Federal Court Holds Erroneous 1099-C Form Not a Contract or Discharge of Debt

Recently, the U.S. District Court for the Eastern District of Virginia dismissed claims brought by a borrower against a large mid-Atlantic bank, finding that an IRS 1099-C “Cancellation of Debt” form (Form 1099-C), which mistakenly listed the borrower’s debt as being paid in full, was not a contract and did not actually discharge the debt. 

The borrower alleged that the bank received a judgment lien against the borrower’s property when the borrower failed to make debt payments.  In 2020, the bank issued the borrower a Form 1099-C, indicating that the bank had decided to discontinue collection of a majority of the amount owed under the judgment.  When the borrower subsequently tried to sell the property, the judgment lien prevented the sale.  The borrower contacted the bank, which shortly thereafter issued a corrected Form 1099-C showing the amount discharged to be zero.

The district court dismissed the borrower’s complaint.  First, the court found it was bound by Fourth Circuit precedent establishing that filing the Form 1099-C does not accomplish an actual discharge of debt.  Even though the filing of a Form 1099-C can trigger income tax liability, an actual discharge is not required for a creditor’s obligation to file a Form 1099-C to arise.  Although a minority of courts in other circuits have found that a Form 1099-C can show prima facia evidence of intent to discharge a loan because Form 1099-C can trigger income tax liability for a debtor, the borrower did not allege that he paid taxes based on the cancellation of his debt.  And even if the Form 1099-C created a presumption of intent to discharge the debt, the issuance of a corrected Form 1099-C rebutted the presumption by eliminating the potential for negative tax consequences.

Second, the court found that the issuance of the Form 1099-C did not create a contract.  The bank did not offer anything in return for discharge of the debt, so there was no offer.  The borrower did not accept any offer, because he did not communicate any acceptance to the bank.  The borrower also did not provide any consideration for a discharge of his debt. 

Finally, the court dismissed the borrower’s bad faith and fraud claims.  The court found that the borrower’s “bad faith” claim failed because the Form 1099-C was not a contract, and therefore did not create an implied covenant of good faith and fair dealing.  The borrower’s fraud claim failed because the borrower did not allege an attempt to mislead, or that he suffered any cognizable injury.