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Johnson v. Branch Banking and Trust Co.

United States District Court, W.D. Kentucky, Louisville

September 19, 2018

Chad JOHNSON, and Rebecca JOHNSON PLAINTIFFS
v.
BRANCH BANKING AND TRUST CO., et al. DEFENDANTS

          MEMORANDUM OPINION AND ORDER

          CHARLES R. SIMPSON III, SENIOR JUDGE.

         I. Introduction

         This case is before the Court on Defendant Branch Banking and Trust Company's (BB&T) motion to dismiss Plaintiffs Chad and Rebecca Johnson's complaint. DN 17. The Johnsons' complaint includes claims of negligence, defamation, and violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. DN 1, p. 2-3. Specifically, the Johnsons allege that: BB&T falsely reported a delinquent debt to the three major consumer reporting agencies (CRAs): Equifax Information Services, LLC, Trans Union, LLC, and Experian Information Solutions, Inc. Id. The Johnsons also name the CRAs as Defendants and allege that they failed to investigate and correct BB&T's credit reporting. Id. On May 18, 2018, BB&T moved to dismiss the complaint for failure to state a claim. DN 17. Since then, the state law claims, along with Defendants Equifax and Trans Union, have been dismissed. DN 21, 22, 28. The Johnsons filed a response on June 22, 2018, which was amended with leave of the Court on July 13, 2018. DNs 23, 26, 30. BB&T replied on July 16, 2018. DN 27. This matter is now ripe for review. For the reasons set forth below, BB&T's motion to dismiss will be denied.

         II. Factual Background

         The Johnsons opened a credit card account with BB&T in April 2011. DN 26, p. 3. In April 2014, following non-payment, BB&T charged off the Johnsons' credit card debt in the amount of $17, 975.20. DN 17, p. 2; DN 26, p. 3. BB&T then issued a Form 1099-C to the Johnsons and filed the form with the Internal Revenue Service (IRS).[1] Id. The Johnsons claim this notice, with the heading “Cancellation of Debt, ” discharged their debt. DN 26, p. 3-4. They further allege that they paid income tax on the cancelled debt and that BB&T has not attempted to collect on the debt since the issuance of the Form 1099-C. DN 26, p. 4. In January 2018, the Johnsons accessed their credit reports and discovered that BB&T was still reporting the debt to the CRAs. DN 26, p. 4; DN 17, p. 2. This action followed.

         III. Legal Standard

         To survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The complaint need not contain “detailed factual allegations, ” yet must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id.

         “[A] district court must (1) view the complaint in the light most favorable to the plaintiff and (2) take all well-pleaded factual allegations as true.” Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009) (citations omitted). “The defendant has the burden of showing that the plaintiff has failed to state a claim for relief[.]” Wesley v. Campbell, 779 F.3d 421, 428 (6th Cir. 2015).

         IV. Discussion

         The disagreement between the parties boils down to determining the legal significance of the filing of a Form 1099-C by BB&T. BB&T argues that the “Johnsons' debt was not discharged or extinguished, and mere issuance of a Form 1099-C does not establish as much.” DN 17, p. 1. The Johnsons, however, argue that a 1099-C can serve as prima facie evidence of the discharge of a debt and that discovery will permit them to prove it. DN 26, p. 10-12, 14. BB&T counters that the Johnsons are not entitled to discovery and urge that the Court dismiss based solely on the legal significance of the 1099-C. DN 27, p. 5-6.

         The disagreement between the parties extends to the courts. Most have held that, absent other evidence, the issuance of a Form 1099-C does not automatically discharge a debt. See e.g. FDIC v. Cashion, 720 F.3d 169, 176-81 (4th Cir. 2013); Cadle v. Neubauer, 562 F.3d 369, 374 (5th Cir. 2009); Wells Fargo Advisors, LLC v. Mercer, 735 Fed.Appx. 23 (7th Cir. 2018). A small minority of courts have disagreed and found that the issuance of a Form 1099-C alone does cancel a debt. See In re Reed, 492 B.R. 261, 268 (Bankr.E.D.Tenn. 2013); In re Crosby, 261 B.R. 470, 476-77 (Bankr. D. Kan. 2001); In re Welsh, 06-10831-ELF, 2006 WL 3859233, at *2 (Bankr. E.D. Pa. Oct. 27, 2006). The minority have generally found that “because filing a Form 1099-C has legal significance to the debtor's income tax liability, and because the debtor faces penalties or fines for failing to comply with the obligations imposed, it would be inequitable to permit a creditor to collect the debt after having received the benefit of the ‘charge-off' of the debt from filing the Form 1099-C.” See Cashion, 720 F.3d at 178.

any applicable entity . . . that discharges an indebtedness of any person . . . must file an information return on Form 1099-C with the Internal Revenue Service. Solely for purposes of the reporting requirements of [this section], a discharge of indebtedness is deemed to have occurred . . . if and only if there has occurred an identifiable event described in paragraph (b)(2) of this section, whether or not an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred.

26 C.F.R. § 1.6050P-1(a) (emphasis added). Under the plain language of the regulation, a creditor may be obligated to file a Form 1099-C even though an actual discharge of the debt has not occurred.

         Further, in explaining the regulation's application, the IRS released a series of informal Information Letters. See IRS INFO 2005-0207, 2005 WL 3561135 (Oct. 7, 2005); IRS INFO 2005-0208, 2005 WL 3561136 (Oct. 7, 2005). The first letter notes that the IRS “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.” The second adds that “Section 6050P and the regulations do not prohibit collection activity after a creditor reports by filing a ...


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