Creditor Liability Under
Soldiers’ and Sailors’
Civil Relief Act |
|
As a result of
the recent increased military deployments, reservist activations
and recruitment activity we have experienced, it is important
that creditors be especially sensitive to the provisions of the
Soldiers' and Sailors' Civil Relief Act (“SSCRA”). North
Carolina hosts some of the largest military bases in the nation,
including Fort Bragg, Camp Lejeune, Pope Air Force Base and
Seymour Johnson Air Force Base. It is especially important that
any creditor seeking to enforce payment agreements or to recover
collateral in North Carolina understand the implications of the
SSCRA.
Title 50, Section
501-591 of the United States Code is commonly referred to as the
“Soldiers’ and Sailors’ Civil Relief Act of 1940.” The
law was enacted in the midst of World War II and when
overwhelming national support of our war effort inspired
Congress to provide some protections for our military. The act
protects those in the active service of the Army, Navy,
Air Force, Marines and Coast Guard. National Guardsmen and
reservists called to full-time active duty or during
their annual training are also protected by the act. Many
creditors are surprised to learn that the act also protects
dependant co-debtors on the obligation, even if they are not
also active duty personnel.
One of the
purposes of the act is to remove any financial deterrent from
those contemplating enlistment and to lessen the economic burden
to those drafted into the military and away from higher paying
jobs in the private sector. A customer who obtains credit and
subsequently enters the military or who was a reservist and is
later called to full-time service is entitled to the greatest
protection under the act. If requested by the debtor, the SSCRA
may require a creditor to lower its interest rate to six percent
on credit obligations incurred prior to active service. The act
may also extend a soldier’s time to redeem property after
default. If it appears a debtor, now in active duty, was a
civilian or a reservist at the time of the application, the act
requires court approval prior to judicial proceedings, self-help
repossession, foreclosure, eviction, or rescission of contracts
or leases.
Congress
recognized the potential for abuse of the act by members of the
armed services. If unlimited, the act could have allowed members
of the armed services to incur great debt with little fear of
consequence. Fortunately for creditors, a member of the armed
services who incurs a debt while on active duty is given less
protection under the SSCRA. Presumably, this is because
individuals incurring debt during a time of active duty are
aware of their limited salary potential and should know to not
overextend themselves.
However, even
those familiar with the act often overlook the protections
provided to all active service personnel, regardless of whether
the debt was incurred prior to active duty. While a service
member’s duty “materially affects” his ability to meet
legal deadlines or to respond to litigation he may be entitled
to protection under the act. Depending on the situation, the act
may toll the statute of limitations on civil actions during the
period of active service and may prohibit eviction without court
approval. In any event, a default judgment may not be entered
against any active member of the armed services unless the
creditor complies with additional procedural requirements.
The act creates
strict liability for creditors who violate its provisions.
Violations of the act can result in the creditor being fined
and/or imprisoned. Ignorance the debtor’s active duty status
is not a defense. Whether the soldier is deployed or whether the
country is at war is irrelevant to whether a member of the armed
services is considered “active.” Even during peacetime,
stateside active members of the armed services receive most of
the same protections as their overseas counterparts.
Admittedly, it is
difficult for a creditor to know when a customer who originally
applied for credit as a civilian has since enlisted or been
called to active duty. Often the creditor only becomes aware of
this status after default and during collection efforts.
Unfortunately for the creditor, this is also the set of
circumstances under which the act provides the most protection.
A creditor must
be especially careful whenever the debtor's information contains
a military rank, (PFC John Doe) or when his or her current
address is apparently of a military nature (Camp Lejeune, Fort
Bragg, APO, etc.) This is a clear signal that further
investigation is required before taking action. A creditor must
not proceed in the normal course of business against a debtor
who is believed to be in service, has a military address or has
a military title before investigating the situation further. It
is imperative that a creditor correctly identify its available
remedies before pursuing collection of the debt.
Under any
circumstances, please seek legal advice before utilizing “self
help” in foreclosing, repossessing or selling any collateral
held by a debtor that might be in the military. We encourage you
to contact our office about the claim so that we may assist you
in determining whether the debtor is protected by the act and
advise you of any available remedies. There is currently a bill
pending before the United States Congress, which would serve to
amend certain provisions of the SSCRA. We will keep you informed
of any substantial amendments to the act in the event they are
enacted.
The author of
this article is Mr. Aaron N. Bailey. Mr. Bailey is an associate
at Smith Debnam and practices in its Creditors’ Rights
section. He may be reached at (919)250-2134 or by email at abailey@smithdebnamlaw.com.
Back
to Index
Coping
with Bankruptcy
Like it or not, bankruptcy
affects all of us. In the current economic and political climate,
businesses and individuals are feeling the pinch and filing
bankruptcy petitions at a record pace. Many of us in North
Carolina have been affected by the bankruptcies of Midway
Airlines, Kmart, and WorldCom, whether it be by the loss of a
customer, employment, or an otherwise valuable investment. Others
have been written off open credit accounts or faced the added
difficulty of enforcing orders for alimony, child support, or
property distribution when a personal bankruptcy case has been
filed. Understanding some of the basics of bankruptcy can help
people identify when to take action.
Bankruptcy is
authorized by federal law and is administered by federal
bankruptcy courts. In North Carolina, the three bankruptcy court
districts are: the Eastern District (e.g., Wilson, Raleigh,
Wilmington), the Middle District (e.g., Winston-Salem,
Greensboro, Durham), and the Western District (e.g.,
Charlotte, Statesville, Asheville). The general policy behind
bankruptcy relief is to provide a fresh start in financial matters
by a reduced payment plan and modified payment terms or through a
total liquidation of all assets. Individual persons that
successfully complete a bankruptcy proceeding receive a “discharge,”
which relieves them of the legal responsibility to pay certain
debts. Businesses seek bankruptcy protection as a means of
reorganization to continue operations or to orderly liquidate
assets.
The person or
business seeking bankruptcy relief is generally referred to as the
“debtor” or “debtor-in-possession.” In individual cases, a
trustee is appointed by the bankruptcy court to administer the
case, collect assets, pay creditors, and bring suits on behalf of
the bankruptcy estate. A trustee may also be appointed in a
business reorganization case under specific circumstances.
However, in many business cases the debtor-in-possession serves
this function. A bankruptcy case is initiated by the filing of a
petition in bankruptcy, which is usually voluntarily filed by the
debtor. The debtor files several “schedules” with the
bankruptcy court showing assets, debts, income, expenses, and
other financial information. In a personal or business
reorganization case, the debtor also proposes a plan of repayment.
The Bankruptcy Code
is divided into several chapters containing provisions for the
administration of the case. A Chapter 7 bankruptcy is commonly
known as a liquidating bankruptcy or “straight” bankruptcy and
is typically chosen by persons and businesses having little to no
assets, high debt that is not secured by collateral (e.g.,
credit cards, medical or doctor bills), and income that barely
meets expenses. In a Chapter 7, the trustee investigates the
debtor’s property and possible claims and rights that make up
the “bankruptcy estate” to determine if anything may be sold
in order to pay creditors. Creditors receive payment in a Chapter
7 case only if the trustee recovers assets. Individuals are
entitled to keep a certain amount of their property free from
distribution to creditors by claiming “exemptions” of property
necessary for the basic living needs of themselves and their
families.
Chapters 11, 12,
and 13 are generally cases in which a reorganization of financial
affairs is sought by the debtor. In cases under these chapters,
creditors are paid through a plan “confirmed” or approved by
the bankruptcy court. Repayment under such plans generally occurs
over several years. Chapter 11 is typically known as a business
reorganization, usually employed by corporations. However, persons
owing large debts may qualify for relief under Chapter 11. The
Chapter 11 case can also be used to sell property and wind down
operations, and such a case is commonly referred to as a “liquidating
11.” Chapter 12 provides for bankruptcy relief to the family
farmer. A Chapter 13 case is the means for individuals to effect a
personal reorganization, i.e., reducing or changing payment
terms and keeping property free from liquidation. Commonly known
as the “wage-earner plan,” a Chapter 13 bankruptcy requires
the debtor to have sufficient income to pay a specific amount to
be distributed to creditors. Chapter 13 cases are usually filed by
debtors that are delinquent in payments to creditors having
security in collateral, such as in a house or car. The Chapter 13
trustee acts on behalf of creditors to collect the payments of the
debtor and disburse them to the creditors in the case under the
terms of the confirmed bankruptcy plan.
When a bankruptcy
notice arrives, the worst thing that a creditor can do is ignore
it. Upon the filing of the bankruptcy petition the debtor is under
the protection of the bankruptcy court. An “automatic stay”
occurs immediately with the filing of the case, preventing
creditors from taking any collection action. Telephone calls,
letters, repossession, seizure, lawsuits, and obtaining liens or
judgments are all prohibited actions. A creditor that ignores the
automatic stay or takes action against the debtor can be subject
to sanctions by the bankruptcy court, which can include an order
to pay damages and attorney’s fees to the debtor or worse yet an
order for arrest for contempt of court. The bankruptcy notice will
give key information as to the type of case filed and important
deadlines, such as when the creditors’ meeting will be held, the
time to file proofs of claim, and the deadline for objecting to
discharge or the dischargeability of debts. Generally, the
bankruptcy case will move along quickly and a missed deadline can
be fatal to the creditor. In addition to notices received in the
case, creditors may obtain information directly from the
bankruptcy courts by accessing their web sites. Access is through
the following sites for North Carolina: Eastern District -
www.nceb.uscourts.gov, Middle District - www.ncmb.uscourts.gov,
Western District - www.ncwb.uscourts.gov
<http://www.ncwb.uscourts.gov>.
Before taking any
course of action in a bankruptcy case, creditors should consider
the amount of the claim, the costs of action, and the perceived
benefit or increased recovery. In addition to properly and timely
filing a proof of claim, which is a statement of the amount owed
made on an official court form, creditors should keep some primary
strategies in mind: (1) seek information; (2) seek payment from
alternative sources; and (3) seek better treatment. Valuable
information about the debtor’s case can be learned at the
creditors’ meeting, and the creditor should consider attending.
The creditors’ meeting or “Section 341 Meeting” is conducted
at the beginning of the case, and the debtor is required to
provide information under oath as to assets and liabilities.
Creditors have an opportunity to ask limited questions and
possibly speak with the debtor’s attorney as to issues
pertaining to their claim or the case.
If there is a
codebtor or guarantor on the creditor’s claim, the creditor
should consider whether payment may be sought from that source. In
Chapter 13 any codebtor on a debt of a consumer nature is
protected by an automatic stay effected by the debtor’s
bankruptcy filing, even if that codebtor is not a debtor in
bankruptcy (e.g., wife who did not file a joint bankruptcy
petition with her husband). This codebtor stay does not apply to
the collection or enforcement of business-related debts or claims.
There is no codebtor stay in Chapter 7 and 11 cases, and it is not
necessary to cease collection activity against any codebtors,
cosigners, or guarantors in those cases. However, in some
instances special orders may be entered in a Chapter 11 case to
protect a nondebtor. In the individual case, the creditor should
read all notices from the bankruptcy court carefully to ensure
that the debtor’s spouse has not joined in the petition to avoid
any violations of the stay. The continued, lawful pursuit of
codebtors can perhaps result in the enforcement of the codebtor’s
obligation, better treatment of the creditor in the proposed plan,
or a reaffirmation agreement from the Chapter 7 debtor agreeing to
remain personally liable on an otherwise dischargeable obligation.
There are ways for
creditors to seek better treatment by making objections in the
bankruptcy case. For example, objections can be made to the
proposed plan of reorganization in the Chapter 11, 12, or 13 case
or to the dischargeability of the creditor’s debt in the Chapter
7 case. Generally, objections to proposed plans of reorganization
are made if the plan does not comply with the requirements of the
Bankruptcy Code, is not proposed in good faith, does not pay
secured creditors the value of their claims in consideration of
the value of the collateral, and is not feasible (i.e.,
debtor will not be able to pay or comply). An objection to the “dischargeability”
of the creditor’s claim in Chapter 7 is made by the filing of an
“adversary proceeding” or lawsuit in the bankruptcy court. For
example, an objection to dischargeability may be brought by
creditors with claims for false pretenses or actual fraud of the
debtor in obtaining property or credit, for willful and malicious
injury by the debtor to another or property of another, and for
separation or divorce obligations incurred by the debtor (e.g.,
equitable distribution order or property settlement agreement).
Before filing an adversary proceeding objecting to the
dischargeability of the claim the creditor should carefully assess
the amount of the claim, the cost of pursuit, including legal
fees, the supporting evidence, the likelihood of success, and the
future ability of the debtor to pay the debt (e.g., age,
health, family circumstances, skills, and earning potential). If
the creditor is successful in the suit, the debtor will remain
obligated on the claim even though other debts were discharged in
the bankruptcy proceeding. Creditors should not hesitate if they
have grounds to object to the dischargeability of their claim. A
suit must be filed within 60 days of the first date set for the
creditors’ meeting, and this is a firm deadline.
There is nothing
that can absolutely prevent a creditor from being affected by a
bankruptcy filing. However, there are some general things to keep
in mind for the voluntary creditor (one affirmatively choosing to
lend, such as a bank or trade supplier) and the involuntary
creditor (one that by application of law is owed a claim or debt,
such as a former spouse or automobile accident victim). For
voluntary creditors, the key is to make informed lending
decisions. It is crucial to get detailed information on the credit
application. Be sure that the applicant, not a representative of
the creditor, completes the application in full, signs, and dates
it. Get credit references, authorization from the applicant for
you to contact the references, and then call them. Assess the risk
of loss early and know what risk level is appropriate in
consideration of the consequences if the applicant cannot pay. An
increased credit risk may be worth an additional down payment,
collateral, cosigner, or higher interest rate. Know that
additional sources of repayment can improve collection success and
get a cosigner or guarantor. If the applicant does not qualify for
credit in his or her own standing under the creditor’s
standards, document the file with this information and then seek a
cosigner or guarantor that meets the usual standard for
creditworthiness. A cosigner or guarantor on the account or debt
is leverage against the debtor to make timely payments. It also
increases the chance of repayment in the event that the primary
obligor files a bankruptcy case.
For voluntary and
involuntary creditors alike, keep the following in mind: (1) get
paid; (2) get security; and (3) get a judgment. Monitor the
payments that are due and don’t let the receivable get out of
control. Allowing late or skipped payments makes the debtor
believe that the creditor is not serious about enforcing the terms
of repayment. If the debtor offers payment, take it. The creditor
should, however, be careful not to facilitate an implied
modification of terms or payment amount. Creditors should not be
afraid to take voluntary payments from debtors that suggest that a
bankruptcy filing is around the corner. While there are certain
instances under the Bankruptcy Code that payments made prior to
bankruptcy may be recovered from the creditor, generally money in
the bank is better than no money at all as the creditor may have
defenses to any demand or action in the subsequent bankruptcy
case.
Creditors with
unsecured credit lines or loans are usually not prevented from
later requesting security or collateral once the debtor has
defaulted under the terms of the credit agreement. Security can be
in many forms: personal property, real estate, bank accounts,
receivables, or cash. If security is obtained, the creditor must
ensure that the security interest is properly documented and
recorded as may be required under law. As with the acceptance of
payment followed by the debtor’s bankruptcy filing, obtaining
security on an unsecured debt prior to bankruptcy may subject the
creditor to a recovery or avoidance action in the bankruptcy case.
However, the risk may be worth it and the creditor may have
defenses under the Bankruptcy Code.
Be realistic about
the debtor’s ability and intent to pay and don’t wait to get
tough. Being quick to sue and bring the claim to judgment can
increase the collectability of the claim as the debtor may have
real or personal property that can be seized to pay the judgment.
If the debtor is not repaying one creditor, then there are most
likely others that are not being paid. Be the first creditor with
the ability to lawfully seize property to enforce collection. In
the event of a bankruptcy, if the debtor has real property to
which the judgment lien has attached the creditor will have a
better likelihood of payment than the creditor with only a
defaulted loan or account.
It is generally
rare that a creditor will receive full payment of a claim in a
bankruptcy case. “No asset” cases in Chapter 7 are the norm,
and nothing is available for liquidation or distribution to
creditors. In Chapter 11 and 13 cases, payments take several years
and are usually a small fraction of the creditor’s total claim.
Bankruptcy reform legislation has been debated in Congress over
recent years. In March the U.S. House of Representatives passed a
bill proposing widespread changes to the Bankruptcy Code that
generally will make discharge of debts more difficult and require
greater repayments to creditors. The bill has yet to be passed by
the U.S. Senate. Meanwhile, bankruptcy will continue to impact our
businesses, our lives, and our bottom lines.
The author of this
article is Ms. Krista F. Norstog
Leonard. Ms. Leonard is a partner
at Smith Debnam and practices in its Construction & Equipment
Leasing practice group. She may be reached at (919) 250-2122 or by
email at kleonard@smithdebnamlaw.com.
Back
to Index
Laws
Affected by the 2002 Session of the North Carolina General
Assembly
The 2002 session of the North Carolina
General Assembly, which ended Oct. 4, affected numerous
substantive areas of North Carolina Law. However, business laws
were changed most dramatically. Some of the most noteworthy
changes are detailed below.
Business Law
Member Approval of Bylaw Amendment: H1505
Ch. 2002-27 N.C.G.S. 55A-10-21(a) conforms the “voting
requirement for member approval of amendments to bylaws to the
voting requirement for member approval of amendments to articles
of incorporation.”
Misc. Business Changes: H1503 Ch. 2002-58
N.C.G.S. 55-7-02(a) states that any public or nonpublic
corporation may confer any rights it wishes such that it may hold
a special meeting of shareholders. Also, the 10% holders of
nonpublic corporation voting shares have an absolute statutory
right for a special meeting within 30 days after demand. Written
demands that represent the necessary percentage of votes for a
special meeting must be received within a 60-day period.
Sections 2 and 3 amend N.C.G.S. 55-13-20(b)
and 55-13-22(a) to create a procedural modification for delivering
notice of dissenters to shareholders “where actions are approved
by written consent of the shareholders.” N.C.G.S. 55-13-20(b)
and 55-13-22(a) require a corporation to inform shareholders of
the event that triggered dissenters’ rights. In addition,
N.C.G.S. 59-35.1(b) now states that any document submitted on
behalf of general partnerships for filing with the Secretary of
State under any of the business entity acts must have a signature
of a general partner.
Finally, a new subsection to N.C.G.S.
59-84.2 is added. This subsection states that: “If a registered
limited liability partnership is dissolved but its business is
continued by some of its partners with or without others in a new
partnership under the same name, then (i) the new partnership
shall automatically succeed to the registration of the dissolved
original partnership as a registered limited liability partnership
and (ii) the dissolved original partnership shall be deemed to be
registered as a registered limited liability partnership until the
winding up of its affairs is completed.” This portion
retroactively affects any registered LLPs established on or after
October 1, 1993.
2002 Technical Corrections: S1217 Ch.
2002-159 N.C.G.S. 59-73.12(a) and 59-1052 were modified for
clarification as to who submits and signs articles of conversion
for general partnerships and who submits and signs articles of
conversion for limited partnerships. Also, the national standard
Uniform Commercial Code forms are now exempt from the requirements
for instruments presented for registration with the register of
deeds.
Transfer DMV Enforcement to CCPS: H314 Ch.
2002-190 All statutory authority, powers, duties, and functions of
the Department of Transportation, Division of Motor Vehicles
Enforcement Section, related to the regulation and enforcement of
“commercial motor vehicles, oversize and overweight vehicles,
motor carrier safety, and mobile and manufactured housing” are
transferred and vested with the Department of Crime Control and
Public Safety.
Real Property
Billboard Just Compensation Sunset Extended:
H1487 Ch. 2002-11 The requirement that just compensation is paid
when local authorities remove billboards on interstates and
federal-aid primary highways is continued. This requirement is
effective until further amendments to or repeal of 23 U.S.C. §§
131(g) occurs.
Electronic Register of Deed Filings: H1581
Ch. 2002-115 N.C.G.S. 161-14 now provides that the register of
deeds can accept for filing electronic records and that fees for
electronic recordation shall be based on “the number of pages
and formatting of the electronic record if it were printed by the
register of deeds” after recordation.
Amend Mortgage Lending Act: H1307 Ch.
2002-169 The Mortgage Lending Act allows exclusive mortgage
brokers to be licensed if the individual applicants comply with
the specific requirements. Criminal history record checks on
applicants and licensees are now required, and certain educational
courses under the Mortgage Lending Act are approved.
Family Law
Address Confidentiality Program: H1402 Ch.
2002-171 An “Address Confidentiality Program” for victims of
domestic violence, sexual offense and stalking now exists. Chapter
15C of the General Statutes allows the State and the agencies of
the State to provide a response to a public records request
without disclosure of a victim’s location. The Attorney General
creates a substitute address for a person in the program and acts
as agent for the enrolled victim for purposes of “service of
process and receiving and forwarding first-class mail or certified
or registered mail.” In addition, N.C.G.S. 132-1.1 now states
that a program participant’s actual address and telephone number
are not public records and only certain circumstances will allow
disclosure. This legislation addresses the time afforded a program
participant and possible disclosure of a program participant’s
telephone number. This act became effective January 1, 2003.
Equitable Distribution: N.C.G.S. 50-20(b)(4)
New legislation clarifies the fact that both decreases and
increases in marital debt constitute divisible property.
Litigation and the Courts
Firearm Regulation Amendments: H622 Ch.
2002-77 The “lawful design, marketing, manufacture,
distribution, sale, or transfer of firearms or ammunition to the
public” is not an unreasonably dangerous activity. In addition,
these are not nuisances per se. This legislation recognizes that
the proximate cause of injuries from firearms or ammunition is the
unlawful use of ammunition or firearms. This act applies to any
action pending or filed on or after August 15, 2002.
Judicial Campaign Reform Act: S1054 Ch.
2002-158 The intent of this bill is to create full public
financing of general elections for appellate judicial candidates
that accept fund-raising and spending limits beginning 2004.
Therefore, the General Assembly established the North Carolina
Public Campaign Financing Fund as an alternate campaign financing
source for candidates that show adequate public support and agree
to certain restrictions. The main funding mechanism of the Fund is
a voluntary contribution from lawyers in the amount of $50 at the
time privilege license taxes are paid beginning July 1, 2003. In
addition, another source of funding is a positive $3 check-off on
the North Carolina individual income tax form.
In addition, the General Assembly lowered
contribution limits for appellate judicial campaigns to $1,000.
However, the contribution limit from immediate family members is
$2,000. This legislation also “establishes a nonpartisan method
of electing Supreme Court Justices and Court of Appeals Judges
beginning in 2004.” A nonpartisan primary is used in this system
such that the field of candidates may be narrowed to two
candidates for each possible position.
Criminal Justice
Level 2 GDL Restriction –– Child
Fatality Task Force: H1546 Ch. 2002-73 This act limits the number
of passengers allowed in a car when the driver is a Level 2 driver
and maintains only a limited provisional license. In addition, the
bill states that failure to comply with this provision does not
constitute negligence per se or contributory negligence, and
evidence of a failure to comply is admissible at trial only when
the action is based on a section violation. This legislation only
applies to limited provisional licenses issued on or after
December 1, 2002.
Felonious Access to Government Computers:
H1501 Ch. 2002-157 A person is guilty of a Class H felony if he or
she willfully and without authorization “accesses or causes to
be accessed any government computer” for any purpose other than
“devising or executing any scheme or artifice to defraud or
obtaining property or services by means of false or fraudulent”
representations.
Counterfeiting/Negotiable Instruments: H1100
Ch. 2002-175 N.C.G.S. 1-539.2C is a new section. It states that a
person injured by financial identity fraud may sue for an amount
up to $5,000 for each incident, or “three times the amount of
actual damages, whichever is greater.”
If you have any further questions about the
laws passed by the North Carolina General Assembly, please contact
attorney James D. Dill. Mr. Dill is an associate at Smith Debnam
and practices in its Construction & Equipment Leasing practice
group. He may be reached at (919)250-2116 or by email at jdill@smithdebnamlaw.com.
Back
to Index
|
