Court of Appeal (Cal.) Finds NOI Class Notice Adequately Informed Putative Classmembers of Potential Tax Consequences of Debt Relief; Was Not Unfair Because Class Release Included 1542 Waiver

In Ally Financial, Inc. v Trujillo, 2016 WL 4766225, at *6 (Cal.App. 6 Dist., 2016), the Court of Appeal held in an unpublished decision that class notice in an NOI class action adequately informed the class members of potential adverse tax consequences.

On appeal, Trujillo and Riley contend that the class notice regarding tax consequences violates due process, and is therefore subject to de novo review, because the class notice (1) “failed to disclose that debt cancellation and debt forgiveness are identifiable events under existing regulations, section 1.6050P-1(b)(2) of the Treasury Regulations;” (2) failed to notify class members that “they were giving up the ability to defend themselves from the undisclosed tax liability via the Civil Code § 1542 waiver;” (3) “failed to notify the Rileys and thousands of class members that 1099s had been sent by Ally and that they would be receiving a tax bill for Ally’s debt cancellation after the deadline for opting out;” (4) “failed to disclose that class members have [a] duty to self report the cancelled debt as income;” (5) “failed to disclosed that per the Settlement Agreement … Ally can issue 1099s without notice, and without breaching the settlement, and class members have no recourse because the § 1542 waiver deprives the class of the ability to contest the NOI;” and (6) “[t]he class notice does not inform class members that the settlement is debt cancellation by Ally, it does not inform them of the amount of debt cancellation, nor does it provide information as to where class members could get free [tax] assistance ….” Trujillo and Riley also assert that the IRS issued a private letter ruling in October 2012 indicating that debt forgiveness constitutes taxable income where, as here, the class action defendant does not admit liability.   Class counsel respond that the class notice regarding tax consequences was sufficient to satisfy due process because the class notice properly advised the class of the possibility of taxation of settlement benefits, avoided giving erroneous legal advice, and gave sufficient information to allow class members to either accept the benefits of the settlement, opt out, or object to the settlement. Class counsel asserts that “details concerning individual Settlement Class Members, and the kind of tax advice [Trujillo and Riley] are demanding would simply be more likely to mislead and confuse the class.”  Ally maintains that federal courts have recognized that a more specific warning in class action notices regarding tax liability would cause a risk of confusion, relying on the decision in In re Ikon Office Solutions (E.D. Pa. 2000) 194 F.R.D. 166, 188, fn. omitted [“Generic language stating that it is advisable to consult a tax specialist is preferable.”] Ally emphasizes that Trujillo did not submit any evidence to show that she or any other class member had been confused or misled by the class notice.  We note that Trujillo and Riley have not provided any legal authority for the proposition that a class action notice must contain more specific information about the potential tax consequences of a proposed class action settlement than was provided in this case, in order to satisfy due process. Our resolution of the issue is therefore governed by the general rules for class notice, as stated by this court in Wershba: “In regard to the contents of the notice, the ‘notice given to the class must fairly apprise the class members of the terms of the proposed compromise and of the options open to dissenting class members.’ [Citation.] The purpose of a class notice in the context of a settlement is to give class members sufficient information to decide whether they should accept the benefits offered, opt out and pursue their own remedies, or object to the settlement. [Citation.] As a general rule, class notice must strike a balance between thoroughness and the need to avoid unduly complicating the content of the notice and confusing class members. Here again the trial court has broad discretion. [Citation.]” (Wershba, supra, 91 Cal.App.4th at pp. 251-252.)  Having reviewed the class notice, we find that the notice clearly informed the class members that acceptance of the settlement benefits (which the notice expressly stated included debt forgiveness) could result in state or federal taxation, depending upon the class member’s individual circumstances, and advised class members to seek legal advice regarding tax matters. In light of the statement that the settlement benefits could be subject to taxation, the recognition that individual circumstances can affect tax liability, and the recommendation that legal advice be sought regarding tax matters, we find that the class notice succeeded in striking a balance between thoroughness and the avoidance of undue complication and confusion regarding tax consequences.

The Court of Appeal also held that inclusion of a 1542 waiver in the Release did not make the settlement and release unfair to the class.

We understand Trujillo and Riley to contend that the trial court abused its discretion in approving a settlement that is unfair because it includes a release of unknown claims against Ally arising from the defective NOIs while imposing tax liability on the class members. They assert that the Rileys and the “thousand of other class members” who received “1099s 30 days before Final Approval” will not be able to challenge the validity of the NOIs and thereby avoid tax liability.⁷ Additionally, Trujillo and Riley contend that the class action was strong on the merits and therefore a section 1542 waiver is unwarranted.  Class counsel dispute the assertion that the settlement agreement is unfair because the release includes a typical section 1542 waiver. They point out that class members could opt out if they did not want to agree to the release. Additionally, Ally argues that the release does not preclude class members from challenging the IRS’s determination of their tax liability, since the IRS is not a party to the settlement. . . .  Second, it is well established that “[a] general release—covering ‘all claims’ that were or could have been raised in the suit—is common in class action settlements. [Citation.]” (Carter v. City of Los Angeles (2014) 224 Cal.App.4th 808, 820-821; see also Villacres v. ABM Industries Inc. (2010) 189 Cal.App.4th 562, 587 (Villacres).) Thus, “ ‘[a] judgment pursuant to a class settlement can bar [subsequent] claims based on the allegations underlying the claims in the settled class action. This is true even though the precluded claim was not presented, and could not have been presented, in the class action itself.’ [Citations.]” (Villacres, supra, at pp. 586-587.) Trujillo and Riley have not provided any authority for the proposition that a section 1542 waiver of all claims that were or could have been raised in the present class action renders the settlement unfair where the acceptance of the settlement benefits may, as stated in the class notice, subject a class member to tax consequences.

Erik Kemp of the Firm’s San Francisco office briefed and argued the case.