General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 2
THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT INTERACTIONS WITH THE BANKRUPTCY CODE
BY JANIE ANDERSON CASTLE, JEFFREY L. SOLOMON, AND JON L. SWERGOLD
The phrase "hurry up and wait" is well known to both members of the U.S. Armed Forces and members of the legal profession. Nowhere is this maxim truer than when the Soldiers' and Sailors' Civil Relief Act of 1940 (SSCRA) intersects with the Bankruptcy Code in a bankruptcy proceeding. Lawyers, whether representing debtors or creditors, should be aware of the potential pitfalls of the SSCRA in order to prepare their clients' cases properly.
The SSCRA is relevant at any stage of any action or proceeding in any court in which a person in military service is involved, during the period of such service or within 60 days thereafter. Under the SSCRA, the action or proceeding may, in the discretion of the court in which it is pending, on its own motion, and must, on application to it by such person or some person on his behalf, be stayed. The exception is if, in the court's opinion, the plaintiff's ability to prosecute the action or the defendant to conduct his defense is not materially affected by reason of his military service. The SSCRA also serves to toll the applicable statute of limitations, whether for or against the service member, irrespective of whether the service member's service actually affects the exercise of her rights.
Courts are required to grant a stay where the application of the service member establishes that the member's case will be "materially affected" by virtue of the individual's service in the military. Due diligence and good faith are factors affecting a court's decision on whether to grant a stay and its length. Stays are not available for certain written agreements entered into after the commencement of military service, such as leases of real property or automobiles. Typically, a military member who writes to the court and provides evidence from his command that leave is not available and that the member's military duties preclude his presence will be granted a stay.
The SSCRA provides for the protection of all active duty personnel and activated reservists. Additionally, certain people not in the military will be afforded the protection of the SSCRA. Specifically, where a proceeding may be stayed under the SSCRA, a party who is not in the military but who is or may be either jointly liable or secondarily liable with someone who is in the military may seek a stay of the proceeding.
Upon the filing of a bankruptcy petition, the automatic stay imposed by 11 U.S.C. § 362 will prevent creditors from proceeding against the debtor. Typically, the section 341 first meeting of creditors will be held and the case will proceed. When the debtor is a service member, however, the meeting may not be held for a considerable amount of time, thereby delaying any distribution to creditors even longer than in a typical bankruptcy case.
Typical Bankruptcy Prob-lems. In In re Ladner, the bankruptcy court held that the service member/debtor was required to appear at the section 341 meeting to allow his creditors an opportunity to question him. Because Ladner's military duties precluded his appearance at the section 341 meeting, the court continued the meeting until a time that the debtor's military duties reasonably allowed him to be present or following the termination of his military service. Thus, the Ladner court's ruling gave the service member/debtor the protection of the automatic stay and delayed any distribution to creditors.
The SSCRA may also have a profound effect on the debtor's estate when a service member is a creditor holding a claim against the estate. In In re A.H. Robins Co., the Fourth Circuit held that the SSCRA served to toll the time in which military members/creditors were required to file proofs of claim. As a result, a service member was permitted to file her proof of claim approximately three years and nine months after the claims bar date, notwithstanding countervailing policy considerations that underlie generally strict enforcement of the claims bar date.
A further delay in the administration of the estate may occur where the debtor has filed an adversary proceeding against a service member. What do the parties and the courts do, for example, when the adversary proceeding is to recover a preference paid to the service member that will substantially affect the plan of reorganization? Where the debtor is a military member, does his time in service apply toward the 90-day preference period for the trustee to recover preference payments if the debtor filed for bankruptcy after leaving the service?
In In re Meade, the court was asked to determine whether the debtor's military service would be "included in computing the period of 'four months before the filing of a petition in bankruptcy' which attachments must have stood in order not to be null and void...." The Meade court concluded that the debtor's military service would not be included in computing the four-month period. In doing so, the court reasoned that since the SSCRA extends the period of time in which creditors may rely on a lien as a basis for an involuntary bankruptcy petition, the SSCRA "should also be interpreted to extend the period of time in which the lien is subject to avoidance by the trustee."
Next, practitioners should be prepared to determine whether the SSCRA effectively precludes the bringing of an involuntary petition against a debtor who is a service member. While such a scenario may benefit a service member/debtor, creditors may well be forced to bear the burden of a debtor's unpaid debts for an unknown period of time at a potentially high price.
Finally, debtors and creditors should examine the effect of SSCRA § 525 when a service member/creditor wants to object to the discharge of the debtor or the debtor wishes to have a claim of the service member/creditor discharged. Given her military service, a service member/creditor may be overseas or otherwise unable to file a timely objection or opposition to the debtor's discharge. Would such a scenario require a court to withhold granting a discharge to the debtor? Alternatively, when the debtor is a service member, would the court extend the time for filing a nondischargeability action until the service member eventually leaves active duty? These and other unforeseen issues have not been resolved, but may pose traps for those unwary of the broad, and sometimes surprising, consequences of the SSCRA.
While the focus of this discussion has been on the SSCRA's interaction with the Bankruptcy Code, the SSCRA provides a wide range of other protections for individuals entering or called to active duty in the military service. It is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty. It applies in civil, not criminal, matters. Reservists and the members of the National Guard are protected under the SSCRA while on active duty. In addition to its provisions concerning bankruptcy proceedings, the most commonly encountered provisions concern: evictions; mortgage foreclosures; actions on installment contracts; maximum rates of interest imposed during active duty; stays of proceedings when the requirements of military service prevent the member from asserting or protecting a legal right; restrictions on the entry of default judgments; and restrictions on the termination, lapse or forfeiture of insurance.
Janie Anderson Castle practices in London, England. Jon L. Swergold practice at Smith Hulsey & Busey in Jacksonville, Florida, and is a U.S. Navy Reservist. Jeffrey L. Solomon practices at Steinberg Fineo Berger & Burlant, P.C., in Garden City, New York.
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- This article is an abridged and edited version of one that originally appeared on page 46 of GP Solo & Small Firm Lawyer, July/August 1998 (15:3).
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