Service-members Civil Relief Act

Car dealers have focused on the rights of active duty service members and their dependents because of the December 14, 2017 change in interpretation of regulations on the Military Lending Act by the Department of Defense. However, the government has also been busy enforcing the Servicemembers Civil Relief Act (“SCRA”), and there are some basics dealers should know. 

On February 15, 2018, the United States Department of Justice filed a complaint against the City and County of Honolulu, Hawaii and its towing contractor for violating the SCRA by auctioning or disposing of vehicles owned by servicemembers to enforce storage liens without first obtaining court orders, as required by the SCRA.  As part of the settlement with the DOJ, Honolulu must obtain court orders to dispose of servicemembers’ vehicles or obtain a valid SCRA waiver from the servicemembers.

BMW Financial Services, N.A., entered a consent order with the DOJ to resolve allegations it violated the SCRA when it failed to refund pro-rata up-front lease payments to 492 servicemembers who terminated their motor vehicles leases under the SCRA. The investigation of BMW FS was triggered by two complaints of military members denied refunds of any of the capitalized cost reduction payments when they terminated their leases due to changes in their duties which sent the servicemembers overseas.  Because of these complaints, the DOJ launched an investigation that revealed BMW FS failed to refund the up-front capitalized cost reduction amounts due 492 servicemembers who invoked their rights under the SCRA to terminate their auto leases. 

Because of the DOJ’s recent enforcement actions, here are some questions car dealers may have about military members’ rights under the SCRA and answers.

What is the SCRA?

The SCRA, which was formerly known as the Soldiers’ and Sailors’ Civil Relief Act, is a federal law enacted in 2003 to protect military personnel. The SCRA eases financial burdens on military servicemembers during their service so they may focus on accomplishing their missions.

What is the purpose of the SCRA?

The SCRA is “(1) to provide for, strengthen, and expedite the national defense through protection extended by this Act 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.” 

What are the protections of the SCRA?

The SCRA provides protections involving certain legal and financial obligations, such as leases, contracts, mortgages, and liens, that may be affected because of the servicemember’s military service.  

What does the SCRA protect that may affect car dealers?

The SCRA protects military service members during periods of military service and sometimes, for a period of time after military service. For example, for dealers that may have a repair lien against a motor vehicle owned by a military member, the law protects that servicemember during his military service and for 90 days after termination of military service. There are also certain circumstances under the SCRA where dependents including spouses and children of military personnel are protected.

Does the SCRA provide servicemembers rights on vehicle leases if their circumstances change?

The SCRA provides the right to servicemembers to terminate motor vehicle leases should the circumstances of a servicemember change during the lease term.   

If the servicemember signed a lease for a motor vehicle prior to joining the military, the servicemember may cancel that lease upon entering the military with orders to serve for over 180 days.  

If the servicemember signed a motor vehicle lease while in the military, the servicemember may terminate that lease should the servicmember receive orders for:

  • A change of permanent station from a location in the continental US to a location outside the continental US;
  • A change in permanent station from a location in a State outside the continental US (i.e., Alaska or Hawaii) to any location outside that State; or
  • A deployment lasting over 180 days.

To properly terminate the motor vehicle lease, the servicmember must adhere to the procedures outlined in the SCRA, which include:

  • The servicmember must send written notice to the lease holder of the servicemember’s intent to terminate.
  • The written notice sent by the servicmember must include the military orders that provide cause to terminate the lease.
  • The motor vehicle must be surrendered within 15 days of the servicemember’s notice to the lessor. The termination is effective as of the date that the servicemember returned the motor vehicle. 
  • The servicmember is responsible for all lease payments, on a prorated basis, until the vehicle is returned.
  • The lessor can charge no early termination fees.
  • Within 30 days of the lease termination, the lessor must refund any prepaid lease payments beyond the date that the vehicle was returned. As described earlier in this article, BMW FS’ failure to return any prepaid lease payments resulted in the consent order with the DOJ.  

What rights does a creditor have to repossess for a breach of a retail installment sale contract?

If a servicemember signs an installment contract to finance purchase of a motor vehicle and pays a deposit or installment before the servicemember enters military service, a dealer may not rescind, terminate or repossess that property without a court order for any breach of the contract when the debtor is in the service.  The objective of the SCRA is to protect those individuals who may have signed a motor vehicle finance agreement making a certain salary before entry into the military but whose military salaries decreased, making the installment payments no longer affordable. 

The SCRA does not protect a servicemember who signs an installment contract for a motor vehicle after the servicemember entered military service. Courts have ruled that the language of the statute protecting against repossession based on breach of a retail installment contract is clear.  It protects only those military servicemembers who signed, and made at least one installment payment, prior to entering military service.

What rights does a dealer have to enforce a repair or storage lien?

A garage that holds a lien on any property or effects of a servicemember during any period of military service and for 90 days after military service may not foreclose or enforce that lien on that property or the effects without a court order.  The SCRA defines lien as “a lien for storage, repair, or cleaning of the property or effects of a servicemember or a lien on such property or effects for any other reason.” 

Therefore, if a servicemember has abandoned his vehicle at the dealership and not paid for the repair work on the motor vehicle, the business must obtain a court order to enforce that lien and foreclose on the motor vehicle.  Evidenced by the DOJ’s consent order with the City of Honolulu, even where a vehicle has been abandoned and is subject to a storage lien, the lienholder must still obtain a court order before enforcement and sale of that motor vehicle.    

Courts have held that the statute that covers repair liens and storage liens and the requirement to get a court order does not cover installment contract liens as a result of financing signed during a servicemember’s service, even though lien is defined to include “any other reason.”  Installment contract liens are not similar to repair or storage liens, and Congress did not intend for the storage lien statute to govern installment contract liens.