District Court (Minn.) Finds Issuance of 1099-C Did Not, by itself, Discharge Debt — But, When Combined with Other Evidence, Might Suggest an Intent to Do So

In Atchison v. Hiway Federal Credit Union, 2013 WL 1175020 (D.Minn. 2013), Judge Frank found that a creditor’s charging-off of an account and issuing a 1099-C did not by itself discharge the debt, but further discovery should be allowed before summary judgment could be granted as to whether the creditor intended for the issuance to discharge the debt.

In addition, the FCRA prohibits any person from furnishing inaccurate consumer information to any CRA. 15 U.S.C. § 1681s–2(a)(1)(B). ¶  At the heart of this action is Plaintiff’s claim that the HFCU discharged his personal debt. Plaintiff alleges that, because the debt was discharged, Law Firm Defendants violated section 1692e(2)(A) by representing to Plaintiff that the full balance was due, and the HFCU violated the FCRA by reporting to a CRA that his debt remains unpaid. Law Firm Defendants argue that Plaintiff fails to state a claim because a Form 1099–C does not discharge a debt, Plaintiff’s debt remains outstanding, and Law Firm Defendants did not violate the FDCPA by informing him that he still owes the debt. Similarly, the HFCU asserts that it did not cancel or extinguish Plaintiff’s debt by filing the Form 1099–C, and therefore Plaintiff cannot demonstrate that he is entitled to relief under the FCRA. ¶  The issuance of a Form 1099–C does not, alone, operate to extinguish a debt. In an Information Letter dated December 30, 2005, the IRS explained: “The Internal Revenue Service does not view a Form 1099–C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.” See I.R.S. Info. 2005–0207, 2005 WL 3561135 (Dec. 30, 2005) (“IRS Letter ”). The parties have not cited, and the Court has not discovered, any case in this circuit applying the principles contained in the IRS letter to a particular case. However, cases in other jurisdictions have followed its reasoning and con-cluded that a Form 1099–C does not legally extinguish or cancel a debt. See, e.g., Fed. Deposit Ins. Corp. v. Cashion, Civil No. 11–72, 2012 WL 1098619, at *7 (W.D.N.C. Apr. 2, 2012) (“[A] Form 1099–C does not itself operate to legally discharge a debtor’s liability.”); Capital One, N.A. v. Massey, Civ. No. 10–1707, 2011 WL 3299934, at *3 (S.D.Tex. August 1, 2011) (holding that a 1099–C does not discharge a debtor from liability, and therefore “the fact that Plaintiff issued a 1099–C in relation to the Borrower’s indebtedness is irrelevant and does not raise a genuine issue of material fact”); U.S. v. Reed, Civ. No. 09–210, 2010 WL 3656001, at *2–3 (E.D.Tenn. Sept. 14, 2010); In re Zilka, 407 B.R. 684, 689. ¶  Without disputing that the issuance of the Form 1099–C, alone, does not operate to extinguish Plaintiff’s debt, Plaintiff argues that while the IRS requires creditors to issue a Form 1099–C in certain circumstances even if the creditor does not intend to discharge the personal liability of the debtor, a creditor’s discharge of a debt is one reason a creditor must file a Form 1099–C. See 26 C.F.R. § 1.6050P–1(b)(2)(i)(G). Plaintiff also argues that he has alleged facts sufficient to plausibly demonstrate that the HFCU discharged Plaintiff’s debt. For example, Plaintiff alleges that after he sent disputes to two consumer reporting agencies, those agencies forwarded a copy of the dispute to the HFCU, and that the HFCU responded by advising those two agencies that the account should be reported as having a zero balance with no amounts due and owing. (Am. Compl. ¶¶ 55–57; 60–70; Doc. No. 43, Lyons Decl. ¶ 4, Ex. 3 (noting account was paid in full and “was a Charge-off”).) Plaintiff claims that this is inconsistent with the fact that the HFCU advised a third CRA that the account should be reported as having a balance of $6,058. (Am.Compl.¶ 65.) Plaintiff further alleges that neither the HFCU nor Law Firm Defendants attempted to collect the debt after the issuance of the Form 1099–C. ( Id. ¶ 29.) ¶  Defendants dispute the veracity, and legal con-sequence, of these factual allegations. For example, they dispute that they did not attempt to collect the debt after the issuance of the Form 1099–C. In addition, the HFCU asserts that Plaintiff’s allegations about the HFCU’s reports to the CRAs are unsupported and maintains that Plaintiff’s allegations that the HFCU reported a “zero balance” to two CRAs do not support his FCRA claim. Instead, the HFCU submits reports it made to Equifax on June 15, 2012, indicating a balance of $6,058 on Plaintiff’s account and that the debt has been “charged off.” (Garrison Aff. ¶¶ III, IV, Exs. 1, 2.) The HFCU submits that a “chargeoff” indicates that a creditor has determined that a payment of the debt is unlikely, but does not relieve a debtor of liability.  ¶  While it is clear from the text of the IRS letter and case law cited above that a Form 1099–C does not operate alone to legally discharge a debtor from liability, the Court concludes that Plaintiff’s assertion that the HFCU otherwise intended to extinguish Plaintiff’s debt merits additional discovery at this early stage of litigation. Despite this ruling, the Court notes that it seems unlikely that Plaintiff’s claim will survive a motion for summary judgment, particularly in light of the law cited above and the current evidence before the Court. Even so, considering the early stage of this litigation, and the fact that Plaintiff’s Amended Complaint pleads plausible causes of action, Plaintiff is entitled to conduct discovery under Rule 56(d). The Court will entertain a future motion for summary judgment after discovery on the issues raised in the present motions.