automobile, other motor vehicle, boat, aircraft, furniture, appliances, fixtures or other tangible personal
property used by the member for personal, business agricultural or other private use, provided the lease was executed by or on behalf of the member prior to the
commencement of the active duty period and provided the lease was not intended as security under the definition of “security interest”.
Federal: Lessee may terminate covered lease at any time after: (1) the lessee’s entry into military service if not already in military service (What Leases? Option #1 immediately above in Req. XX); or (2) the date of the lessee’s military orders if already in military service (What Leases? - Option #2 immediately
above in Req. XX).
IL, MI & OH: Service member must be deployed on active duty for a period of not less than 180 days. Applies to IL/MI/OH defined “servicemembers” who
are IL/MI/OH residents.
IA: Lessee may terminate covered lease at any time after: (1) the lessee’s entry into military service (What Leases? IA Option #1 immediately above in Req.
XX); or (2) the date the lessee receives military orders to deploy with a military unit (What Leases – IA Option #2 immediately above in Req. XX). Applies to
IA defined “servicemembers” who are IA residents.
LA: Servicemember on active duty. Applies to LA defined “servicemembers” who are LA residents.
NJ: Servicemember may cancel anytime following date of receipt of the order to enter military service. Some confusion here, as statute also implies that have
to be in active military service.
NY: Any time following the date of the beginning of active military service.
Req.
Termination of MV Leases (Fed, IL, IA, LA, MI,
NJ, NY, OH & PA) – Effective Date
PA: Servicemember deployed on active duty for a period of not less than 30 consecutive days. Applies to PA defined “servicemembers” who are PA residents.
Federal. Termination is effective as of the date ALL of the requirements noted in Req. XX above have been met.
IL, LA, MI & OH: Termination not effective until: (1) servicemember, or the servicemember’s spouse, gives the lessor notice via certified mail, return receipt
requested, of the intention to terminate the lease together with a copy of the military or gubernatorial orders, AND (2) returns the MV to the custody or control
of the lessor not later than 15 days after the delivery of the written notice.. Applies to IL/LA/MI/OH defined “servicemembers” (covers both state and federal
active duty) who are IL/LA/MI/OH residents.
IA: Termination of the lease effective on the day on which the vehicle is delivered to the lessor or the lessor’s grantee. Applies to IA defined “service
members (covers “state active duty” only) who are IA residents.
NJ: Cancellation of lease providing for monthly payments shall not be effective (1) until the last day of the month following the month in which notice of
cancellation is made, or (2) when the leased motor vehicle is returned to the lessor or the lessor’s assignor, whichever is later. What about non-monthly pays?
NY: Termination of lease providing for monthly payments shall not be effective (1) until 30 days after the first date on which the next lease payment is due and
payable subsequent to the date when such notice is delivered; or (2) when the leased motor vehicle is returned to the custody or control of the lessor, whichever
is later.
Req.
Termination of MV Leases (Fed, IL, IA, LA, MI,
NJ, NY, OH & PA) – Terminates Whose
Obligations?
PA: In the case of leases providing for monthly payments, termination of the lease shall be effective 30 days after the first date on which the next lease
payment is due and payable subsequent to the date when the notice is mailed or delivered. In the case of all other leases, termination shall be effective on the
last day of the month following the month in which the notice is delivered or mailed.
Federal. Lease termination terminates any obligations of dependent on the lease as well –as co-lessee, cosigner, or guarantor. Does not terminate any
obligation that a non-dependent may have under the lease.
IA. Tracks Federal. Applies to IA defined “service members (covers “state active duty” only) who are IA residents.
IL, LA, MI, NY, OH & PA: Doesn’t address.
Req.
Termination of MV Leases (Fed & IL, IA, FL,
LA, MI, NJ, NY, OH & PA) – Lease
Payments/Fees & Charges
NJ: Any cosigner obligations also terminated.
Federal: Lease amounts unpaid for the period preceding the effective date of the lease termination shall be paid on a prorated basis (day to day calculation).
Lessor may not impose an early termination charge, but any taxes, summonses, and title and registration fees and any other obligation and liability of the lessee
in accordance with the terms of the lease, including reasonable charges to the lessee for excess wear, use and mileage, that are due and unpaid at the time of
termination of the lease shall be paid by the lessee.
Hudson Cook: “Federal and State Laws Impacting Lessor’s and Motor Vehicles of Leases of Military Servicemembers” memo provides: “Is it necessary to
prorate rental receipts taxes or title and registration fees paid under or through the lease to the effective ‘day’ of termination? Probably not, as most taxing
jurisdictions do not provide for a refund mechanism once the tax payment becomes due. A peculiar problem arises in the case of personal property (also called
ad valorem) taxes paid by the lessor, which are rarely collected by the taxing jurisdiction concurrently with the assessment period. Where the lease obligates
the lessee to pay the tax, or to reimburse the lessor the tax, a lessor’s ability to collect personal property taxes is has paid a taxing authority from a lessee whose
lease terminated some months prior is difficult in any case, and doubly so where the lessee has been stationed overseas.
...
The SCRA does not specifically address a lessor’s right to apply the security deposit to pay amounts during the period proceeding the effective date of lease
termination. Presumably, the lessor may apply a security deposit to amounts known to be due. A lessor may not retain a lessee’s security deposit in
anticipation that, for some vague reason, an amount may become known in the future.”
IA & MI: Note fees that lessor can impose a little different under IA statute – deletes “taxes” and adds “new registration fee”. MI statute deletes “summonses”
and replaces with “court costs”. Ultimately – not sure there is any practical difference or merely reflects IA/MI fee structure. Applies to IA/MI defined
“service members” who are IA/MI residents.
IL, LA & OH: Tracks Federal (e.g., OH – uses “cost of summonses”, etc.) . Applies to IL/LA/OH defined “servicemembers” (covers both state and federal
active duty) who are IL/LA/OH residents.
NJ: Upon cancellation of the lease, the former lessee and any cosigner shall have no further liability to the lessor, except that the lessee and any co-signer shall
be obligated to the lessor for any damages to the motor vehicle and excess mileage over the prorated amount permitted as of the date of cancellation of the
lease. The lessor shall not impose any penalty or charge upon the lessee or any cosigner for early cancellation.
NY: Any unpaid lease payments for a period preceding termination shall be proratably computed.
Req.
Req.
Termination of MV Leases (CA) – Payment of
Arrearages
Termination of MV Leases (Fed, IL, IA, LA, MI,
NJ, NY, OH & PA) – Lease Prepayments
PA: Nothing prohibits the forfeiture, in whole or in part, of a security or damage deposit paid by the member when the forfeiture is authorized by law and the
lessor demonstrates that the forfeiture of the deposit is necessary to pay for actual damages to the premises or tangible personal property arising during the
period prior to termination of the lease when the premises or tangible personal property were under the care, custody and control of the member or his family.”
CA: Any servicemember who terminates a motor vehicle lease pursuant to SCRA shall be allowed by the lessor to make payment of any arrearages and other
obligations that are due and unpaid at the time of termination of the lease in equal installments over a period equal to at least the period of military service. Cal.
Mil. & Vet. Code § 826.
Note – while definition of “servicemember” under California Military Families Financial Relief Act of 2005 (Cal. Mil. & Vet. Code § 821(a)) is broader than
SCRA in that it includes state active duty – nowhere do I see provision giving state covered servicemembers protections of federal SCRA . . . as such given
language of this provision one could certainly argue only applicable to federal “servicemembers”. However, as noted elsewhere herein, we may choose to give
protections of SCRA to all state active duty personnel regardless of state. This provision would only be applicable to CA residents.
Federal. Any prepaid lease payments for a period after effective date of termination must be refunded to the lessee by the lessor (or the lessor's assignee or the
assignee's agent) within 30 days of the effective date of lease termination.
IL, IA, LA, MI & OH: Tracks Federal law.
NJ: Not addressed.
NY: Any lease payments made in advance for a period succeeding termination shall be refunded by the lessor.
Req.
Termination of MV Leases (Fed, IL, IA, LA MI,
NJ, NY, OH & PA) – Lessor Protections
PA: For non-monthly pay leases, termination is effective on the last day of the month following the month in which the notice is delivered or mailed, and in
such case, any rental paid in advance for a period after termination shall be refunded to the member by the lessor or his agent.
Federal: Upon application by the lessor to a court before the termination date provided in the written notice, relief granted by this section to a servicemember
may be modified as justice and equity require.
IL, IA, LA, MI, NY & OH: Track Federal. Applies to IL/IA/LA/MI defined “servicemembers” who are IL/IA/LA/MI residents.
NJ: While not specifically addressed presumably such a right exists.
PA: Upon application by the lessor to the appropriate court of common pleas prior to the termination provided for in this section, any relief granted by this
section shall be subject to such modifications or restrictions as, in the opinion of the court, justice and equity may require in the circumstances.
Req.
Deferred MV Insurance Coverage (PA) – General
Requirements
51 Pa. Stat. § 7317. Deferred motor vehicle insurance coverage
(a) APPLICABILITY.-- This section shall apply to members of the Pennsylvania National Guard who are called or ordered to active duty with the armed forces
of the United States, other than active duty for training, or to State active duty under this title, and members of other reserve components who are called or
ordered to active duty with the armed forces of the United States, other than active duty for training, when the period of active duty or State active duty is 30
consecutive days or more.
(b) DEFERRAL OF COVERAGE.-- A member of the Pennsylvania National Guard or other reserve component of the armed forces of the United States, as
described in subsection (a), may defer without cost or penalty motor vehicle insurance coverage during the period of active duty on one or more vehicles
owned by the member, either individually or jointly with another person, provided the member certifies to the insurer the vehicle will not be operated during
his absence on active duty, and, if a motor vehicle serves as collateral for a loan, the member shall continue to insure it against the risks of property
damage and theft as required by the lender.
(c) LIMITED EXEMPTION.-- Any person described in subsection (a) shall have the same limited exemption from financial responsibility requirements as
established in 75 Pa.C.S. § 1786(d)(2) (relating to required financial responsibility).
(d) REFUND OR CREDITING OF PREPAID PREMIUMS.-- The insurer shall, at the election of the member, refund premiums paid for coverage during the
period of deferral or credit such premiums to coverage in effect after the end of the deferral period.
(e) REINSTATEMENT OF DEFERRED COVERAGE.-- Upon the member's release or discharge from active duty, the insurer shall, upon notice, reinstate the
member's coverage at the rates then in effect.
(f) ACTIONS PROHIBITED.-- No insurer shall, because of the deferral of insurance coverage provided under this section, cancel, nonrenew, impose a
surcharge or a rate penalty or remove any premium discount on any insurance coverage upon reinstatement of the member's coverage.
(g) INTENT.-- It is the specific intent of the General Assembly to treat individuals subject to this section as if no deferral of insurance coverage occurred and
insurance coverage was not interrupted.
Termination of Other Leases (PA) – General
Requirements
See MV Lease provisions above – those provisions also apply to all tangible personal property leases. Applies to PA defined “service members” who are PA
residents.
Foreclosure/Repossession (Fed) – General
Requirements
50 USC app § 533. Mortgages and trust deeds
(a) Mortgage as security. This section applies only to an obligation on real or personal property owned by a servicemember that-- (1) originated before the
period of the servicemember's military service and for which the servicemember is still obligated; and (2) is secured by a mortgage, trust deed, or other security
in the nature of a mortgage.
(b) Stay of proceedings and adjustment of obligation. In an action filed during, or within 9 months after, a servicemember's period of military service to enforce
an obligation described in subsection (a), the court may after a hearing and on its own motion and shall upon application by a servicemember when the
servicemember's ability to comply with the obligation is materially affected by military service-- (1) stay the proceedings for a period of time as justice and
equity require, or (2) adjust the obligation to preserve the interests of all parties.
(c) Sale or foreclosure. A sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) shall not be valid if made during, or
within 9 months [reverts to 90 days on 12/31/2010] after, the period of the servicemember's military service except-- (1) upon a court order granted before such
sale, foreclosure, or seizure with a return made and approved by the court; or (2) if made pursuant to an agreement as provided in section 107 [50 USCA Appx
§ 517].
Req.
Foreclosure/Repossession (Fed) – Required
Actions by Servicemember
Req.
Foreclosure/Repossession (Fed & All States)–
Available to Who?
(d) Penalties. (1) Misdemeanor. A person who knowingly makes or causes to be made a sale, foreclosure, or seizure of property that is prohibited by subsection
(c), or who knowingly attempts to do so, shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both. (2)
Preservation of other remedies. The remedies and rights provided under this section are in addition to and do not preclude any remedy for wrongful conversion
otherwise available under law to the person claiming relief under this section, including consequential and punitive damages.
Federal. None. Although as a practical matter we have to know (or have reason to know) that they are a servicemember subject to these provisions. A request
for rate reduction and/or copy of orders would constitute knowledge. To the extent in court – see stay provisions in subsection (b). If we “knowingly” violate
this section and foreclosure/repossess/sell anyway – potentially subject to criminal penalties. A sale/foreclosure/repossession/sale for breach of an obligation
described herein is void . . . even if we had no knowledge or reason to know of applicability. May want to institute check of Dept. of Defense website prior to
repossession/sale of whether person military?
Federal. Protections available to “servicemembers” in “military service” that meet requirements herein. Defined below.
All States. As noted below, many states extend this protection and/or their own to state national guard when ordered to “state active duty” by governor in
certain circumstances. Expands parties covered of SCRA. Some states provide unique protections not only for “state active duty” but also those on federal
“active duty.”
Req.
Foreclosure/Repossession (Fed) – Loan Covered?
Req.
Req.
Foreclosure/Repossession (Fed) – Property Owner?
Foreclosure/Repossession (Fed) – Borrower
Req.
Req.
Foreclosure/Reposession (Fed) – Which Debts?
Foreclosure/Repossession (Fed) – Moratorium
Period
Options: (1) Just follow federal law regarding availability – risk: subject ourselves to reputational and litigation risk. Not really an option; (2) If we have,
review orders provided via 1.a and determine whether provided by governor vs. President/Secretary of Defense, determine whether particular state provides
additional coverage, and apply if applicable; or (3) Provide additional coverage to national guard/reserves called up to “state active duty” across the board if we
know or have reason to know that they are a servicemember in military service. From an implantation/risk perspective - #3 may be easiest option, and my
recommendation.
Federal. Restrictions apply to all real estate and personal property secured loans/lines and retail installment contracts – whether for consumer, business or
agricultural purposes provided other requirements are met. Does not apply to unsecured.
Federal. Property must be owned by the servicemember in whole or in part.
Federal. Provision provides that the servicemember must be obligated (i.e., Borrower, Guarantor, Co-signer) on the underlying debt. As a practical matter not
sure what we would do in a 3rd party owner situation, where servicemember is owner but not borrower/guarantor/co-signer.
Federal. Debt must have been incurred prior to military service.
Federal. If the above applies, a sale, foreclosure, seizure is NOT valid if it is made during, or within 9 months [starting 1/1/2011 – 90 days] after, the period of
the servicemember’s military service except: (1) upon a court order granted before such sale, foreclosure, seizure with a return made and approved by the
court; or (2) if made pursuant to an agreement as provided in section 107 [50 USCA Appx § 517].(i.e., waiver agreement).
“Period of military service” means the period beginning on the date on which a servicemember enters military service and ending on the date on which the
servicemember is released from military service or dies while in military service.” Entry into military service – typically active duty date, but this protection is
expanded for reserve component personnel (50 USC app §516(a)) to date they receive their active duty orders. Protections can also be extended in advance of
any actual active duty report date for draftees. 50 USC app §516(b). As such, unless we are going to make these determinations/distinctions any
foreclosure/repossession protection should be started/implemented the earlier of: (1) date of active duty orders; or (2) active duty date.
Business Credit Collection/Recovery (Fed) –
General Requirements
50 USC app §596 provides:
(a) Availability of non-business assets to satisfy obligations. If the trade or business (without regard to the form in which such trade or business is carried out)
of a servicemember has an obligation or liability for which the servicemember is personally liable, the assets of the servicemember not held in connection with
the trade or business may not be available for satisfaction of the obligation or liability during the servicemember's military service.
(b) Relief to obligors. Upon application to a court by the holder of an obligation or liability covered by this section, relief granted by this section to a
servicemember may be modified as justice and equity require.
On business/agricultural purpose debt, if servicemember is personally liable (e.g., guarantor, sole proprietor) his/her personal assets may not (absent a court
order) be used for satisfaction of the debt while the servicemember is on active duty.
PROCEDURAL/JUDICIAL RELATED PROTECTIONS
No.
PROTECTION
DETAILS
Repo/Foreclosure – Stay
Also Note NY - Installment Purchases limitation
(Leases) – sec. 311.
N/A
N/A
Stay – Judicial Proceedings (States)
Ark. Stay, judicial relief and other procedural provisions/protections – Ark. Code Ann. 12-62-706 et seq.
Stay – Administrative Proceedings (AZ)
Ariz. Rev. Stat. § 41-1071. Military relief from administrative procedures; process
Tolling of Statute of Limitations
“At any stage, any action or proceeding before any state agency, board, commission or administrative tribunal involving a person on active duty in the military
service of the United States or this state as a necessary party, which occurs during such period of service or within sixty days thereafter, may be stayed in the
discretion of the state administrative entity before which it is pending, on its own motion. The state administrative entity shall not stay an action or proceeding
on its own motion if the service member makes a written objection to the stay. Such action or proceeding shall be stayed on application to the state
administrative entity by such person or some person on his behalf, unless in the written decision of the state administrative entity, the ability of the service
member to pursue the claim or defense in the action or proceeding is not prejudiced by the military service.”
Utah – 39-7-110. Vt – title 12, section 553. WA – 38.42.090. WI 321.62(9).
Tolling of Statute of Limitations (AR)
Ark. Code Ann. § 16-56-118. Suspension of limitations -- Persons in the armed forces.
“(a) The statutes of limitations in this state are suspended so far as those statutes affect the claim or cause of action of a person in the armed forces of the United
States during the existence of a state of war between the United States and any other nation, and for six (6) months thereafter.
(b)Any person in the armed forces of the United States during the existence of a state of war between the United States and any other nation may, at any time
within one (1) year after the end of the state of war and six (6) months thereafter, maintain a suit for the collection of any debt or the recovery of any real or
personal property to which the person may be entitled if the statute of limitations had not run against the action prior to the person's entry into the armed forces
of the United States.”
Ark. Code. Ann. § 12-62-712. Statutes of limitations affected by military service. The period of military service is not included in computing any period
limited by law, rule, or order for bringing an action or proceeding in any court, board, bureau, commission, department, or other agency of government by or
against any person in military service or by or against his or her heirs, executors, administrators, or assigns, whether the cause of action or the right or privilege
to institute the action or proceeding has accrued before or during the period of military service.
SOME BASIC FEDERAL DEFINITIONS/GENERAL PROVISIONS
(1) “Servicemember” means a member of the Army, Navy, Air Force Marine Corps, Coast Guard, the commissioned corps of the National Oceanic and Atmospheric Administration (“NOAA”), and the commissioned
corps of the Public Health Service (“PHS”). 50 USC app §511(1) & 10 USC §101(a)(5).
*Note: the term “servicemember” includes the servicemember’s legal representative (i.e., an attorney acting on behalf of the servicemember or an individual possessing a power of attorney.) 50 USC app §519. In
addition, SCRA’s protections may be extended to US citizens servicing in the armed forces of allies in certain circumstances. 50 USC app §514. Finally, see state-chart below – depending upon state
“servicemember” may include state national guard when called to “state active duty”, etc.
(2) “Military Service” means -(A) In the case of a servicemember who is a member of the Army, Navy, Air Force, Marine Corps or Coast Guard –
i. “Active Duty” – i.e., full-time duty in the active military service of the US. Such term includes full-time training duty, annual training duty, and attendance, while in the active military service, at
a school designated as a service school by law or by the Secretary of the military department concerned. Such term does not include full-time National Guard duty.
ii. in case of a member of the National Guard, includes service under a call to active service authorized by the President or the Secretary of Defense for a period of more than 30 consecutive days
under 32 USC §502(f) for purposes of responding to a national emergency declared by the President and supported by Federal Funds.
(B) In the case of a servicemember who is a commissioned officer of the PHS or NOAA active service; and
(C) Any period during which a servicemember is absent from duty on account of sickness, wounds, leave or other lawful cause. 50 USC app §511(2) & 10 USC §101(d)(1).
(3) “Period of Military Service” means the period beginning on the date on which a servicemember enters military service and ending on the date on which the servicemember is released from military service or dies
while in military service.
*Note: Several sections of the SCRA modify the particulars of when its protections commence/terminate, etc.
(4) “Dependent” with respect to a servicemember means –
(A) the servicemember’s spouse;
(B) the servicemember’s child as defined in 38 USC §101(4); or
(C) an individual for whom the servicemember provided more than one-half of the individual’s support for 180 days immediately preceding an application for relief under the SCRA. 50 USC app §511(4).
(5) “Motor Vehicle” means a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line. 50
USC app §511(8) & 49 USC §30102(a)(6).
Waiver of SCRA Benefits – Requirements for valid waiver SCRA benefits. 50 USC app §517.
Territorial Application and Jurisdiction - 50 USC app §512.
Transfers to Take Advantage of SCRA – circumstances under which such transfers void. 50 USC app §581.
Missing & Deceased Persons - 50 USC app §582.
STATE ACTS/PROVISIONS
COMMENTS:
1.
State provisions can come in a variety of formats: (1) apply federal SCRA protections to new actors (“state active duty”); (2) apply state protections to non-SCRA actors; OR (3) apply state protections to
SCRA actors and/or new actors.
2.
Legend For Below:
1 = Applies some provisions of federal SCRA/SSCRA to state national guard (or others) when ordered to “state active duty” by governor in certain circumstances.
2 = Applies all provisions of federal SCRA/SSCRA to state national guard when ordered to “state active duty” by governor in certain circumstances.
3 = Unique misc. provisions
4 = State version of SCRA/SSCRA applies to state national guard when ordered to “state active duty” by governor in certain circumstances.
STATE
AL
AK
AZ
AR
CA
CO
CT
FL
CITATION
N/A
Alaska Stat. § 26.05.135
Ariz. Rev. Stat. §§ 41-1071
and 26-168
Arkansas Soldiers’ &
Airmen’s Civil Relief Act –
Ark Code Ann. §§12-62-701
et seq.
Ark. Code Ann. §16-56-118
California Military Families
Financial Relief Act – Cal.
Mil. & Vet. Code §§ 800 et
seq. & California Military
Families Finance Relief Act of
2005 – Cal. Mil. & Vet. Code
§§ 820 et seq.
Colorado State Military
Service Civil Relief Act – Col.
Rev. Stat. §§ 28-3-1401 et seq.
Conn. Gen. Stat. § 27-34a
Fl. Stat. Ann. §250.5201 et
seq.; Florida Uniformed
Servicemembers Protection
Act (Fl. Stat. Ann. §250.80 et
seq. & Fl. Stat. Ann. §520.14 (
SUMMARY
DETAILS
N/A
1
Alaska Stat. § 26.05.135”
2, 3
“The provisions of 50 U.S.C. App. 501—590, pertaining to the temporary suspension of enforcement of civil liabilities of persons in the military service of the United States,
apply to members of the Alaska National Guard and Alaska Naval Militia while on active duty for the state by order of the governor.”
Extends protections of federal SCRA to National Guard ordered to “state active duty” by governor in certain circumstances. Also unique state administrative stay provision.
3, 4
N/A
Ark. Soldiers’ & Airmen’s Civil Relief Act has extensive provisions mimicking fed. SCRA applying to state National Guard ordered to “state active duty” in certain
circumstances. Also tolling provision.
3
California Military Families Financial Relief Act and California Military Families Financial Relief Act of 2005 have extensive provisions which extend benefits to any member
of the US Military Reserve who is a California resident or any member of the California National Guard who is called to active duty after September 22, 2005 as part of the
Iraq and Afghanistan conflicts (CA “Reservists”).
4
Col. State Military Service Civil Relief Act has extensive provisions mimicking fed. SCRA applying to state National Guard ordered to “state active duty” in certain
circumstances.
2
3, 4
Extends protections of federal SCRA to National Guard ordered to “state active duty” by governor in certain circumstances.
§ 250.5201. Stay of proceedings where troops called out into state active duty or active duty
(1) Any civil action or proceeding in any court which involves a person called into state active duty as defined in subsection (3) may be stayed by the court during such service
and for a period thereafter not exceeding 30 days.
(2) The stay may be granted by the court on its own motion, and shall be granted upon the motion of a plaintiff or defendant unless, in the opinion of the court, the ability to
prosecute or defend the action is not materially affected by reason of the movant's state active duty.
(3)Notwithstanding the definition in s. 250.01 "state active duty or active duty" as used in ss. 250.5201-250.5205 is limited to service that exceeds 17 days and that is ordered
by the Governor.
(4) Before a soldier is entitled to any of the provisions of this section, that soldier must furnish to the affected creditor, landlord, court, or other affected person a copy of his or
her orders, together with a written statement from the Adjutant General of the State of Florida, or his or her designee, that the soldier has served continuously on state orders
for the period commencing with the date of the orders through the date of the statement. The court may require the soldier to furnish a recertification every 30 days thereafter,
which shall be furnished to the soldier by the Adjutant General upon request.
§ 250.5204. Installment contracts for purchase of property; penalty
(1) If a creditor has received a deposit or installment of the purchase price under an installment contract for the purchase of real or personal property from a member of the
Florida National Guard who, after the date of the payment of such deposit or installment, is called into state active duty or active duty and has provided written notice to the
creditor of the state active duty or active duty, the creditor may not exercise any right or option under such contract to rescind or terminate the contract or resume possession of
the property for nonpayment of any installment due, or for any other breach of the terms of the contract occurring during the period of state active duty or active duty, except
upon affirmative authorization by a court of competent jurisdiction.
(2) Upon hearing such action, the court may order the repayment of prior installments or deposits, or any part thereof, as a condition of terminating the contract and resuming
possession of the property, or may, on its own motion, and shall, on application to it by such person in state active duty or active duty or some person on his or her behalf, order
a stay of proceedings, unless, in the opinion of the court, the ability of the defendant to comply with the terms of the contract is not materially affected by reason of such
service. Alternatively, the court may otherwise dispose of the case as is in the interest of all parties.
§ 250.5205. Mortgages, trust deeds, etc.; penalty
(1) In any proceeding commenced during the period of state active duty or active duty to enforce obligations secured by mortgage, trust deed, or other security upon real or
personal property owned prior to the commencement of a period of state active duty or active duty, the court may on its own motion stay the proceedings or otherwise dispose
of the case as is equitable to conserve the interests of all parties. The court shall stay the proceedings upon the application of a person or agent of the person in state active duty
or active duty unless, in the opinion of the court, the ability of the defendant to comply with the terms of the obligations is not materially affected.
(2) A sale, foreclosure, or seizure of property for nonpayment of any sum due under any obligation, or for breach of the terms of such obligation, is not valid if made during the
period of state active duty or active duty or within 30 days thereafter, unless upon an order previously granted by the court and a return made to and approved by the court.
(3) This section applies only to obligations secured by a mortgage, trust deed, or other security in the nature of a mortgage upon real or personal property owned by a person in
state active duty or active duty at the commencement of the period of state active service and still owed by her or him, which obligation originated prior to such person's period
of state active service.
§ 520.14. Termination of retail installment contract for leasing a motor vehicle by a servicemember
(1)Any servicemember, as defined in s. 250.01, may terminate his or her retail installment contract for leasing a motor vehicle by providing the sales finance company with a
written notice of termination, effective on the date specified in the notice, which date shall be at least 30 days after the receipt of the notice by the sales finance company, if any
of the following criteria are met:
(a) The servicemember is required, pursuant to a permanent change of station, to move outside the continental United States; or
(b) The servicemember receives temporary duty orders, temporary change of station orders, or active duty orders outside the continental United States, provided such
orders are for a period exceeding 60 days.
(2) The written notice to the sales finance company under subsection (1) must be accompanied by either a copy of the official military orders or a written verification signed by
the servicemember's commanding officer.
(3) Upon termination of a contract under this section, the lessee is liable for the amount due under the contract, prorated to the effective date of the termination, payable at such
time as would have otherwise been required by the terms of the contract. The lessee is not liable for any other fees due to the early termination of the contract as provided for in
this section.
(4) The provisions of this section may not be waived or modified by the agreement of the parties under any circumstances.
HI
Civil Relief for State Military
Forces (H.R.S. § 657D-1 et
2
Hawaii Civil Relief for State Military Forces Act essentially SSCRA for state active duty personnel.
ID
IL
IN
IA
KY
LA
ME
MD
seq.)
Idaho Militia Civil Relief Act
(Id. Code § 46-409)
815 ILCS 205/4.05, 815 ILCS
636/37, and 330 ILCS 60/5.1
Ind. Code Ann. §10-16-7-23
Iowa National Guard Civil
Relief Act (Iowa Code §§
29A.90 et seq.).
Ky. Rev. Stat. § 38.510.
Louisiana Servicemembers
Civil Relief And Consumer
Rights Act (La. Rev. Stat. §
29:311 et seq.
Maine Servicemembers’ Civil
Relief Act (Me. Rev. Stat.
Ann. tit. 37-B §389-A)
(1) Md. Code Ann. Pub.
Safety §13-705; (2) Md.
Code Ann. Pub. Safety §14201 et seq.
2
Extends protections of SCRA to state national guard ordered to state active duty by governor in certain circumstances.
3
815 ILCS 205/4.05 is the 6% interest cap provision. 815 ILCS 636/37 – MV lease termination provision. 330 ILCS 60/5.1 – Stay of prosecution.
2
4
Extends protections of SCRA to state national guard ordered to state active duty by governor in certain circumstances.
2
4
Extends protections of SCRA to state national guard ordered to state active duty by governor in certain circumstances.
3
"Service member" means a member of the uniformed services as that term is defined in 10 USC §101(a)(5) or a member of the state military forces as that term is described in
section 102, on active state service as that term is defined in section 101-A.” Me. Rev. Stat. Ann. tit. 37-B §389-A(1)(B). Includes stay provision. Applies to state and federal
servicemembers on state active duty.
2, 3
Extensive state provisions See IA 2009 HB 706 amending 29A.102 & 29A.103 (punishment) and adding 654.17B relative to foreclosure.
Extensive state provisions
Md. Code Ann. Pub. Safety §13-705 provides:
“(a) Scope of section. -- The rights granted to members of the National Guard and Maryland Defense Force by this section shall be in addition to the rights granted to them by
federal law, including the Servicemembers Civil Relief Act and the Uniformed Services Employment and Reemployment Rights Act. (b) Protections. -- The following
provisions of federal law shall be adopted as State law and applied to members of the National Guard and Maryland Defense Force:
(b) Protections. – The following provisions of federal law shall be adopted as State law and applied to members of the National Guarnd and Maryland Defense Force:
(1) the Servicemembers Civil Relief Act applies only when members of the National Guard or Maryland Defense Force are ordered to military duty under this title or Title
10 or Title 32 of the United States Code for a period of 14 consecutive days or longer;”
Md. Code Ann. Pub. Safety §14-201 et seq. – Maryland Emergency Management Civil Relief During Emergency Periods Act – extends various SCRA like protections to
state/local 0emergency management workers.
MI
MN
(1) Michigan Military
Personnel MV Leasing Act Mich. Comp. Laws §§
445.1011 et seq.(2) Mich.
Comp. Laws §§ 600.3185 &
600.3285; (3) Mich. Comp.
Laws § 32.517
Minn. Stat. § 190.055
3
(1) Lease provisions mimic SCRA to some extent For purposes of this Act – “’Service member’ means a member of the armed forces, a reserve branch of the armed forces, or
the Michigan national guard”; (2) Other provisions various limitations on repossession/foreclosure, etc.
2
Minn. Stat. §190.055 PROTECTIONS
(a) A person called or ordered to active service, as defined in section 190.05, subdivision 5a or 5b, has all the protections afforded to persons in the military service of the
United States under:
MO
MT
Mo. Rev. Stat. § 41.950
Montana National Guard Civil
Relief Act (Mont. Code Ann.
§ 10-1-901 et seq.)
3
4
(1) the Servicemembers Civil Relief Act, United States Code, Appendix 50, sections 501 to 548, and 560 to 591, as amended at any time;”
Exempts from various state and local tax, registration fees, etc.
Relates to ability of court to stay proceedings (including related to nonpayment of mortgage, lease, or rental agreement).
NH
NJ
N.H. Rev. Stat. Ann. § 110C:2
2
New Jersey Soldier’s &
Sailor’s Civil Relief Act (N.J.
Rev. Stat. §§ 38:23C-1 et
seq.)
4
N.H. Rev. Stat. § 110-C:2 Civil Relief for Members of the New Hampshire National Guard, State Guard, or Militia.
I. Any person who shall be called by the governor to active duty for a period of 30 days or more as a member of the state guard or national guard or as a member of the militia,
shall be afforded the same civil protections, rights, privileges, benefits and relief, accorded under the Soldiers and Sailors Civil Relief Act, 50 U.S.C. Section 500 et seq., and
Section 560 et seq., as if they had been called to federal active duty in the service of the United States.
II. In any civil action to enforce the provisions of this section, the prevailing party may be allowed reasonable attorney's fees to be assessed by the court and collected as costs.
Extensive provisions that apply to state defined persons in military service.
§ 38:23C-2. Definitions
As used in this act:
a. The term "military service" means duty by any person, male or female, in the active military service of the United States and active duty in the military service of the State
pursuant to an order of the Governor issued pursuant to law.
b. The term "person" when used herein with reference to the holder of any right alleged to exist against a person in military service, or against a person secondarily liable under
such right, shall include individuals, partnerships, corporations, and any other forms of business association.
NM
NY
ND
OH
N.M. Stat. Ann. § 20-4-7.1
New York State Soldiers’ &
Sailors’ Civil Relief Act (N.Y.
Mil.§§ 300 et seq.) & N.Y.
Exec. Law. § 296-a
N.D. Cent. Code § 37-01-43.
Ohio Rev. Code §§ 5923.12,
5919.29, 1343.031 & 1349.02.
2
3, 4
2
2, 3
c. The term "court" as used herein, shall include any State court of competent jurisdiction, whether or not a court of record.
N.M. Stat. Ann. § 20-4-7.1. Servicemember's Civil Relief Act benefits; Uniformed Services Employment and Reemployment Rights Act; federal or state active duty
A. The rights, benefits and protections of the federal Servicemember's Civil Relief Act shall apply to a member of the national guard ordered to state active duty for a period of
thirty or more consecutive state duty days or to any federally funded duty performed in an operational role for homeland security in accordance with 32 USC 502. The
federally funded duty is in addition to and different from any federally funded unit training, assembly or drill pursuant to Section 20-4-7 NMSA 1978.
State SSCRA applies to state and federal servicemembers.
N.D. Cent. Code §37-01-43. North Dakota military civil relief act.
A person called or ordered to active service for thirty consecutive days or longer has all of the protections afforded to persons in the military service of the United States under
the Soldiers and Sailors Civil Relief Act of 1940 [Pub. L. 102-12; 105 Stat. 34, 50 USC 501-548 and 560-593].
Ohio Rev. Code Ann. § 5923.12. Pay and allowances for state active duty; protections afforded members
...
When ordered by the governor to perform training or duty under this section or section 5919.29 of the Revised Code, members of the Ohio national guard shall have the
protections afforded to persons on federal active duty by "The Soldiers and Sailors Civil Relief Act of 1940," 54 Stat. 1178, 50 App. U.S.C.A. 501-548 and 560-591.” Ohio.
Rev. Code 5919.29 duplicates this section.
OK
Okla. Stat. tit. 44, § 208.1
2
Okla. Stat. tit. 44, § 208.1. Oklahoma National Guard--Civil relief--Employment and reemployment rights
The following provisions of federal law shall be adopted as state law and applied to members of the Oklahoma National Guard when such members are ordered to state active
duty or full-time National Guard duty under Sections 501 through 507 of Title 32 of the United States Code:
OR
PA
RI
Or. Rev. Stat. §§ 408.440 &
36.405
51 Pa. Stat. §§ 7301 et seq.
51 Pa. § 4105.
RI State Soldiers’ and Sailors’
Civil Relief Act – R.I.Gen.
3
1. The Servicemembers Civil Relief Act of 2003 (SCRA), codified at 50 USC App., Section 501 et seq., which updates, renames, and replaces the Soldiers' and Sailors' Civil
Relief Act of 1940; . . . “
RE foreclosure provisions. See Also 2009 HB 2303 providing for damages for violation of SCRA, etc..
4
State SCRA applies to state and federal servicemembers.
2
R.I. Gen. Laws § 30-7-10. State Soldiers' and Sailors' Civil Relief Act
All national guard members on state active duty for a continuous period exceeding ninety (90) days shall be entitled to the rights, protections, privileges, and immunities
Laws § 30-7-10
SD
UT
VT
VA
WA
WI
WY
afforded under the Soldiers' and Sailors' Civil Relief Act, 50 USC §§ 500-592. These rights, protections, privileges and immunities shall include, but are not limited to, the
following: maximum rate of interest not to exceed six percent (6%), continuation of insurance policies, protection from eviction as well as the right to terminate a lease due to
military service, and continuance or stay of civil proceedings. Jurisdiction shall be exclusive to the superior court for any alleged violations of this section.
S.D. Codified Laws § 33-17-15.1. National Guard members ordered to active duty -- Federal protections
S.D. Codified Laws § 33-1715.1
2
Utah Service Members’ Civil
Relief Act – Utah Code Ann.
§§ 39-7-101 et seq.
Vt. Stat. Ann. tit. 12, § 553
Va. Code Ann. § 44-102.1
4
State SCRA applies to state National Guard
3
2
Tolls statute of limitations during period of military or naval service of US.
Washington Service
Members’ Civil Relief Act
(Wash. Code Ann. §§
38.42.010 et seq.); Wash.
Code Ann. §§ 49.60.175,
49.60.176, 61.24.025,
73.16.070
Wisconsin Service Members
Civil Relief Act – State Active
Duty – Wis. Stat. Ann. §
321.62
Wyoming Military Service
Relief Act (Wyo. Stat. § 1911-101 et seq.); Wyo. Stat. §
19-9-401.
If any member of the South Dakota National Guard is ordered to active duty service by the Governor of the State of South Dakota or the President of the United States, the
member has all protections afforded to persons serving on federal active duty by the Servicemembers Civil Relief Act of 2003, 54 Stat. 1178, 50 App. U.S.C.A. 501-548 and
560-591, as amended to January 1, 2007, and by the Uniformed Services Employment and Reemployment Rights Act, 108 Stat. 3149, 38 USCA 4301 to 4333, as amended to
January 1, 2007.
3, 4
Va. Code. Ann. § 44-102.1. Rights, benefits and protections upon call to active duty
Any right, benefit, or protection that may accrue to a member of the Virginia National Guard under the Federal Soldier's and Sailor's Civil Relief Act (50 USC App. § 501 et
seq.), as a result of a call to federal active duty service under Title 10 of the United States Code shall be extended to a member of the Virginia National Guard called to active
duty service under Title 32 of the United States Code, or to state active duty by the Governor, if the active duty orders are for a period of 30 consecutive days or more.
Under WA SCRA – “military service” means a service member (WA resident) under a call to active service authorized by the president of the United States or the secretary of
defense for a period of more than 30 consecutive days.
4
Applicable to WI residents on state active duty.
2
Wyo Stat. § 19-11-122. SCRA; application to national guard; penalty for violation of rights afforded to guard members; enforcement; preferences.
(a) Members of the Wyoming national guard ordered to active state service by the state or federal government for a period of more than thirty (30) consecutive days shall have
all protections afforded to persons in the military service of the United States under the Servicemembers Civil Relief Act, Public Law 108-189. Except as provided in
subsection (b) of this section, nothing in this subsection shall be construed to authorize the imposition of any penalty under the Servicemembers Civil Relief Act for violation
of the protections afforded to members of the Wyoming national guard pursuant to this subsection. As used in this subsection, "active state service" means as defined in W.S.
19-7-101(a)(v).
GUARD YOUR SETOFFS!
Part I: Protecting Your Right of Setoff
Client’s Problem: I have a claim against the debtor but I may also owe
money to the Debtor. The confirmation hearing is next week. Do I need to do anything
to preserve my right of setoff?
Conventional Wisdom: No. Setoff rights are preserved under §553 of
the Bankruptcy Code. In In re De Laurentiis Entertainment Group, Inc., 963 F.2d 1269
(9th Cir. 1992), the court found that a creditor’s right to setoff under Section 553 was not
extinguished even where the debtor’s Chapter 11 plan of reorganization was already
confirmed.
NBC Broadcasting Co. (“NBC”) filed a proof of claim asserting a right to
$1.6 million based on unpaid advertising fees. Id. at 1271. It also claimed a right to
setoff $1.25 million owed to the debtor for unpaid movie rights. Id. NBC also filed a
motion for relief from the automatic stay so that it could pursue its setoff claim. Id. The
bankruptcy court converted the claim into an adversary proceeding, through which NBC
filed a complaint and the parties engaged in discovery. Id. Meanwhile, the debtor filed a
plan of reorganization that was confirmed by the bankruptcy court. Id. Under the plan,
the debtor’s successor, CTI, acquired the rights to the $1.25 million claim against NBC
“free and clear” of all pre-bankruptcy claims or interests not listed in the plan. Id. NBC
did not object to the plan or contest the order confirming it. Id.
After the confirmation order was entered, CTI intervened in the adversary
proceeding and asserted its right to the $1.25 million payment. Id. NBC asserted its right
to setoff. Id. CTI argued that the setoff right was discharged under bankruptcy laws
2283638
when the plan was confirmed, but the bankruptcy court found that NBC was still entitled
to assert the right. Id. On appeal the district court affirmed, and appeal was taken to the
Ninth Circuit. Id.
CTI argued that Section 1141 of the Bankruptcy Code discharged its debt
to NBC and res judicata precluded NBC from asserting it because NBC did not object to
the reorganization plan. Id. at 1274. NBC argued that under Section 553 the plan did not
affect its right to assert a setoff. Id. at 1274-75. The Court found that Section 553 takes
precedence over Section 1141, and therefore NBC’s right to setoff survived the
confirmation of the debtor’s plan. Id. at 1276. “Section 553 provides that, with listed
exceptions not relevant here, ‘this title does not affect the right of creditor to offset a
mutual debt . . . .’ This language not only establishes a right to setoffs in bankruptcy,
subject to enumerated exceptions, but seems intended to control notwithstanding any
other provision of the Bankruptcy Code. To give Section 1141 precedence would be to
ignore this language.” Id. at 1276-77. The Court also noted that NBC asserted its setoff
during the pendency of the bankruptcy proceedings by both filing a proof of claim and a
petition for relief from the stay, and CTI was therefore on notice that NBC intended to
assert the right. Id. at 1277.
Why Conventional Wisdom may be Malpractice: The Third Circuit, in
In re Continental Airlines, 134 F.3d 536 (3rd Cir. 1998), held that a creditor that had not
asserted its right to setoff in the bankruptcy proceedings lost that right upon plan
confirmation. In Continental, the General Services Administration of the United States
(“GSA”) filed an amended proof of claim after confirmation of the debtor’s plan,
asserting a right to setoff for the first time. Id. at 537-38. The setoff was based on a $4.8
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million judgment post-confirmation entered against the GSA in favor of Continental in
the United States District Court for the District of Columbia. Id. at 538. The D.C.
District Court allowed the GSA to deposit the disputed sum in the bankruptcy court’s
registry while the GSA attempted to setoff the $4.8 million against the $14.5 million in
claims due its agencies. Id. The bankruptcy court ruled that the GSA could not exercise
its setoff rights, and the district court affirmed. Id.
On appeal, the GSA argued that the $4.8 million was not property of the
estate, and the confirmation order did not extinguish its right of setoff in the funds
because the GSA still held them at the time of confirmation. Id. at 538-39. The Court,
however, found that “[e]ven though the actual funds themselves may not have passed as
property of the bankruptcy estate, upon confirmation of the plan, Continental did acquire
a claim or interest in them subject only to final resolution of the Government’s appeal.”
Id. The court looked to its previous decision in United States v. Norton, 717 F.2d 767 (3d
Cir. 1983), which held that setoff is not permitted after confirmation of a bankruptcy plan
of reorganization, to find that the GSA’s right to setoff was extinguished upon plan
confirmation. Id. at 539-40. The court distinguished the case before it from De
Laurentiis because there NBC filed a timely proof of claim asserting its right to setoff
and filed a motion for relief from the automatic stay prior to confirmation. Id. at 541. In
contrast, in Continental, “the plan of reorganization proceeded on the justifiable
assumption that the reorganized debtor faced no setoff claim.” Id. The Court reasoned
that allowing the GSA to assert a setoff right for the first time after confirmation would
treat an unsecured claim as a secured claim, disrupt the plan of reorganization, potentially
protract the bankruptcy proceedings, and be unfair to other creditors. Id. at 542. The
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court therefore found that the GSA’s right to setoff was extinguished once the debtor’s
plan was approved. Id.
Part II: Triangular Setoffs
Client’s Problem: I am dealing with an affiliated group of companies. I
sell my products almost exclusively to one of those companies (“Company A”) but then I
buy products from other companies (“Companies B and C”) affiliated with Company A.
My company and the affiliated companies, Companies A, B and C, are in complete
agreement that, for purposes of setoff, all of the affiliated companies’ claims and
liabilities may be aggregated against my claims and liabilities. Is this a problem?
Conventional Wisdom: Not a problem. Even in bankruptcy, several
courts have long recognized the existence of triangular setoff. See, e.g., In re Garden
Ridge Corp., 338 B.R. 627 (Bankr. D. Del. 2006); U.S. Aeroteam, Inc. v Delphi
Automotive Sys., LLC (In re U.S. Aeroteam, Inc.), 327 B.R. 852 (Bankr. S.D. Ohio 2005);
In re Custom Coals Laurel, 258 B.R. 597 (Bankr. W.D. Pa. 2001).
Why Conventional Wisdom may be Malpractice: While there is a
relatively long list of cases suggesting that triangular setoffs would be enforced in
bankruptcy, in In re SemCrude, L.P., 399 B.R. 388 (Bankr. D. Del. 2009), the Court
observed that none of those cases actually enforced triangular setoffs in bankruptcy. Id.
at 394. Rather, each of the decisions recognized the contract exception but otherwise
denied allowing setoff or finding mutuality on other grounds. The SemCrude Court
found that a contractual triangular setoff between affiliated companies could not satisfy
the mutuality agreement requirement of §553 as a matter of Federal Bankruptcy law.
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The SemCrude Court concluded that private agreements cannot confer
mutuality on non-mutual debts in bankruptcy, Id. at 396-98, and that no exception to the
mutual debt requirement exists. Id. at 398-99. Thus, while triangular setoffs may be
enforceable under certain state laws, counsel should be aware that triangular setoff may
not be enforceable in bankruptcy.
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BE AWARE OF THE STRINGS ATTACHED
TO THE CRITICAL VENDOR PAYMENT
Client Issue: We just had one of our major customers file bankruptcy.
They owe us a lot of money. We were devastated and, as a result of not being paid the
prepetition receivable, we were contemplating filing bankruptcy ourselves. However, the
debtor has created a “critical vendor” program and, if we sign on to the program, they
will pay us the prepetition receivable. Any problems?
Conventional Wisdom: Hallelujah! Our problems are solved. If you are
an unsecured creditor, you are not likely to get anything. If they are paying your
prepetition receivable, take it and be thankful.
Why Conventional Wisdom may be Malpractice: While, generally
speaking, getting paid 100% of your prepetition claims beats the heck out of receiving
pennies on the dollar as the holder of a general unsecured claim, the critical vendor
program needs to be carefully scrutinized so that the client understands what strings are
attached to the critical vendor payment. In particular, carefully review the client’s future
performance obligations with regard to pricing, quantity, and credit terms. If, by
receiving a critical vendor payment, a vendor has to agree to reduce prices or keep prices
at a specified level for an excessive period of time, receipt of the critical vendor payment
may be no deal at all. Likewise, if the client was on 20-day terms prepetition and receipt
of the critical vendor payment requires the vendor to provide the debtor with 90-day
terms, the client has to carefully evaluate whether extension of such terms is worth the
receipt of the critical vendor payment. Many critical vendor programs have also required
vendors to extend debtors “customary trade terms”. Unless you want to litigate what
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customary trade terms is before the Bankruptcy Court, you should carefully define and
understand what customary trade terms means. If you do not, then the Court will
interpret it for you and these results have not always been beneficial to vendors. See,
e.g., In re Kmart (Bankr. N.D. Ill., Case No. 03-B02474); In re Tower Automotive,
(Bankr. S.D.N.Y., Case No. 05-10578); In re Calpine (Bankr. S.D.N.Y., Case No. 0560200); In re Trinsic (Bankr. S.D. Ala., Case No. 07-10324): In re Frontier Airlines,
(Bankr. S.D.N.Y., Case No. 08-11298); In re Meridian Automotive Sys-Composites Ops.,
Inc., 372 B.R. 710 (Bankr. D. Del. 2007).
A client should also carefully evaluate whether it would have received all
or a portion of the critical vendor payment in any event. Debtors may be required to pay
all or a portion of a creditor’s claim under §503(b)(9) or under §365 upon assumption of
a contract. In addition, if a vendor has no contractual obligation to provide the debtor
with products or services, the creditor may be in a position to simply refuse to continue to
provide services or product to the debtor and negotiate very favorable future terms as
well as accept a critical vendor payment without any strings attached.
Finally, the client should be aware that, unless there is an agreement or
provision in the critical vendor program regarding preferences, a creditor is likely to
continue to have preference liability for payments made and received within the 90 days
prior to the bankruptcy filing.
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GET YOUR SERVICE OF GOVERNMENT AGENCIES RIGHT!
Part I: Serving Government Agencies with Claim Objections,
Other Contested Matters and Adversary Proceedings
Client’s Problem: My debtor client has a dispute with the IRS and I want to
object to the IRS’ claim. Do I just serve the IRS with the claim objection at the address listed on
its proof of claim?
Conventional Wisdom: Sure.
In In re Arnott, 388 B.R. 656 (Bankr. W.D.Pa.
June 18, 2008), Chapter 13 debtors objected to the proof of claim that the IRS had filed in its
own name. The IRS moved to dismiss on the ground that it was not the proper respondent, the
objection should have been served on the United States, and that the court lacked jurisdiction to
hear the debtors' objection. The court, however, found that having filed a proof of claim in its
own name, the IRS was barred, by principles of waiver and estoppel, from objecting when the
debtors responded in like fashion and filed an objection naming the IRS, rather than the United
States, as respondent. Id. at 659.
In addition, the court held that service of the debtors’ objection to the IRS proof
of claim was governed by Rule 3007(a), since Rule 3007 is the specific rule concerning
objections to claims, rather than the more general Rule 9014(b) dealing with service of motions
in contested matters.
388 B.R. at 660. Furthermore, the court observed that Rule 9014(b)
speaks to "motions" and is preceded by Rule 9014(a), which states in pertinent part:
In a contested matter in a case under the Code not otherwise
governed by these rules, relief shall be requested by motion, and
reasonable notice and opportunity for hearing shall be afforded the
party against whom relief is sought.
Fed. R. Bankr. P. 9014(a) (emphasis added). The court stated: “The emphasized language
indicates that where the Federal Rules of Bankruptcy Procedure provide an alternative procedure
for a specific type of contested matter, as they do with respect to service of objections to claims
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under Rule 3007, that alternative procedure applies. Put another way, the Objection is not a
“motion” for purposes of Rule 9014(b) and Debtors did not need to comply with the service
requirements of that Rule.” Id.
Why Conventional Wisdom May Be Malpractice: To be safe, whether you are
serving a government agency with a claims objection or any other adversary proceeding or
contested matter, you should not only comply with Rule 3007, if that is applicable, but also Rule
7004 which is incorporated in Rule 9014.
Although the Bankruptcy Code does not specifically define contested matters, the
Advisory Committee Note to Rule 9014 states, “[w]henever there is an actual dispute, other than
an adversary proceeding, before the bankruptcy court, the litigation to resolve that dispute is a
contested matter. For example, the filing of an objection to a proof of claim, to a claim of
exemption, or to a disclosure statement creates a dispute which is a contested matter.” Advisory
Committee Notes, Rule 9014. See also In re Ochoa, 399 B.R. 563, 566 (Bankr. S.D.Fla. 2009)
(“The Advisory Committee Notes to Rule 9014 make clear that the filing of, e.g., a plan, a
disclosure statement or a proof of claim do not inherently create “an actual dispute,” while filing
an objection to a plan or disclosure statement, or an objection to a claim, does become a
contested matter.”); In re Levoy, 182 B.R. 827 (9th Cir.BAP 1995) (In dispute over adequacy of
service on the IRS, court ruled that “[Rule] 3007 does not provide the manner for service of the
objection to a proof of claim. However, the rule's Advisory Committee Note states: ‘The
contested matter initiated by an objection to a claim is governed by rule 9014 . . . .’ [Rule] 9014,
which pertains to contested matters, in turn, makes applicable the service provisions of [Rule]
7004.”); United States v. Hernandez, 173 B.R. 430 (N.D.Ala.1994) (debtor was required to serve
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objection to claim and notice of hearing on United States Attorney for district in which action
was brought and United States Attorney General, under Rules 9014 and 7004).
Under Rule 7004(a)(4) and (a)(5), the United States and its officers and agencies
are to be served by mailing a copy of the relevant document(s) to (1) the civil process clerk at the
office of the United States attorney for the district in which the action is brought, (2) to the U.S.
Attorney General in Washington, D.C., and (3) to the relevant officer or agency of the United
States.
It is also important to note that in the Arnott case, the IRS appealed, and thereafter
a resolution was reached in which the debtors withdrew their claim objection and the IRS moved
to vacate the earlier opinion as moot. The bankruptcy court ruled that its opinion had to be
vacated, despite the court’s continued belief in the soundness of its decision, where the debtors’
withdrawal of their objection to proof of claim mooted the appeal and frustrated the
government’s desire to obtain review of order. In re Arnott, Bankr. W.D. Pa. Oct. 09, 2008) 395
B.R. at 243, 345. In the ruling vacating the earlier opinion, the court stated: “Having granted the
Motion to Vacate, the Court nevertheless seeks to make clear that this decision is in no way
premised on a belief that the June 18, 2008 Memorandum Opinion and Order was wrongly
decided.” Id. So, to be safe, when serving a government agency, comply with Rules 3007 and
9014.
Part II: Plans and Disclosure Statement
Client Problem: Okay, so I should just service government agencies with a plan
and/or disclosure statement according to Rules 3007 and 9014 to be safe?
Conventional Wisdom: Sure. Rule 9014 looks like it is pretty broadly worded
and, based on the above analysis, that looks like the safe bet.
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Why Conventional Wisdom May Be Malpractice:
Given the Advisory
Committee Notes to Rule 9014 stating that it governs “actual disputes,” the filing of a plan and
disclosure statement may not rise to the level of a contested matter under the Rule. See Ochoa,
399 B.R. at 566 (noting that the Advisory Committee Notes to Rule 9014 make clear that the
filing of, inter alia, a plan or a disclosure statement do not inherently create “an actual dispute”).
In serving the IRS with notice of the filing of a proposed plan and disclosure
statement , Debtors should carefully review Rule 2002 and consult with the Clerk’s office.
“Rule 2002(j) governs notices where the United States is a creditor or party in interest and directs
to which governmental agencies notices must be mailed.” 9 Collier on Bankruptcy ¶ 2002.02[2]
(15th Ed. Rev. 2009). Rule 2002(j)(3) provides that in Chapter 11 cases, notice required to be
mailed to all creditors shall be mailed to the IRS “at its address set out in the register maintained
under Rule 5003(e) for the district in which the case is pending.” The debtor, therefore, can look
to the address the IRS has designated under Rule 5003(e) for service to determine where to serve
notice of its proposed plan and disclosure statement. Rule 5003(e), however, is a permissive rule
that does not mandate that the IRS designate an address for service. Under that rule the United
States may file a statement designating its mailing address. The address is to be identified in a
register kept by the clerk of the bankruptcy court, and such mailing address “is conclusively
presumed to be a proper address for the governmental unit, but the failure to use that mailing
address does not invalidate any notice that is otherwise effective under applicable law.”
Under Rule 2002(g)(2), “if a creditor . . . has not filed a request designating a
mailing address under Rule 2002(g)(1) or Rule 5003(e), the notices shall be mailed to the address
shown on the list of creditors or schedule of liabilities, whichever is filed later.” This Rule
seems to indicate that where the IRS has not designated an address for service under Rule
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5003(e), the first “fall back” address is the address designated under Rule 2002(g)(1), and only if
none has been designated under that Rule will the debtor’s schedule of creditors or liabilities be
used. Rule 2002(g)(1) provides that “[n]otices required to be mailed under Rule 2002 to a
creditor . . . shall be addressed as such entity or an authorized agent has directed in its last
request filed in the particular case. For purposes of this subdivision- (A) a proof of claim filed
by a creditor . . . that designates a mailing address constitutes a filed request to mail notices to
that address . . . .” Therefore, though the Rules governing service on the IRS are convoluted, it
can be concluded that a debtor should serve the IRS with its plan and disclosure statement at the
address the IRS has designated under Rule 5003(e), or if no such designation has been made, the
address the IRS has identified on its proof of claim.
In Delaware, the IRS has designated an address in Baltimore, Maryland under
Rule 5003(e) as its preferred address for service in Chapter 11 cases. District of Delaware Case
Management/Electronic Filing System (CM/ECF) Manual for Attorneys & Their Staff,
“Noticing of 341 Meeting in a Chapter 11 Case”; see also In re Magnatrax Corporation, 2003
WL 22807541 (Bankr. D. Del. Nov. 17, 2003) (within this lengthy confirmation order is a
finding that the service of the disclosure statement and plan on the District Director of the IRS
was adequate and sufficient where service, according to the Solicitation Certificate, was made on
the IRS at its Baltimore address). Debtors in Delaware, however, have been inconsistent in their
notice practice for plans and disclosure statements. See e.g., In re Landsource Communities
Development, LLC, et al., Case No. 08-11111 (KJC) (plan confirmed and notice ruled sufficient
where the disclosure statement was sent to the IRS at its Centralized Insolvency Operation in
Philadelphia as well as the U.S. Attorney General in Washington and the U.S. Attorney’s office
in Delaware, with additional notice of the confirmation hearing sent to the IRS offices in Van
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Nuys, California; Newark, Delaware; Philadelphia; and Fresno, California); In re Special
Devices Incorporated, Case No. 08-13312 (MFW) (finding notice sufficient and adequate where
plan and disclosure statement were sent to the IRS at its Insolvency Section in Baltimore and in
Philadelphia, and U.S. Attorney’s office was served as well). This inconsistency may indicate
that the best approach is to serve the IRS (1) under Rules 3007 and 7004, (2) at the address the
IRS has designated under Rule 5003(e) and (3) at the address designed by the IRS in its proof of
claim.
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THE PERISHABLE AGRICULTURAL
COMMODITIES ACT (“PACA”) [7 U.S.C. § 499e(c)] :
WHY PACA IS A DIRTY, ROTTEN, FOUR LETTER WORD
TO SOME DEBTORS AND SECURED LENDERS
I.
BACKGROUND:
In 1984, Congress saw fit to elevate produce creditors ahead of secured and unsecured
creditors, giving PACA creditors first rights to the assets of insolvent produce purchasers. As
indicated in the first paragraph of the statute itself, the PACA trust amendment was needed to
remedy the “burden on commerce” created by financing arrangements favorable to secured
lenders of produce purchasers.
To understand how one class of creditors obtained the super priority and unique
protection afforded by the trust provisions amended to the Perishable Agricultural Commodities
Act of 1930 (“PACA”), it is worth noting the historical catalyst for the enactment of the PACA
trust amendment. It had nothing to do with fruits and vegetables; it had to do with beef.
In 1976, Congress amended the Packers and Stockyards Act 7 U.S.C. §196, by creating a
statutory trust in favor of unpaid livestock producers. This was a response to the fallout from the
bankruptcy of a large meat packing company causing the financial ruin of numerous livestock
producers who were never paid for their fatted cattle just delivered to the meat packing company.
Meanwhile, the meat packing company’s secured lender made certain that its loan, as well as
penalties and interest, was fully repaid. These protections worked so well for the livestock
producers, that in 1984, Congress amended the Perishable Agricultural Commodities Act of 1930
to add trust rights for the protection of unpaid suppliers of perishable agricultural commodities, 7
U.S.C. §499e(c). Congress enacted similar statutory trust provisions for the protection of poultry
producers in 1987. 7 U.S.C. §197.
The PACA trust provisions added under §499e create, immediately upon delivery, a
nonsegregated “floating” trust in favor of unpaid sellers on the perishable commodities sold and
the products and proceeds derived from the commodities. If the seller is not paid promptly, the
trust assets must be preserved and the seller’s claims prime those of other secured and unsecured
creditors for the full amount of the claim until the seller has been paid.
II.
ELEMENTS OF A VALID PACA TRUST CLAIM
A.
The transaction must involve Perishable Agricultural Commodities.
Perishable agricultural commodities include "fresh fruits and vegetables
of every kind or character, whether or not frozen or packed in ice or cherries
in brine." 7 U.S.C. §499 a (b)(4).
1.
Fresh fruits and vegetables “…include all produce in fresh form
generally considered as perishable fruits and vegetables, whether or not packed in
1
ice or held in common or cold storage, but does not include those perishable fruits
and vegetables which have been manufactured into articles of food of a
different kind or character.
2.
How much manufacturing does it take to change fruits and
vegetables into to food of a different character which is not covered under PACA?
7 C.F.R. §46.2(u) states in relevant part:
“…The effects of the following operations shall not be
considered as changing a commodity into a food of a different kind or
character: Water, steam, or oil blanching, battering, coating,
chopping, color adding, curing, cutting, dicing, drying for the removal of
surface moisture; fumigating, gassing, heating for insect control, ripening
and coloring; removal of seed, pits, stems, calyx, husk, pods rind, skin,
peel, et cetera; polishing, precooling, refrigerating, shredding, slicing,
trimming, washing with or without chemicals; waxing, adding of sugar or
other sweetening agents; adding ascorbic acid or other agents to retard
oxidation; mixing of several kinds of sliced, chopped, or diced fruit or
vegetables for packaging in any type of containers; or comparable
methods of preparation.” (Emphasis added.)
3.
Incidental, Non-Produce Charges Reflected on Invoice Are
Included as Part of PACA Trust Claim.
Charges such as freight, storage, precooling, palletizing, stripping, airbags,
gassing, temperature recorders and even attorneys fees and late fee if buyer fails
to pay in accordance with terms. Middle Mountain Land and Produce, Inc. v.
Sound Commodities, Inc., 307 F.3d 1220 (9th Cir. 2002). The Ninth Circuit stated
that "Congress wrote the statute broadly to include not only the value of
commodities sold but also expenses in connection with the sale of perishable
agricultural commodities when it drafted the statute." Id., at pp 122-1224. The
Court further observed that: "[t]he plain meaning of the PACA statute's words 'in
connection with' encompasses not only the price of the perishable agricultural
commodities but also additional expenses, including contractual attorneys' fees
and interest, in a PACA claim[,]" and that "[i]t is unlikely that Congress, in
enacting a statute to provide better insolvency remedies to perishable agricultural
commodities sellers, wanted selectively to exclude legitimate portions of a
covered contract from the scope of a PACA claim." Also see, Country Best v.
Christopher Ranch, LLC, 361 F.3d 629 (11th Cir. 2004), in which the Court’s
reasoning for including non-produce charges as part of a PACA creditor’s trust
claim was as follows: "[h]ad Congress intended to limit PACA claims solely to
the price of commodities, it could have inserted language reflecting this limitation
in 7 U.S.C. § 499e(c)(2). Instead, it chose to allow 'full payment of the sums
owing in connection with [commodities] transactions.' This unambiguously
encompasses not only the price of commodities but also additional related
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expenses…”, Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701, 705-706 (2d
Cir. 2007)(Court held that because PACA trust creditors’ invoices provided for
attorneys’ fees, they may recover such fees under the UCC); Cavendish Farms v.
Fleming Companies, Inc., 316 B.R. 809, 816 (Bankr. D. Del. 2004)(Court found
that pursuant to U.C.C. § 2-207, attorneys fee language included in plaintiffs'
invoices give them the right to recover their fees as ‘sums owing in connection
with [the] transaction’ and that “[PACA] gives an unpaid supplier an interest that
is superior to all other creditors, which illustrates Congress's intent to provide
suppliers with the utmost protection with respect to money owed;” “[a]llowing a
buyer to make a late payment without paying the appropriate interest, and
accumulating the interest for itself, is antithetical to the purpose of PACA.”).
B.
The receiver of the produce must either be LICENSED or SUBJECT TO
LICENSE under the Act.
1.
Commission merchant, dealer or brokers are required to have
PACA licenses under the act, and only those commission merchants, dealers and
brokers licensed or operating subject to PACA in the marketing of perishable
agricultural commodities have PACA trust liability to unpaid produce suppliers.
(a)
The Act, 7 U.S.C. §499a(b)(6), defines “Dealer” as:
“…any person engaged in the business of buying or selling in
wholesale or jobbing quantities…any perishable agricultural
commodity in interstate or foreign commerce except that:
(b)
No producer shall be considered as a ‘dealer’ in respect to
sales of any such commodity of his own raising;
(c)
No person buying any such commodity solely for sale at
retail shall be considered as a ‘dealer’ until the invoice cost of his
purchases of perishable agricultural commodities in any calendar year
are in excess of $230,000; and
(d)
No person buying any commodity other than potatoes for
canning and/or processing within the state where grown shall be
considered a ‘dealer’ whether or not the canned or processed product is
to be shipped in interstate or foreign commerce, unless such product is
frozen or packed in ice or consists of cherries in brine, within the meaning
of paragraph (4) of this section.”
(e)
A produce firm entitled to operate without a license, but
which nevertheless procures one, is considered a “dealer” and is subject
to PACA. See also, 7 C.F.R. §46.2(m)(4)
2.
Wholesale or jobbing quantities – Are defined as “aggregate
quantities of all types of produce totaling one ton (2000 pounds) or more in
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weight in any day shipped, received, or contracted to be shipped or received.” 7
C.F.R. §46.2(x)
3.
Restaurants - Although the USDA does not license restaurants,
several circuit courts of appeal have found that restaurants purchasing requisite
quantities of produce are subject to PACA and have PACA trust liability for
produce purchasers. Royal Foods Co., Inc. v. RJR Holdings, Inc., 262 F.3d 1102
(9th Cir. 2001); Old Fashion Enterprises, Inc., 236 F.3d 422 (8th Cir. 2001); and In
re Magic Restaurants, Inc., 205 F.3d 106 (3rd Cir. 2000), cert. denied, 121 S.Ct.
56 (Oct. 2, 2002).
C.
Payment terms may not exceed permissible limits – 30 days.
1.
Maximum 30-day payment terms. Written payment terms cannot
exceed 30 days or the debt will be disqualified from priority protection under the
PACA Trust. 7 C.F.R. §46.46(e)(2). See, In re Altabon Foods, Inc., 998 F.2d
718, 720 (9th Cir. 1993); In re Davis Distributors, Inc., 861 F.2d 416 (4th Cir.
1988); Overton v. Heritage; 340 F.3d 361 (6th Cir. 2003), rehearing denied (Sept.
22, 2003).
2.
Divisible payment terms – partial PACA protection. If the
payment terms are divisible – i.e., call for payment of a portion of invoice amount
within 30 days, and the balance thereafter, one circuit court has held that the
portion payable within 30 days is subject to PACA trust. Hiller Cranberry
Products, Inc. v. Clermont, Inc., 165 F.3d 1 (1st Cir. 1999). (PACA protection
found for 75 percent of the purchase price due within 30 days reasoning that
“…construction of PACA in a strict and unbending fashion would erode the trust
protection PACA was meant to provide.”) (Id. at 7).
3.
Written payment terms count - not parties’ course of dealing. Fact
that debtor routinely paid produce vendor in more than 30 days will not negate
PACA trust applicability. In re Lombardo Fruit & Produce, 12 F.3d 806 (8th Cir.
1993); Mid-Valley Produce Corp. v. 4-XXX Produce Corp., 819 F.Supp. 209, 211
(E.D.N.Y. 1993).
4.
Long term payment plans, promissory notes, can vitiate PACA
trust protection. The Seventh Circuit has ruled that a PACA claimant who
entered into post-default, written long-term agreement for repayment of debt, had
waived his PACA trust rights. The court reasoned that the PACA creditor
assumed a position more akin to a long-term lender, rather than a cash or shortterm credit produce supplier which Congress sought to protect. Greg Orchards &
Produce, Inc. v. Roncone, 180 F.3d 888 (7th Cir. 1999); Patterson Frozen Foods,
Inc. v. Crown Produce Intern., Inc., 307 F.3d 666 (7th Cir. 2002); American
Banana Co., Inc., v. Republic National Bank of New York, N.A., 362 F.3d 33 (2d
Cir. 2004) (even oral agreements to extend payments terms can nullify trust
rights); but see, In re Cafeteria Operators, L.P., 299 B.R. 411 (Bankr. N.D. Tex.
2003) wherein Court found that a post default payment plan agreed to by the
4
parties did not void PACA rights, citing statutory language stating that PACA
claimants hold PACA rights “…until they are paid in full.”
D.
The PACA claimant must have properly preserved and perfected its trust
claim by sending a timely trust notice.
1.
Who gets notice?
Since 1995, only the debtor or defaulting
purchaser is required to receive the trust notice. PACA Trust creditors need no
longer provide trust notices to the USDA. Moreover, there is no filing
requirement, such as with UCC filings, nor are PACA claimants required to notify
their debtor’s secured lender of their PACA trust claims.
2.
Content of notice.
Notice must “set forth information in
sufficient detail to identify the transaction…” 7 U.S.C. §499e(6)(3), and must
state that it is a “notice of intent to preserve trust benefits” and must, for each
shipment, specify:
(a)
Name
beneficiary);
and
address
of
the
unpaid
supplier
(trust
(b)
Date of transaction, commodity price and payment terms;
(c)
Date of notice dishonored payment instrument; and
(d)
Amount past due and unpaid.
7 C.F.R. §46.46(f)(1)
3.
Time limit: 30 days from expiration of payment term. The seller
will forfeit PACA trust rights unless it gives the buyer or commission merchant
the required notice within 30 days of payment default. 7 U.S.C. §499e(c)(3); 7
C.F.R. §46.46(f)(2)
(a)
Alternate methods – for PACA licensees C.F.R. 46.46(f)(3)
Licensees may simply include prescribed statutory language on
their invoice – OR – file a separate trust notice with debtor.
Non-licensed produce suppliers, however, cannot rely upon the
invoice notification method, and must file a separate trust notice
with debtor.
G.
The written payment term letter cannot be inconsistent with payment
terms reflected upon invoices, accountings and related documents.
1.
Inconsistencies can be fatal. If the parties have entered into
written payment terms prior to shipment, a seller will lose trust standing if
invoices are silent as to terms, or if terms are inconsistent with term letter. In re
5
San Joaquin Food Service, 958 F.2d 938 (9th Cir. 1992) (where parties had term
letter of 21 days and invoices made no reference to terms, seller was found
ineligible for trust protection).
2.
Absence of payment term letter will not nullify claim. Where
invoices specify something other than prescribed prompt terms, (i.e., 21 days), but
there is no written payment term letter, terms are deemed to revert back to
implicit prompt payment terms, and PACA trust status remains intact. In re
Idahoan Fresh, 175 F.3d 197 (3rd Cir. 1998); Hull v. Hauser Foods, 924 F.2d 777
(8th Cir. 1991); In re Richmond Produce, 112 B.R. 364 (Bankr. N.D. 1990).
III.
WHAT ASSETS ARE SUBJECT TO THE REACH OF PACA TRUST
CREDITORS?
A.
Statute
1.
Perishable agricultural commodities.
2.
Food products derived therefrom.
3.
Accounts receivable.
4.
Cash proceeds from the sale of produce.
B.
No Tracing. Unlike some lien statutes, the PACA trust is characterized
as a non-segregated floating trust, and commingling of debtor’s assets is contemplated.
Thus, the PACA trust is applicable to all produce inventories, receivables or proceeds
therefrom, regardless of the source. No tracing is required. See, e.g. Sanzone-Palmisano
Co. v. M. Seaman Enterprises, Inc., 986 F.2d 1010 (6th Cir. 1993).
C.
Debtor’s Burden of Proof.
Courts have determined that all of the
debtor’s assets are presumed to have been purchased with proceeds from produce sales,
no matter when acquired, unless debtor proves that certain of its assets are exempt from
the PACA trust. In re Atlantic Tropical Mkt. Corp., 118 B.R. 139 (Bankr. S.D.Fla. 1990)
See also, Tom Lange Co., Inc. v. Kornblum & Co., Inc., 81 F.3d 280 (2d Cir. 1996). The
Second Circuit in Kornblum ruled that there were only three ways in which a debtor may
successfully meet its burden of proof in this regard:
1.
No PACA trust existed when property acquired;
2.
Even though a PACA trust existed at the time, the property was not
purchased with PACA trust assets; and
3.
Although PACA trust existed and PACA assets used to purchase
assets, debtor thereafter fully extinguished PACA trust by paying
in full all produce suppliers prior to the PACA claims in issue.
6
D.
Assets Acquired With Income Derived From Sale of Produce Can Also Be
Subject to the PACA Trust:
1.
Commingled bank accounts. When receipts from produce sales are
commingled in accounts with receipts from non-produce sales, the entire account
will be subject to PACA trust unless buyer can trace the funds to some other
source. Sanzone-Palmisano Co. v. M. Seaman Enters., Inc., 986 F.2d 1010 (6th
Cir. 1993). See, also In re Richmond Produce, Inc.; 112 B.R. 364 (Bankr. N.D.
Cal. 1990) (where court permitted debtor a small percentage deduction from
receipts for funds attributable to soda pop sales). But see, Six Ls v. West Des
Moines State Bank, 967 F.2d 256 (8th Cir. 1992) where court determined that nonPACA funds (insurance proceeds) “temporarily parked” in debtor’s general
account did not transform them into PACA assets subject to the reach of PACA
creditors.
2.
New businesses, or other non-produce related assets, which were
capitalized or purchased with PACA assets. See, Kornblum, supra.
3.
Real estate. Office equipment and machinery, real estate or
other assets purchased by a debtor using funds derived from produce sales. See
Tom Lange Co., Inc. v. Kornblum & Co., Inc., 81 F.3d 280 (2d Cir. 1996)
(produce bays); Tony Vitrano Co. v. National Produce Co., Inc., 815 F. Supp 23
(D. D.C. 1993); In re Al Nagelberg & Co., 84 B.R. 19 (Bkrcy. S.D.N.Y. 1988)
(grocery stores).
IV.
LIABILITY OF THIRD PARTY RECIPIENTS OF PACA TRUST ASSETS.
A.
If The Original Produce Buyer/PACA Trustee Has Insufficient Assets to
Pay PACA Creditors in Full, Certain Third Party Transferees of Trust
Assets May Be Liable For Trust Debt.
1.
Debtor’s shareholders, principals, and managers controlling the
day-to-day operation of the debtor. Sunkist Growers, Inc. v. Fisher, 104 F.3d 280
(9th Cir. 1997); Golman-Hayden Co. v. Fresh Source Produce, Inc., 217 F.3d
348, 351 (5th Cir. 2000); Coosemans Specialties, Inc. v. Gargiulo, 485 F.3d 701
(2d Cir. 2007); Hiller Cranberry Products, Inc. v. Koplovsky, 165 F.3d 1, 8-9 (1st
Cir. 1999); Shepard v. K.B. Fruit & Vegetable, Inc., 868 F. Supp. 703,706 (E.D.
Pa. 1994); Morris Okun, Inc. v. Harry Zimmerman, Inc. 814 F.Supp. 346
(S.D.N.Y. 1993); Bronia, Inc. v. Ho, 873 F.Supp. 854 (S.D.N.Y. 1995); In re
Fair, 134 Bankr. Rptr. 672 (M.D. Fla 1991).
2.
“Insiders” of corporate trustee who may have unjustly transferred
PACA trust funds to themselves.
7
3.
“Attorneys” and other fiduciaries, who receive funds with notice of
the unpaid trust claims. In re Matter of Harmon, 11 B.R. 162 (Bankr. N.D. Tex.
1980); In re Fair, 134 B.R. 672 (Bankr. M.D. Fla. 1991).
4.
Other Suspicious Transferees The debtor’s payment ledgers may
reveal for transfers to retirement accounts or “trusts” established for children or
dependents, corporations or other businesses owned or controlled by shareholders
of debtor, or persons or entities which are not innocent or bona fide purchasers for
value of trust assets. Follow the money!
5.
Secured Lenders
Lenders of funds to produce purchasers, particularly asset based
lenders, typically take a security interest in the borrower’s PACA assets (accounts
receivable, inventory, proceeds of sale, etc.). Thus, a lender may be required to
disgorge payments made with PACA funds toward preexisting loans unless the
lender received such funds in the ordinary course of business AND it was a bona
fide purchaser for value who had no reason to know that PACA trust debt also
was not being satisfied by its borrower. A secured lender’s exposure for PACA
trust also debt may directly correlate to the manner in which it acquires funds
from its borrower.
(a)
Forced transfer. If the lender declares a default and
forecloses on its lien in the accounts receivable or otherwise causes a
“forced transfer” of the inventory or receivables (e.g. establishes a lock
box for collection of accounts receivable, sells the inventory, etc.) it will
probably required to disgorge funds to unpaid PACA creditors it acquired
in this manner. C.H. Robinson Co. v. Trust Co. Bank, N.A., 952 F.2d 1311
(11th Cir. 1992); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67
F.3d 1063 (2nd Cir. 1995); Gargiulo v. G.M. Sales, Inc., 131 F.3d 995
(11th Cir. 1997).
(b)
Ordinary course payments. Secured Lenders receiving
payments from the borrower in the ordinary course of business, such as
receipt of regular interest or loan repayments, may not be subject to
disgorgement, provided that the lender can successfully argue that it was a
BONA FIDE PURCHASER FOR VALUE. Albee Tomato, Inc. v. A.B.
Shalom Produce Corp., 155 F.3d 612 (2d Cir. 1998). Specifically, the
lender must show:
(c)
It gave value for trust property; and
(i)
When it received such payments, it had no
actual or constructive notice that the borrower
was in breach of its PACA obligations
8
6.
BFP defense. Resolution of disputes between lenders of
a produce buyer and that buyers PACA creditors will often come down
to the merits of the lender’s bona fide purchaser for value defense. In
determining whether the lender was a BFP when receiving PACA trust
assets, the courts have focused on the following factors:
(a)
Transfer not for value. E. Armata v. Platinum
Funding Corp., 887 F.Supp. 590 (S.D.N.Y. 1995); (factoring
company purchasing accounts receivable for 60-65% of face
value held not to have been for “value” so the factor was not a
bfp). See also, Endico Potatoes, Inc. v. CIT Group/Factoring,
Inc., 67 F.3d 1063 (2d Cir. 1995) (court rejected CIT’s argument
that it paid value or “purchased” interest in borrower’s account
receivable, where borrower still remained primarily liable for
loan balance, after assigning its accounts receivable to the bank.
Thus, CIT’s interest in the receivables was still held subject to
PACA trust).
(b)
Ordinary course payments. Where bank contended
that its use of lock box procedure was its standard, routine
method of receiving repayments on a loan, and not a method of
enforcing its rights under its security agreement, Court found a
genuine issue of fact as to whether payments bank received were
in the “ordinary course.” Garguilo v. G.M. Sales, Inc., 131 F.3d
995 (11th Cir. 1997)
(c)
Notice of breach.
Secured Lenders are not
“guarantors” and are not strictly liable to PACA trust creditors
simply by virtue of their security interest in the account debtor’s
accounts receivable. Notice of the existence of the PACA
statutory trust alone is not sufficient, there must also be notice of
a breach of the PACA trust by the borrower. If lender was a
transferee for value without notice that the transferor was in
breach of the trust, it will not be required to disgorge payments
received from trust funds. C.H. Robinson Company v. Trust
Company Bank, 952 F.2d 1311 (11th Cir. 1992); Battle v. Fresh
Prep Distribution, Inc., 873 F.Supp.1062 (E.D. Mich. 1995);
Boulder Fruit Express - Heger Organic Farm Sales v.
Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001).
(d)
Inquiry notice. A secured creditor’s duty of
inquiry is triggered when 1) the account debtor is not paying
produce suppliers, or 2) debtor is in financial difficulty.
Consumers Produce Co. v. Volante Wholesale Produce, Inc., 16
F.3d 1374 (3d Cir. 1994); In re Richmond Produce Co., 112 B.R.
364 (Bankr. N.D. Cal. 1990). The key issue for the Second
Circuit was not whether or not the debtor will be likely to repay
9
its loan, but whether it is paying its produce suppliers. Albee
Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612
(1998). Several courts have had little trouble finding that secured
lenders should have known about their borrowers unpaid produce
suppliers, and thus, the lenders security interests were trumped by
the priority PACA trust claims. E. Armata, Inc. v. Platinum
Funding, supra; In re Richmond Produce Co., supra; Post &
Taback, Inc. v. Merrill Lynch Bus. Fin. Servs., Inc., 859 F.Supp
757 (S.D.N.Y. 1994); A & J Produce Corp. v. CIT Factoring,
Inc., 829 F.Supp. 651 (S.D.N.Y. 1993).
(e)
Reasonable inquiry. A duty to inquire is
triggered when transferee knows facts which would lead
reasonably intelligent and diligent persons to inquire whether
trustee is committing a breach and if such inquiry, when pursued
with reasonable intelligence and diligence would give transferee
reason to know that trustee is committing a breach. Albee
Tomato, Inc., supra; Consumer’s Produce Company, supra.
Applying this standard, some courts have imposed an extremely
exacting duty upon the lender - - including a demonstration that
the bank attempted to verify the accuracy of possibly fraudulent
data supplied by its borrower as to payment of produce debts.
Albee Tomato, supra. But compare, Consumer Produce, Inc.,
supra, where Third Circuit found that lender satisfactorily met its
obligations with respect to its inquiry notice.
(f)
Factoring companies which enhance the Trust are
not necessarily liable to unpaid PACA creditors. A PACA
trustee’s exchange of one form of PACA asset for another of
substantially equivalent value, is not, ipso facto, a breach of the
PACA trust requiring the factor to disgorge PACA assets.
Boulder Fruit Express-Heger Organic Farm Sales v.
Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001.)
See also, Shamrock Trading, LLC, U.S. Bankruptcy Court E.D.
Washington Case No. 00-06672-R4W, Adersary No. A00-0572R4W, Memorandum Opinion (Nov. 26, 2003) – Attachment A.
7.
Other PACA Trust Creditors
One federal district court held that a PACA trust claimant who
enforced its PACA trust rights against a customer it alleged was insolvent before
the customer ceased operations was required to disgorge collected amounts into a
pool for the benefit of all unpaid PACA trust creditors. Fresh Kist Produce v.
Choi Corp., Inc., 251 F.Supp.2d 138, 2002 WL 1803723 (D.D.C. July 31, 2002);
but see H.C. Schmieding Produce Co., Inc., et al. v. Alfa Quality Produce, Inc., et
al., 597 F. Supp. 2d 313 (E.D.N.Y. 2009) (Court expressly disagreed with Choi
decision stating PACA creditors are not trustees or corporate insiders and owe no
10
duty to one another and cannot be required to disgorge to other PACA creditors
payments received from insolvent customer).
8.
Ordinary Creditors are Generally Considered BFPs/and Not
Subject to PACA Trust
Ordinary creditors, secured and unsecured, such as utility companies,
telephone companies, employees receiving regular salaries, etc., who receive
PACA trust funds in good faith without knowledge of the existence of PACA
trust, are not required to disgorge trust funds received. In re Tanner, 77 B.R. 897
(Bankr. N.D. Ala. 1987).
V.
PACA PROVE-UP OR CLAIMS PROCEDURES USED IN
BANKRUPTCY CASES.
A.
PACA Trust Issues in Bankruptcy Setting
1.
Chapter 11 proceedings
In cases in which the Debtor-In(a)
Injunctive relief.
Possession is using PACA trust assets to meet ordinary operating
expenses, and the schedules or other evidence make it doubtful that
sufficient trust assets will be available to satisfy PACA trust obligations,
injunctive relief or a motion for relief from stay and immediate turnover of
assets not part of bankruptcy estate must be considered. The Bankruptcy
Court should not permit a debtor with no realistic chance of reorganization
to further deplete trust assets which are not estate property.
(b)
Adversary proceeding. An adversary complaint to enforce
PACA trust rights should, if necessary, be initiated to obtain payment after
proving eligibility under the PACA trust. Secured lenders or other
creditors who may be challenging a plaintiff’s PACA trust eligibility may
need to be included as defendants in the adversary action. The controlling
shareholder may also be named as a defendant in the adversary
proceeding, but jurisdiction over shareholder defendants who have not also
filed for bankruptcy protection sometimes becomes an issue.
(c)
PACA Claim Procedure Orders with PACA Claim Bar
Date. When debtor has significant PACA trust exposure to multiple
produce suppliers, it is often most expedient to enter into an agreed,
streamlined method for evaluating and paying valid PACA claims. This
generally entails the establishment of a PACA claim bar date, date for
objections to claims, date for replies thereto and date by which all PACA
trust claim amounts should be fixed and paid. Because PACA creditors
move to the head of the line and are entitled to payment from funds which
are not part of the debtor’s estate, they are entitled to receive payment
without delay, and prior to plan approval. In re Fresh Approach, Inc., 51
11
B.R. 412 (Bankr. N.D. Tex. 1985). See, In re Constellation Concepts,
U.S. Bankr. Ct Case No. 03-45363-EDJ11; PACA Claims Procedure
Order (Attachment B); In re Sun World International, Inc., U.S. Bankr. Ct
C.D. California Case No. RS-03-11370; PACA Claims Procedure Motion
and Order (Attachment C); and In re Basha’s, Inc., (Bankr. D.Ariz. 2009)
Case No. 2:09-bk-16050-JMM; PACA Claims Procedure Order
(Attachment D).
(d)
Objection to expenditures early in case. PACA creditors
may need to consider filing regular objections to debtors’ motions for
employment of professionals, use of cash collateral, or debtor’s proposed
other dispositions of assets. Whenever the suggested use of funds may
jeopardize debtor’s ability to promptly repay PACA trust obligations,
objections to such proposals are warranted. Sometimes, it is helpful for
PACA claimants to become such an annoyance that Debtor has to find a
way to get rid of them.
(e)
Potential recourse against transferees of PACA assets in a
Chapter 11 case. Because the PACA trust is a non-segregated, floating
trust, it continues until the end of the world, or the payment of PACA debt,
whichever comes first. Consequently, those receiving PACA trust funds
with knowledge of unpaid PACA trust debt risk being required to disgorge
such funds to trust beneficiaries. Those at risk include:
(i)
Attorney(s) and professionals hired by debtor to
perform service in the case, In re Matter of Harmon, 11 B.R.
(Bankr. N.D. Tex 1980); In re Fair, 134 B.R. 672 (Bankr. M.D.
Fla. 1991);
(ii)
Trustees, receivers, or appointed professionals
incurring administrative fees in the case, In re Super Spud, 77 B.R.
930 (Bk. M.D. Fla. 1987); C.H. Robinson Company v. Alanco
Corp., 239 F.3d 483 (2nd Cir. 2001); Six L’s Packing Co., Inc. v.
Post & Taback, Inc., 132 F. Supp.2d 306 (S.D.N.Y. 2001); and
(iii)
Corporate
officers
or
directors
receiving
compensation with PACA trust funds, Bronia, Inc. v. Ho., 873
F.Supp. 854 (S.D.N.Y. 1995).
VI.
TWO HYPETHETICAL CLIENT SCENARIOS INVOLVING PACA
ISSUES.
A.
Client Problem #1: Client, a factoring company, is concerned
about potential PACA trust liability after one of its customers, a produce
wholesale company, files a petition in bankruptcy. The client claims that prior to
the bankruptcy filing it had been “purchasing” the wholesaler’s receivables for
12
80% of their face value, and that its brilliant attorney, Robert Zadex1, had drafted
an iron-clad purchase agreement which the wholesaler had signed. The client
further expressed a desire to enforce its personal guarantee and perfected security
interest with respect to the assets of the wholesaler because many of the
receivables were over 90 days old and would never be collected.
B.
Unduly Smug Response to Client Based on Ninth Circuit
Authority: Not a problem. The Appellate court in our own circuit has ruled that
factoring arrangements under which a PACA trustee converts one form of PACA
asset (receivables) into another form of PACA asset (cash) do not, per se, violate
PACA. Boulder Fruit Express & Heger Organic Farm Sales, et al. v.
Transportation Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001). Moreover, in
Boulder Fruit, the court specifically found that a factoring discount of 20% of the
face value of the invoices was for value, and was not commercially unreasonable.
Thus, the Court found that the corporate PACA trustee’s factoring of its
receivables did not constitute a breach of the PACA trust. If that were not enough,
everyone knows that Bob Zadex is the foremost authority on factoring
arrangements, and if he had anything to do with drafting the factoring agreement,
it HAD to be commercially reasonable.
With respect to the client’s wish to enforce its security agreement against
the debtor’s assets, this will be possible only if there are no unpaid PACA trust
creditors of the debtor. Everyone knows that the PACA trust claims against the
debtor’s produce inventory, receivables and cash from the sale of debtor’s produce
will trump the factoring company’s security interest in such assets held by the
debtor. The factoring company’s security interest should be enforceable against
any of the debtor’s non-PACA assets, however, and the factoring company may
still pursue collection from the debtor’s CEO and majority shareholder (who did
not file a petition in bankruptcy), based upon his personal guarantee.
C.
Why the Above-Described Advice May Be Dead Wrong. In the
first place, the court, in Boulder Fruit, never addressed or analyzed the factoring
agreement between Transfac, the factoring company, and Certified Organics, the
produce buyer which failed to pay its produce vendors. Had it done so, it may
well have decided that, in view of Transfac’s contractual right to charge back any
uncollectable receivables against Certified’s account, the relationship between
Transfac and Certified was, in essence, one of lender/borrower rather than
buyer/seller. Instead, the Ninth Circuit in Boulder Fruit, citing Black’s Law
Dictionary, merely characterized “factoring” as “…the commercial practice of
converting receivables into cash by selling them at a discount.” (Id., at p. 1271).
The court seemed to simply accept the terminology and labels used by the parties,
declining to look beneath the surface of agreement to determine the true nature of
the relationship between the parties.
1
The name has been changed to protect the innocent.
13
It is also noteworthy that the Boulder court characterized Transfac’s
payment of $3,297,244 for receivables with a face value of $4,763,213 as a 20%
discount. It was actually a 30% discount.
In any event, both the Second Circuit and the Fifth Circuit have also had
occasion to review factoring agreements in determining whether PACA trust
creditors were legally entitled to recover collected produce receivables from
factoring companies while the debtor’s produce vendors remained unpaid. Endico
Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063 (2d Cir. 1995); Reaves
Brokerage Company, Inc. v. Sunbelt Fruit & Vegetable Company, Inc., 336 F. 3d
410 (5th Cir. 2003). In both of these cases, the courts applied a “risk transfer
analysis” standard to determine the true relationship of the parties. Under this
test, if the putative “buyer” of the accounts receivable retained the risk of nonpayment of the accounts receivable, a genuine sale of those receivables would be
deemed to have occurred. On the other hand, if the factor had reserved a right of
recourse against the “seller” if the receivables were uncollectable, the risk of nonpayment would have remained with the putative seller, not the factoring company.
Where the seller of accounts receivable is required to assume virtually all of the
financial risk if the receivables ultimately are uncollectible, the factoring
company will be viewed not as a purchaser for value, but as a secured lender.
Endico Potatoes, supra; Reaves Brokerage, supra.
The Reaves Brokerage case discussed both the Boulder Fruit and the
Endico Potatoes decisions and followed the Second Circuit’s Endico Potatoes
risk transfer analysis in determining that the “so-called” factoring agreement was
the “functional equivalent of a secured lender agreement.” Reaves, at 417. The
court cited language in the agreement making it clear that the risk of non-payment
or underpayment would be borne exclusively by Sunbelt and never shifted to
Fidelity. Moreover, in Reaves, as in our scenario raised above, the agreement
required Sunbelt to convey a security interest to Fidelity, which Fidelity perfected
by filing its financing statement in accordance with the Uniform Commercial
Code, in all of Sunbelt’s “‘accounts, contract rights, instruments, documents,
chattel paper’ and ‘general intangibles’--- not just the receivables purportedly
sold.” Id., at 416. In addition, Sunbelt’s president was required to execute a
personal continuing guaranty by which he guaranteed full payment by Sunbelt.
Based on all of the foregoing, the Court concluded that Fidelity was liable to
disgorge the trust assets it received to the plaintiff PACA trust creditors.
See also, In re Shamrock Trading, LLC; U.S. Bankruptcy Court E.D.
Washington Case No. 00-06672-R4W, Adversary No. A00-0572-R4W,
Memorandum Opinion (Nov. 26, 2003) See Attachment A, for an excellent postBoulder Fruit analysis of a factoring company’s potential liability to unpaid
PACA creditors. Applying the Endico Potatoes risk transfer analysis, Judge
Rossmeissl concluded that Capco’s (the factoring company’s) relationship with
Shamrock Trading, LLC, the debtor, did not involve factoring; it was a loan. The
Judge concluded that the entire amounts transferred to the factoring company,
14
($998,169.09), which were received by Capco in knowing breach of the PACA
trust must be disgorged.
D.
Client Problem #2: A food distribution company (“FDC”) has
retained your firm to represent it in its reorganization under Chapter 11. FDC’s creditors
include unpaid suppliers of fruits and vegetables, and it holds a PACA license.
Fortunately, you have had other PACA trust cases and you well know that PACA claims
are superior to all other creditor claims, even those of FDC’s secured lender. The client
advises you that FDC has only four produce suppliers, owed a total of $1.6M. FDC has
been doing business with all four for many years. FDC indicates that it would like to
compromise its claims with the PACA creditors, and it believes that due to the strong
relationship between FDC and these vendors, they will agree to take somewhere around
$.80 on the dollar in full satisfaction of their claims.. The client wants to know if you see
any problem with this plan, and whether it will have any negative impact on FDC’s
ability to successfully reorganize and get its plan approved.
E.
The Hasty Response: As long as the PACA creditors are willing
to compromise their claims and sign full releases, you don’t see any problem with
FDC’s proposal, and you tell your client so.
F.
Why Your Client Should Have Retained Another Attorney:
Wholly apart from PACA trust issues, 7 U.S.C. §499(b)(4) makes it a violation to,
among other things, fail to “…make full payment promptly…” with respect to any
transaction involving perishable agricultural commodities.
The Secretary of Agriculture is charged with enforcement of this
provision, and will, in appropriate cases, take steps to revoke a buyer’s license
issued under PACA for “no pay” violations. Wayne Cusimano, Inc. v. Block, 692
F. 2d 1025 (5th Cir. 1982) (nonpayment of amounts due to produce creditors was
“willful” and “flagrant so as to justify license revocation); Farley and Calfee, Inc.
v. U.S. Department of Agriculture, 941 F.2d 964 (9th Cir. 1991) (licensee’s failure
to pay for 51 lots of produce was considered “repeated” within the meaning of the
Act and warranted license revocation); Bilardi Food Chain v. United States, 2007
WL 624337 (3rd Cir. 2007) (post default payment work out agreement calling for
partial payment to be made to unpaid produce suppliers of a PACA licensee, did
not preclude Secretary of Agriculture from initiating disciplinary proceeding to
revoke PACA license for violation of full and prompt pay provisions of Act).
What’s worse, the saving stay protections from governmental license
revocations or employment sanctions pending reorganization afforded debtors
under 11 U.S.C. §525 DO NOT APPLY in two types of cases: disciplinary license
proceedings under PACA and under the Packers & Stockyards Act (“PSA”).
Therefore, the USDA is permitted, and often does, institute an administrative
action seeking to revoke the PACA license of an operating debtor in possession
for section 2 “no pay” violations. See, Melvin Beene Produce Co. v. Agricultural
Service, 728 F.2d 347, 351 (6th Cir. 1984); Quinn v. Butz, 510 F.2d 743 (D.C. Cir.
1975).
15
Accordingly, counsel for debtors who operate within the produce industry
should be mindful of the following:
(i)
Schedules – In a licensing revocation proceeding,
the USDA often relies upon the debtor’s schedules filed under
penalty of perjury, as prima facie evidence that the licensee/debtor
has failed to pay it produce debts promptly.
(ii)
Produce debt v. PACA debt – For purposes of the
disciplinary action, all debt to produce suppliers, not just PACA
trust debt, will be included in a Complaint brought by the Secretary
to revoke the PACA license of a Debtor in Possession. Thus, it is
no defense for debtor to claim that all PACA trust debt has been
satisfied. USDA will often wait until debtor makes payment to
PACA trust creditors before instituting its license revocation action
against debtor.
(iii)
Compromise and release of produce debt does not
satisfy USDA – Even where produce creditors have agreed to settle
claims and release debtor for less than a 100% payout, the unpaid
balance is viewed by the USDA as the new “no pay” amount. As
long as that amount in more than a de minimus amount (more than
$5,000.00) it will be enough to warrant license revocation.
(iv)
Discharge automatically terminates PACA license.
A discharge of the Debtor, or of any partner if the Debtor is a
partnership, generally results in the immediate and automatic
termination of the PACA license. 7 U.S.C. §499d(a).
(v)
In Chapter 11 cases, approval of a plan is deemed
tantamount to discharge – and triggers immediate license
termination. Debtor can be completely taken off guard by the
immediate loss of its PACA license, which coincides with an
otherwise successful reorganization. To counteract this potential
result, a Debtor should consider the following options if the PACA
license is essential to its business:
-
Waiver or deferral of produce debt. Waiving,
deferring or excepting pre-petition produce debt
from discharge under the plan, (under 11 U.S.C.
§1141) and requesting Secretary to permit PACA
license to continue based upon a special
circumstances examination, under 7 U.S.C.
§499(d)(a).
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-
Pre-plan notice to Secretary and posting of
acceptable surety bond upon plan confirmation. A
new PACA license may be issued immediately upon
approval of a Plan of Reorganization, provided that
a bond in an amount satisfactory to the Secretary has
been posted and all other conditions imposed by the
Secretary have been met. 7 U.S.C. §499d(e).
-
Dismissal of bankruptcy proceedings under 11
U.S.C. §349. A
dismissal
of
bankruptcy
proceedings prior to discharge allows Debtor to
continue operating as a produce dealer with no
adverse impact upon its PACA license, as long as
unpaid produce debt does not remain unpaid.
(vi)
License and Employment restrictions. The Secretary will
refuse to grant a new PACA license to an entity or partner adjudicated or
discharged as bankrupt within the preceding three years, or to any person
“responsibly connected” with bankrupt entity. A bond will generally be
required if Secretary thereafter deems applicant fit for a PACA license. 7
U.S.C. §499(d). In addition, Responsibly connected individuals (officers,
directors and shareholders who hold more than 10% equity) of a firm
whose PACA license has been revoked, may not be employed, in any
capacity, directly or indirectly, by another PACA licensed firm for a period
of two years, except with approval of the Secretary. 7 U.S.C. §499(h)(b).
In conclusion, Debtor’s counsel in the above-described scenario was completely clueless
about the fact that the debtor might be ambushed at any moment by the disciplinary might of the
Secretary of Agriculture. Plainly, PACA license revocation for a produce business would be
tantamount to its death sentence. A consensual settlement of the debt to PACA creditors for 80%
of the amount due and owing would not deter the Secretary from pursuing license revocation
against the debtor because the debtor failed for failing to pay the remaining 20% owed,
according to the debtor’s own schedules. The Secretary’s imposition of a hefty surety bond
required to retain a debtor’s license after plan approval could also conceivably become an
insurmountable financial hurdle for the debtor – economic capital punishment.
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