In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit recently held that the protections against default judgment under the Servicemembers Civil Relief Act ("SCRA") do not apply to the seizure and sale of real property in in rem proceedings under Louisiana law where the debtors have agreed to a confession of judgment in the mortgage or security agreement.
A copy of the opinion is available at: Link to Opinion
A group of individuals filed a putative class action seeking damages and declaratory and injunctive relief against two banks, two loan servicers and a federal credit union, alleging that defendants violated the SCRA by foreclosing on their properties in Louisiana state courts while they were on active military duty using confession of judgment clauses contained in the mortgages or security agreements.
The complaint alleged that the foreclosure actions violated sections 3931 and 3918 of the SCRA. Section 3931 "provides active duty servicemembers with protections against default judgment absent a waiver that meets certain requirements." Section 3918 sets forth "the requirements for waiving SCRA protections".
Four of the defendants moved to dismiss for failure to state a claim, which the trial court granted with prejudice. The remaining defendant moved for judgment on the pleadings, which was also granted with prejudice.
On appeal, the Fifth Circuit first rejected the borrowers' argument that the "state court orders authorizing seizure and sale" of their properties were default judgments under FCRA section 3931 because the section "does not encompass Louisiana executory proceedings where, as here, the debtors confessed judgment."
The Court explained that "[u]nder Louisiana law, an executory proceeding is an expedited in rem civil action … used to effect the seizure and sale of property … to enforce a mortgage … importing a confession of judgment. … By virtue of a confession of judgment, a debtor in an executor proceeding 'has appeared in the suit, and answered the demand.'"
Because under Louisiana law the debtors were deemed to have "appeared," the Court concluded that "§ 3931 does not apply to Louisiana executor proceedings where, as here, the debtors have confessed judgment."
Next, the Court rejected the borrowers' argument that "their confessions of judgment do not constitute proper waivers under the SCRA" section 3918 because "§ 3931 does not apply to Louisiana executory proceedings where the debtor has confessed judgment[," and the SCRA's "waiver requirements are therefore inapplicable because there is nothing to waive here; Appellants were never protected under § 3931 against seizures and sales ordered through Louisiana executory proceedings."
The Court affirmed the trial court's orders of dismissal.
Ralph T. Wutscher
Maurice Wutscher LLP
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