Corporations May Be People, But They Are Not Servicemembers

The Servicemembers Civil Relief Act enables servicemembers “to devote their entire energy to the defense needs of the Nation” by deferring or suspending certain obligations during active duty and for certain periods after the end of active duty. The SCRA’s core protections include interest-rate reductions on certain credit obligations, and the prevention of foreclosure and repossession of certain property.

Both federal regulators and individual plaintiffs have pushed to expand the SCRA’s protections to cover a broader range of obligations and liabilities. The business obligations of individual servicemembers is one area of increasing focus, as typified by a recent case, Davis v. City of Philadelphia. A servicemember attempted to reduce the risk of personal liability by transferring property to a corporation that he owned. He did not realize, however, that the transfer would operate to remove the property from potential future SCRA protections.

The 3d U.S. Circuit Court of Appeals delivered the first appellate opinion on the issue, affirming a district court’s order dismissing the case and holding that SCRA protections do not attach to property owned by a corporation — and provided much-needed guidance on the limits of the SCRA’s reach.

Michael Davis and his wife attempted to “insulate themselves from liability” by transferring full ownership of their rental property to Global Sales Call Center, a Pennsylvania corporation solely owned and managed by Davis. In 2009, after several periods of military service, Davis requested that the Philadelphia Department of Revenue reduce the interest accruing on Global’s property tax debt under the SCRA because Davis was a servicemember.

The city department denied Davis’s request on the basis that Global was a corporation and not a servicemember entitled to the SCRA’s benefits and protections. Davis’ ownership of Global did not change the analysis. Davis, at the direction of the revenue department, filed a tax abatement petition with the Philadelphia Tax Review Board in 2010, requesting a recalculation of the interest and penalties against his property. The Review Board agreed with the revenue department and denied Davis’s petition.

Originally published in Consumer Financial Services Law Report; reprinted with permission.