In connection with a motion to dismiss, a Maryland federal district court has ruled that the cash “capitalized cost reduction” (CCR) payment allegedly made by a military servicemember upon signing his auto lease was refundable under the Servicemembers Civil Relief Act (SCRA). This ruling is particularly significant in light of the Consumer Financial Protection Bureau’s identification of SCRA compliance as an enforcement priority.
The SCRA allows a lessee called to active military duty to terminate an auto lease without incurring an early termination charge and requires the lessor to refund any “lease amounts paid in advance for a period after the effective date of the termination of the lease.” After being called to active duty, the plaintiff in Durm v. American Honda Finance Corporation allegedly had terminated his lease early and did not receive a refund of his cash CCR payment. The plaintiff filed a class action complaint alleging that the lessor’s failure to refund a prorated portion of his cash CCR payment violated the SCRA.
The lessor had allegedly deducted the plaintiff’s cash CCR payment from the vehicle’s “gross capitalized cost,” which the court described as an amount that “‘represents the value of the leased [vehicle] at the beginning of the lease,’” to determine the “adjusted capitalized cost” (ACC). According to the court, the ACC, minus the vehicle’s residual value, was then divided by the number of lease payments to arrive at the amount of the periodic lease payment. (While not reflected in the decision, the lessor presumably would have added a “rent charge” to the difference between the ACC and the residual value before arriving at the periodic lease payment amount.)
The plaintiff claimed that his cash CCR payment was a “‘lease amount’ that he paid ‘in advance, for the full period of the lease,’ that had the ‘net effect of [a] prorata reduction or prepayment of a portion of each future month[’s] payment.’” (emphasis added).
The court observed that the question of whether a lessee’s cash CCR payment can be “lease amounts paid in advance” appeared to be one of first impression. It held that the plaintiff’s complaint had “sufficiently alleged” that his cash CCR payment constituted such amounts and that the lessor was required by the SCRA to refund a prorated portion.
The court noted, however, that it was deciding only whether the plaintiff had stated a claim concerning his own cash CCR payment and “the question of whether all voluntary cash CCR payments made by eligible service member motor vehicle lessees are ‘lease amounts paid in advance’ is more appropriately considered in a motion for class certification.” The court further noted that it had not been presented with, and therefore was not deciding, “whether non-cash value incorporated into the CCR amount (including the value of a car traded-in) is considered ‘lease amounts paid in advance’ under the SCRA.”
In support of its motion to dismiss the SCRA claim, the lessor had argued that the CCR payment could not be characterized as “lease amounts paid in advance” because it was in the nature of a down payment. The court concluded, however, that the SCRA’s plain language did not limit the refund requirement to refunds of periodic payments or exclude down payments from its scope. According to the court, if the plaintiff’s CCR payment “formed part of the ‘lease amounts’ that [he] was obliged to pay” the lessor to lease the vehicle and he paid the amount in advance, the SCRA’s plain language “suggests” that such payment “is covered by the phrase ‘lease amounts paid in advance.’”
The court also rejected the lessor’s argument that because lease amounts must have been “paid in advance for a period after the effective date of the [lease] termination,” the statutory text limited the refund requirement to “‘lease payments that were not scheduled to be due until after the date the lease is terminated.’” According to the court, the SCRA “requires the lessor to refund lease amounts that were ‘for’ the time after the lease terminated, not lease amounts ‘due after’ termination.” The court concluded that if, as alleged, the plaintiff’s CCR payment “resulted in a pro rata reduction of the lease amounts for the period after termination,” the payment was within the scope of the SCRA refund requirement.
While claiming to be consistent with the SCRA’s plain language, the decision interprets the requirement to refund lease amounts paid in advance “for a period after” lease termination to mandate refunds of amounts that have the effect of reducing the monthly lease payments. Although a cash CCR payment may have such an effect, the statute uses periodic payment language in referring to amounts “paid in advance for a period after the effective date” of termination.
In concluding that the SCRA refund requirement is not limited to periodic payments merely because “the statutory language does not [explicitly] tether the refund obligation to the due dates set by the lessor for periodic payments [and] instead the refund obligation begins on the date of lease termination,” the court has substituted a result-oriented reading for the statutory language.
The court did, however, dismiss the plaintiff’s claims under Maryland law for unjust enrichment and conversion. Because the plaintiff alleged that his right to a refund arose under the SCRA, there was no contract upon which his unjust enrichment claim allegedly rested, the court found. It also found that the plaintiff had not sought the return of specific segregated or identifiable funds as required for a conversion claim but had only alleged that he was owed a specific amount of money. Because the SCRA authorizes an award of both monetary and equitable relief, however, the court rejected the lessor’s argument that plaintiff’s claims for declaratory and injunctive relief should be dismissed because they were subsumed by his SCRA refund claim.
The CFPB continues to examine banks and nonbanks for compliance with SCRA requirements in all types of consumer financing and leasing transactions. On February 6, 2014, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will conduct a webinar, “Understanding the CFPB's Defense Strategy on Military Lending.” Our presenters will discuss recent developments pertaining to the SCRA and Military Loan Act (which can be enforced by the CFPB against nonbanks) and the effects of these laws on the financial services industry.
Members of the firm’s Consumer Financial Services Group regularly consult with their clients on compliance with the SCRA and MLA, and the Group has created a team of lawyers who are helping clients prepare for CFPB examinations and respond to CFPB civil investigative demands. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).