United States District Court, W.D. Kentucky, Louisville
MEMORANDUM OPINION AND ORDER
CHARLES R. SIMPSON III, SENIOR JUDGE.
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.
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). 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
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,
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).
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.
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
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
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.
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 ...