Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
An Internal Revenue Service Form 1099 sent to Chapter 7 debtors alerting them that a foreclosure on their home might have tax consequences isn’t an attempt to collect a debt ( Bates v. CitiMortgage, Inc. , 1st Cir., No. 16-1228, 12/14/16 ).
Judge O. Rogeriee Thompson of the U.S. Court of Appeals for the First Circuit Dec. 14 concluded that the IRS Form 1099-A sent to the debtors “provides information,” and doesn’t demand payment or threaten any action.
The form wasn’t coercive even though it contained false information, the court said. Lender Federal Home Loan Mortgage (Freddie Mac) incorrectly checked the box on the form showing that the debtors were personally liable for the debt, but the form didn’t create tax liability for the debtors or any other consequences, the court said.
CitiMortgage, Inc., which made the original loan to the debtor, made the situation worse when a representative gave the debtors wrong information over the phone that the debt hadn’t been discharged in bankruptcy, the court said. However, the “subjective feeling of coercion” isn’t enough to prove a violation of the discharge injunction, the court said. The debtors also didn’t present evidence that the form was objectively coercive, the court said.
Debtors Cathy and Timothy Bates’s home in New Hampshire was secured by a mortgage from CitiMortgage. The debtors filed for Chapter 7 bankruptcy in which their nonexempt assets were liquidated by a trustee, and the proceeds were distributed to creditors. Their mortgage debt was discharged in 2009. Subsequently, the debtors entered into a loan modification agreement with CitiMortgage in which they could avoid foreclosure and stay in the home as long as they made payments. After they stopped making payments, CitiMortgage foreclosed and the debtors moved out.
Shortly thereafter, the debtors received a Form 1099-A listing Freddie Mac as the lender and stating that the principal balance outstanding was $194,624, and the fair market value of the home was $168,000. Box five on the form was checked indicating that “the borrower was personally liable for the repayment of the debt.”
The debtors reopened their bankruptcy case and sued CitiMortgage and Freddie Mac for attempting to collect on a discharged debt in violation of the Bankruptcy Code’s discharge injunction.
The bankruptcy court found the form didn’t give the debtors any objective basis to believe the lender was trying to collect a discharged mortgage debt, and the district court affirmed.
The form stated that because of the foreclosure, "[y]ou may have reportable income or loss,” but it didn’t demand payment or threaten any action, the appeals court said.
Judges Sandra L. Lynch and David J. Barron joined the opinion.
Terrie Harman, Kristina Cerniauskaite of Harman Law Offices, represented Appellants Cathy and Timothy Bates. Gregory N. Blase, David D. Christensen of K&L Gates LLP, represented Appellees CitiMortgage, Federal Home Loan Mortgage Corporation.
To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)