Gericke v. Truist (3rd Cir.)
The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), analyzing a recent decision of interest:
In a recent unpublished but instructive opinion from the Third Circuit Court of Appeals (“the Court”), the Court explained why the issuance of Internal Revenue Service (“IRS”) Form 1099-C does not mean a debt has been cancelled or forgiven and further collection efforts regarding the unpaid debt are not a violation of consumer protection laws. Gericke v Truist, 2022 WL 2128561 (3rd Cir. June 14, 2022).
To view the opinion, click here.
Appellant John Gericke (Gericke) took out a consumer installment loan from Susquehanna Bank upon which he defaulted. Susquehanna obtained a judgment for almost $250,000 against Gericke and his wife in 2012. It then merged with Branch Banking and Trust Company, which later became Truist, the appellee in this matter. After Gericke failed to satisfy the judgment, Truist issued an IRS Form 1099-C to him for the 2018 tax year, indicating that almost $200,000 was the “[a]mount of the debt discharged.” However, it then notified Gericke that it intended to continue efforts to collect on the judgment.
In the underlying litigation, filed in the New Jersey state court as a putative class action but removed to the United States District Court of New Jersey by Truist, Gericke argued this was deceptive and that Truist must cancel his obligation to repay the underlying judgment upon issuance of the Form 1099-C. Truist filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which was granted by the District Court. Gericke appealed to the Court, which affirmed.
Gericke asserted that a creditor should never send a Form 1099-C unless it had forgiven the underlying debt and that the Form 1099-C issued here should be rescinded because it violated applicable federal regulations and other consumer protection laws. The Court disagreed with Gericke, concluding that the plain language of 26 C. F. R. § 1.6050P-1 defeated that argument. That regulation provides that “[s]olely for the purposes of the reporting requirements of section 6050P…, a discharge of indebtedness is deemed to have occurred…if and only if there has occurred an identifiable event….” An identifiable event may occur “whether or not an actual discharge of indebtedness has occurred….” This means that the filing of a Form 1099‑C is a “reporting” requirement that does not depend on cancellation of the debt or release of the debtor’s liability. If one of seven identifiable events has happened, then a creditor is mandated to file the Form 1099-C. The seven identifiable events are set forth in the regulations and include the debtor filing for bankruptcy, the expiration of the statute of limitations for collection of the debt, settlement of the debt, and a creditor’s decision to “discontinue collection activity and discharge the debt.” 26 C.F. R. § 1.6050P-1(b)(2)(i).
The Court referenced the only precedential Court of Appeals’ decision interpreting 26 C.F.R. § 1.6050P – F.D.I.C. v Cashion, 720 F. 3d 169 (4th Cir. 2013) – and noted that it reached the same conclusion that filing the Form 1099-C did not operate to cancel the debt nor was such cancellation a condition precedent to filing the Form. If an identifiable event occurred, the creditor was compelled to issue the Form 1099-C as a reporting requirement. Gericke argued that a 2016 amendment to the regulation which removed an eighth identifiable event known as the “36-month rule” had made cancellation necessary, but the Court said that amendment did not affect the plain language of the regulation which still applied to the remaining seven events.
The Court concluded no consumer violation had occurred as a matter of law and further collection efforts were allowed.
The “charge off” of a debt on a credit report and the issuance of a Form 1099-C are two widely misunderstood events by consumer debtors and their counsel. This is not surprising, since the words and Form use language which implies the debt is no longer owed. This relatively simple and straight-forward opinion makes it clear that the Form 1099-C satisfied an IRS reporting requirement only and has no impact whatsoever on collectability of the debt. I hope this review will assist consumer attorneys in explaining to their clients why they still owe the unpaid debt, unless it is actually discharged in a bankruptcy proceeding or satisfied by payment. They might also keep in mind that the expiration of an applicable statute of limitations—one of the seven identifiable events which trigger a Form 1099‑C —also does not mean the debt no longer exists, only that collection efforts must be suspended.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.