The man was driving a car owned by a relative who is a member of the New Zealand Defence Force but was not present.
The officers told the driver they suspected illegal activity and alerted police.
Military police have no power to arrest civilians outside NZDF-owned property.
The man claims that he and his passengers were "forcibly detained" until police arrived - and intimidated by the officers who stood on either side of the car "restricting" the occupants from getting out.
"I asked if we were being detained and he said 'yes you are'," the man said.
"What happened to us has all the elements of kidnapping as defined in section 209 of the Crimes act 1961, and is punishable by up to 14 years' imprisonment."
The man said he was threatened repeatedly with arrest and the officer told him that between the hours of 9pm and 6am he had "the same powers as a New Zealand Police constable".
"That night we all felt we lost our rights as New Zealand citizens," he said.
"This incident was intimidating to all of us ... We were all fearful of what was about to happen ... They did detain us and they are not allowed to do that - end of."
The man complained to then-Defence Minister Ron Mark but got no response.
In November he repeated his complaint to new minister Peeni Henare.
Last week he got a letter confirming action was being taken.
"It's been a lengthy wait and I'm happy it's finally been investigated after seven months," the man said.
"I feel let down by NZDF that it's taken this long."
In December the NZDF said the incident was "handled appropriately" and military police "followed the mandated procedures for calling police".
While it was "regrettable" the man was upset by the incident - they had no intention of reviewing what happened.
"The NZDF has confidence that the military police involved on the night acted professionally and did not act outside their authority," they said.
"At no point were the occupants of the car detained or arrested by military police."
However, the letter from Henare confirmed the matter was being looked into.
"In your letter you make some significant allegations about the professionalism and conduct of the military police during their interactions with you," he said.
"Complaints about the conduct of members of the NZDF are treated seriously and therefore Defence Force is conducting an inquiry into the matter.
"I trust that this response will reassure you that your complaint has been received and is under action."
The man has also made a complaint to police about the incident.
Almost two months after he went into the Palmerston North police station, an officer contacted him to confirm the allegation would be looked into.
The officer told him someone would be in touch as soon as possible to arrange his formal statement being taken.
In a phone call the man recorded, the officer said police were committed to looking into the allegation and "it is going to be actioned" but had been delayed while they worked out who was best placed to take it forward.
He could not give a time frame to the man, but assured him "someone will be in touch" and "it won't be long".
