The Soldiers and Sailors Relief Act Are You Stayed from Obtaining Relief from the Automatic Stay

The Soldiers and Sailors Relief Act Are You Stayed from Obtaining Relief from the Automatic Stay

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The effect of the automatic stay is common sense for bankruptcy practitioners. However, this article is not a discussion of how to obtain relief from the automatic stay. Instead, this article concerns another stay, imposed by the U.S. Code, when an individual is on active duty in the armed services.

The Soldiers' and Sailors' Civil Relief Act of 1940 (the "Act"), found at 50 U.S.C. App. §501-591, not only suspends various civil liabilities, but may also stay an otherwise appropriate motion for relief from stay and/or other bankruptcy proceeding. More importantly, violating certain provisions of the Act can lead to harsh penalties, including fines and imprisonment. 50 U.S.C. App. §§520, 530-535 (West 1998). Therefore, the smart practitioner will examine the Act, and the exceptions thereto, when dealing with an individual who is on active duty in the armed services.

The Soldiers' and Sailors' Civil Relief Act of 1940

In 1940, Congress passed the Soldiers' and Sailors' Civil Relief Act of 1940 to "provide for, strengthen and expedite the national defense" by "suspending enforcement of civil liabilities, in certain cases, of persons in military service of the United States." 50 U.S.C. App. §510 (West 1998). In furtherance of this goal, the Act applies to all persons on active duty in the armed services, beginning upon induction and ending upon death or discharge. 50 U.S.C. App. §511 (West 1998). The Act's language is broad and slightly vague. Unfortunately, as broad and vague as §510 is, it is the Act's main section, thus affecting all aspects of a creditor's rights upon default, including the interest rate a creditor may charge. 50 U.S.C. App. §526 (West 1998) (currently the Act provides for a maximum of six percent).

Although §510 suspends legal proceedings, §521 limits the suspension of legal proceedings to situations where the serviceman's ability to prosecute or defend is not materially affected by reason of military service. 50 U.S.C. App. §521 (West 1998). However, §521 applies only to legal proceedings and does not mention non-judicial foreclosure. Thus, while the Act requires active military service, which materially affects the serviceman's ability to prosecute and/or defend legal proceedings to stay legal proceedings, mere active duty stays foreclosure.

While staying foreclosure is automatic, the stay of legal proceedings arises in one of two ways. First is §521's mandatory prong, whereby the serviceman applies to the court for imposition of the stay. 50 U.S.C. App. §521 (West 1998); Hackman v. Postel, 675 F.Supp. 1132, 1133-34 (N.D. Ill. 1988) (where the court required the serviceman/defendant to affirmatively show that his military service actually and adversely affected his ability to appear, and that his absence negatively affected his rights).

Second is a discretionary prong, imposed by the court. 50 U.S.C. App. §521 (West 1998). Further, in an attempt to allow a reclamation period, the Act provides for a discretionary extension of the stay for up to six months after discharge. 50 U.S.C. App. §590 (West 1998).

This extension is not the same as the Act's statute of limitations tolling provisions. 50 U.S.C. App. §525 (West 1998). Pursuant to §525, not only may the serviceman avoid a lawsuit, he may delay his initiation of a lawsuit to an indefinite future date. Id; In re A.H. Robbins, 996 F.2d 716, 719 (4th Cir. 1992) (where the court held that a creditor's military service tolled any and all periods limited by law, thereby excusing her late-filed claim based upon alleged personal injuries).

Additionally, the court may, in its discretion, stay legal proceedings against persons secondarily liable for debts owed by the serviceman (i.e., guarantors and sureties). 50 U.S.C. App. §513 (West 1998). Consequently, upon application of the stay to co-debtors/co-defendants, a creditor's remedies are completely, although temporarily, suspended. Therefore, the Act applies to all aspects of the debtor/creditor relationship in order to protect the serviceman, regardless of the creditor's prejudiced rights.

Resolving the Act's Inconsistencies and Inequities

At first glance, §§510 and 521 appear unfair. After all, an individual need only join the military to avoid creditors permanently. Congress apparently foresaw such inequity and included the materially affected by reason of military service clause. Thus, §521's protection does not extend to military personnel whose service does not affect their ability to participate in otherwise protected proceedings. 50 U.S.C. App. §521 (West 1998). Accordingly, when a lawsuit is brought in San Antonio against a serviceman stationed in San Antonio, the serviceman had better hire a lawyer. Conversely, if the same suit is brought in San Antonio, and the president sends the serviceman to a war zone, the court will probably stay the lawsuit.

To further prevent inequitable results under the Act, Congress included an exception to the stay in §517. Section 517 states that "nothing contained in this Act [§§501-591] shall prevent repossession, retention, foreclosure, sale, forfeiture or taking possession of property that is security for any obligation or that has been purchased or received under contract, lease or bailment, pursuant to a written agreement of the parties thereto, executed during or after the period of military service of the person concerned. 50 U.S.C. App. §517 (West 1998) (emphasis added). Therefore, §517 provides an exception for when the serviceman entered into the contract during or after military service. Consequently, §510 applies only to contracts entered into prior to military service. 50 U.S.C. App. §517 (West 1998); see, also, Engstrom v. First National Bank of Eagle Lake, 47 F.3d 1459, 1463 (5th Cir. 1995).

However, §517 does not expressly apply to legal proceedings, even though it specifically excepts foreclosures. This lack of inclusion could create problems in jurisdictions that require judicial foreclosure. More specifically, in the bankruptcy context, where a creditor otherwise has legal rights to foreclose pursuant to contractual terms, that exclusion could hinder the ability to obtain relief from the automatic stay.
Such a result is highly inequitable because it allows servicemen to use the bankruptcy court as a sword and shield. Further, since §517 does not affect contracts entered into after induction into military service, it is only logical to apply §517 to legal proceedings related to foreclosure. See, e.g., Pritchard v. Dixie Greyhound Lines, 192 S.W.2d 845 (Tenn. 1946). Consequently, Congress should amend §517 to specifically exclude legal proceedings necessary to foreclosure for contracts and obligations entered into after induction. After all, the bankruptcy court is a court of law and equity. Yet, how equitable is a bankruptcy proceeding in which the debtor may affect the rights of creditors by lien quashing, five-year pay-outs and discharging deficiencies, when those same creditors are stayed from seeking relief from the automatic stay, prosecuting an adversary proceeding, or otherwise meaningfully participating in the bankruptcy process? In such cases, the debtor is truly using the Act, as well as the Bankruptcy Code, as both a sword and shield.


...Congress should amend §517 to specifically exclude legal proceedings necessary to foreclosure for contracts and obligations entered into after induction.

The suggested legal proceeding exclusion already arguably exists in §517, which expressly applies to the entire Act and "all of its sections." However, it is easy to see the potential for confusion. To help ease this confusion, include the argument that the specific legal proceeding is necessary to enforce rights under a contract when drafting a motion for relief from stay, or when responding to an application to stay proceedings under the Act. Alternatively, one should also plead that the debtor's/defendant's military service does not materially affect his or her ability to defend, such as in jurisdictions where preliminary relief from stay hearings are by affidavit only.

Additionally, when entering into a contract with a serviceman, one may obtain a waiver from the serviceman's guarantor or surety. 50 U.S.C. App. §513 (West 1998). A waiver obtained pursuant to §513 is valid only if entered into at the time of the contract's formation and, although no case law exists, normal contractual defenses should apply to such waivers. However, the waiver does not apply to the servicemen themselves, whose protection Congress so thoroughly provided for.

Conclusion

The Act is a potential hurdle for creditors when an individual is a member of the armed services. Beware of its existence, as ignoring it may result in overturned judgments, not to mention imprisonment and fines. Further, the Act's existence may affect more than lawsuits against servicemen. Co-debtors and co-defendants may also receive the Act's protection. However, keep in mind that a waiver from the co-debtor/co-defendant may save future delays, even though the serviceman remains protected.

In protecting the serviceman, the Act has teeth, but creditors can avoid its bite. Avoiding the Act's stay depends upon the timing of legal obligations, as well as a bit of advocacy. Such avoidance, however, is on a case-by-case basis, because not all applications have exceptions.

Journal Date: 
Monday, March 1, 1999