Sending IRS Form Isn't Improper Attempt to Collect a Debt

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By Diane Davis

Feb. 16 — CitiMortgage, Inc. didn't improperly harass and/or coerce debtors in violation of their bankruptcy discharge injunction by sending them an IRS form informing them they might have reportable income or loss following their foreclosure, a district court in New Hampshire held Feb. 10.

Affirming the judgment of the bankruptcy court, Judge Steven J. McAuliffe of the U.S. District Court for the District of New Hampshire concluded that Federal Home Loan Mortgage Corporation (Freddie Mac) was required to provide the debtors with IRS Form 1099-A following the foreclosure of their home and it wasn't an attempt to “collect” a debt in violation of the discharge injunction.

The IRS form didn't impose or seek to impose any tax liability on the debtors or aim to “collect” anything, the court said. The mere issuance of the form didn't impose any tax liability on the debtors, the court said.

Debtors Timothy and Cathy Bates argued that CitiMortgage violated the discharge injunction provision of Bankruptcy Code Section 524(a), which provides that “a discharge in bankruptcy operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” Section 524(a) is crucial to the honest but unfortunate debtor's “fresh start” as embodied in the Bankruptcy Code, according to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 64 (D. Michael Lynn et al. eds., 2016).

Section 524 doesn't define what is a “willful” violation of the discharge injunction, and as a result, courts vary in their approach. According to research conducted by Bloomberg BNA, some circuits, like the U.S. Court of Appeals for the Ninth Circuit, require the debtor to prove that the creditor knew that the discharge injunction applied and intended to violate the injunction, while the Eleventh Circuit has adopted a standard where the focus of the court's inquiry is on whether their conduct complied with the order. The Fourth Circuit has taken a similar approach and found that the state of mind of the creditor “is irrelevant and therefore good faith, or the absence of an intent to violate the order, is no defense,” according to Bloomberg Law: Bankruptcy Treatise.

A secured creditor such as CitiMortgage needs to know whether the courts view these specific actions as “collecting” on a debt and a violation of the discharge injunction. In this case, an automated telephone call was considered by the court to be in violation of the discharge injunction, but a notice-type form sent as required by law wasn't.

Debtors Lose Their Home

The debtors obtained a loan from CitiMortgage, which was secured by their home in New Hampshire.

Subsequently, the debtors filed for Chapter 7 protection in which their nonexempt assets are liquidated and the proceeds are distributed to creditors. The debtors didn't reaffirm their mortgage debt with CitiMortgage while in bankruptcy, and CitiMortgage was granted relief from the automatic stay.

The debtors then received a discharge notice indicating that they were no longer personally obligated on the debt to CitiMortgage. CitiMortgage, however, retained the right to foreclose upon the debtors' home.

After their bankruptcy case closed, the debtors received a foreclosure notice. They negotiated a loan modification agreement and made payments under that agreement for several years to CitiMortgage. When they stopped making payments, CitiMortgage began foreclosure proceedings again and ultimately foreclosed on their home.

Alleged Violations of Discharge Injunction

Three months later, the debtors received IRS Form 1099-A in the mail from Freddie Mac indicating that the difference between the amount of the debt that was discharged, forgiven, cancelled, or deemed uncollectible, and the fair market value of the house that was sold might be treated as taxable income.

The debtors said they believed that the IRS form violated the discharge injunction because Box 5 on the form was checked, which provided that the “borrower was personally liable for repayment of the debt.” According to the debtors, their personal obligation to repay that debt had been discharged in bankruptcy.

The debtors moved to reopen their bankruptcy case. Shortly thereafter, Timothy received an automated telephone call in error from CitiMortgage with a recorded message that it was unable to obtain current insurance information. Although CitiMortgage didn't demand the debtors to go out and buy insurance, the debtors said they felt harassed, and suffered emotional distress after receiving the call.

The debtors brought an adversary proceeding against CitiMortgage alleging six separate violations of the discharge injunction.

Automated Call Violated Discharge Injunction

The bankruptcy court ruled in favor of CitiMortgage on all of the claims, except that it found that CitiMortgage violated the discharge injunction by telephoning the debtors with the automated call.

The bankruptcy court also awarded $2,500 in punitive damages as a sanction against CitiMortgage, and awarded attorneys' fees of $6,100, and expenses of $179. The court said that the debtors failed to show they suffered any emotional distress damages as a result of the call.

The debtors appealed to the district court.

To prevail on their assertion that CitiMortgage violated the discharge injunction, the debtors had the burden to show that CitiMortgage: “(1) had notice of their discharge; (2) intended the actions which constituted the alleged violation; and (3) acted in a way that improperly coerced or harassed plaintiffs,” the court said, citing the standard in the First Circuit.

Failed to Meet Burden of Proof

The district court found that the debtors failed on their burden of proof. According to the court, there is no suggestion in the record that CitiMortgage sought or attempted to collect the discharged debt. The IRS forms, even if they were incorrect as alleged by the debtors, didn't “impose or seek to impose any tax liability on plaintiffs, or to ‘collect' anything,” the court said.

The bankruptcy court acted well within its discretion in awarding punitive damages and attorney's fees and expenses, the court said.

Terrie L. Harman, Harman Law Offices, Portsmouth, N.H., represented the debtors/plaintiffs/appellants Timothy and Cathy Bates; Andrea Lasker, Harmon Law Offices PC, Newton, Mass., and David D. Christensen, and Gregory N. Blase, K&L Gates LLP (MA), Boston, represented defendants/appellees CitiMortgage, Inc., s/b/m to ABN AMRO Mortgage Group, Inc., and Federal Home Loan Mortgage Corporation.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at