Impact of 1099-C Filing On Indiana Deficiency Judgments

Lesson. The filing of a 1099–C form (“1099-C”) does not, in and of itself, operate to extinguish a deficiency judgment under Indiana law. Ultimately, however, lenders should consult with their tax advisors to document, if necessary, that any issuance of a 1099-C following a sheriff’s sale was not the result on an intent to release a borrower (or guarantor) from the deficiency but rather a good faith effort to follow IRS rules and regulations.

Case cite. Leonard v. Old Nat. Bank Corp., 837 N.E.2d 543 (Ind. Ct. App. 2005)

Legal issue. Whether a lender’s issuance of a 1099-C as to its borrower cancelled the underlying debt so as to release the guarantor from liability.

Vital facts. A bank filed a 1099-C following its borrower’s bankruptcy case, which ended in a dismissal but not a discharge. (For more on 1099-C’s, click here.) It appears that the form pertained only to the borrower, not the personal guarantor of the loan, although the 1099-C dealt with the entire loan balance. Please note that Leonard did not involve a mortgage foreclosure. Also, the opinion did not mention whether the bank internally wrote off the debt. The bank in Leonard pursued the guarantor for the loan balance. In response, the guarantor asserted that the 1099-C cancelled the debt.

Procedural history. Following a bench trial that focused primarily on evidence of the bank’s intent, the court entered judgment for the bank and concluded that the bank did not extinguish the debt when it filed the 1099–C. The guarantor appealed.

Key rules. The Indiana Court of Appeals explained that the IRS requires a 1099–C to be filed after an “identifiable event,” which includes “a discharge of debt in bankruptcy, an agreement between the creditor and debtor, and a cancellation or extinguishment of the debt by operation of law that makes the debt unenforceable.”

Holding. The Court affirmed the trial court’s holding that the bank did not cancel the debt by virtue of the 1099–C.

Policy/rationale. The evidence showed that the bank’s filing was the result of the bank’s belief that the IRS required the form to be filed, but it was not an expression of the bank’s intent to discharge the debt.

Leonard appears to be the only Indiana appellate court opinion to address the 1099-C issue, which is to say that there is no Indiana case dealing directly with deficiency judgments following foreclosure sales. The holding is good for Indiana lenders because it definitively concludes that the mere filing of a 1099-C does not cancel a debt. Having said that, Leonard arguably leaves open the door for borrowers or guarantors, with appropriate evidence, to claim that their lender intended to cancel the deficiency by filing the form. In my view, a—or perhaps “the”—compelling factor will be whether the lender filed a satisfaction of judgment, which to my knowledge is the only way to formally terminate a deficiency judgment under Indiana law. Absent a satisfaction of judgment, the deficiency should not be extinguished by the mere issuance of a 1099-C.

Related posts.

• Judgment Deemed Satisfied After Defendant Guarantor Utilizes Strawman To Purchase It
• Full Judgment Bid = Zero Deficiency

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Part of my practice includes representing judgment creditors and lenders, as well as their mortgage loan servicers, in connection with contested mortgage foreclosure actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Report: Surprise Plunge In Bankruptcies Puts Attorneys To Test

From yesterday's Indiana Lawyer:  article link.  The piece does not address consumer/residential foreclosure attorneys, but my understanding is that the story is the same and perhaps even worse due to the ongoing federal foreclosure moratorium.  Meanwhile, commercial foreclosures, which are not subject to a moratorium, also remain surprisingly low here in Indiana.              

Southern District Of Indiana Opinion Explains Why Federal Tax Liens Are Not Terminated In Bankruptcy

Lesson. A bankruptcy discharge can eliminate a tax payer’s personal liability for unpaid income taxes, but it will not extinguish a pre-existing tax lien on the tax payer’s real estate.

Case cite. United States v. Webb, 486 F. Supp. 3d 1238 (S.D. Ind. 2020) PDF

Legal issue. Whether federal income tax liens that attached to real estate belonging to bankruptcy debtors as of the date of the bankruptcy petition were unaffected by the bankruptcy.

Vital facts. The IRS filed notices of tax liens with the Hendricks County Recorder in 2010 against the Webbs related to certain tax assessments. The Webbs filed for bankruptcy in 2013, and one of the assets they scheduled was their residence. Later in 2013, the Webbs received a bankruptcy discharge. In 2014, the IRS mistakenly abated the tax assessments and mistakenly released the tax liens. The IRS corrected these mistakes in 2016 by reversing the abatement and filing revocations of the tax lien releases..

Procedural history. In this action before United States District Judge Hanlon, the USA, on behalf of the IRS, filed a motion for summary judgment to enforce its tax liens.

Key rules.

The Court noted that “a federal tax lien arises when ‘any person liable to pay any tax neglects or refuses to pay the same after demand.’” 26 U.S.C. § 6321.

Moreover, a “lien automatically ‘arise[s] at the time the assessment [of a tax] is made.’” 26 U.S.C. § 6322.

Such liens “attach to ‘all property and rights to property’ owned by the delinquent taxpayer during the life of the lien, 26 U.S.C. § 6321, and continue ‘until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.’” 26 U.S.C. § 6322.

Further, the Court in its opinion noted that prior federal courts have held that a taxing authority's existing lien upon property at the time of bankruptcy is not released or affected by the discharge. “Tax liens survive bankruptcy and may be enforced in rem even after the debtor has been discharged.”

Holding. The District Court granted the IRS’s summary judgment motion. The tax liens “remained intact.”

Policy/rationale. The Webbs asserted that the tax liens could not be reinstated because the tax assessments were discharged through bankruptcy. However, the discharge only extinguished one mode of enforcement, specifically an action against the Webbs for personal liability. The bankruptcy did not, however, disturb the in rem action against the Webbs’ real estate. In other words, the discharge terminated the underlying tax assessments against the Webbs individually but did not affect the right of the IRS to pursue relief for those assessment against the Webbs’ real estate. The Court emphasized the policy that federal tax liens have a “broad reach.”

The Court’s opinion discussed the Webbs’ other contentions concerning the mistaken releases and various bankruptcy-related matters. Please read the opinion if you have further interest in the Webb case.

Related posts.

• An “In Rem” Judgment Limits Collection To The Mortgaged Property
• Mortgage Liens Survive Chapter 7 Bankruptcy Discharge, Allowing In Rem Foreclosures
• Subsequent Federal And State Income Tax Liens: Priority And Redemption

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My practice includes representing lenders, as well as their mortgage loan servicers, entangled in lien priority and title claim disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Absence Of Personal Jurisdiction Dooms Action To Domesticate Ohio Judgment In Indiana

Lesson. Domesticating an out-of-state judgment in Indiana is typically an easy and indefensible process, unless the original court lacked jurisdiction to enter the judgment in the first place.

Case cite. Ferrand Laser Screening v. Concrete Management, 150 N.E.3d 227 (Ind. Ct. App. 2020).

Legal issue. Whether a judgment creditor could domesticate and collect an Ohio judgment in Indiana.

Vital facts. Following construction-related litigation in Ohio, the judgment creditor (plaintiff) filed an action in Indiana against the judgment debtor (defendant) to domesticate and collect on the Ohio judgment. (Judgment Creditor also asserted claims against other defendants to pierce the corporate veil.)

Procedural history. Judgment Debtor filed a motion to dismiss the Indiana action on the basis that the judgment was not eligible for domestication because the Ohio court lacked personal jurisdiction. The trial court denied the motion. Judgment Debtor then filed a motion for summary judgment on the same basis that was denied. Following a bench trial, the court entered an order domesticating the Ohio judgment, and Judgment Debtor appealed.

Key rules. The Indiana Court of Appeals in Ferrand first noted that, under Indiana law, “a judgment of a sister state is presumed to be valid but is ‘open to collateral attack for want of personal jurisdiction or subject matter jurisdiction.’” Judgment debtors carry the burden of rebutting this presumption.

“In assessing a claim that a foreign judgment is void for lack of personal jurisdiction, [Indiana courts] apply the law of the state where the judgment was rendered.”

At issue in Ferrand were principles of “long-arm” jurisdiction from Ohio Revised Code 2307.382. (In Indiana, Trial Rule 4.4(A) governs long-arm jurisdiction.) Without going into detail, there are rules rooted in constitutional law that govern whether a court has personal jurisdiction (power) over an out-of-state defendant. To learn more, please read the opinion.

Holding. The Court held that the Ohio court lacked personal jurisdiction over Judgment Debtor and that the Ohio judgment was, accordingly, void.

Policy/rationale. The Court examined the evidence pertinent to the procedural issues and concluded that Ohio’s long-arm statute did not confer personal jurisdiction over Judgment Debtor. For purposes of this blog, an analysis of the technicalities is not altogether important. What is significant, however, is that a foreign judgment may not be automatically enforceable in Indiana. Although the underlying merits of the judgment cannot be attacked, judgment debtors still can defend the action on the basis that the foreign court lacked jurisdiction (power) to enter the judgment in the first place—assuming the circumstances as applied to the foreign court’s procedural law warrant such a defense.

As an aside, the Judgment Creditor in Ferrand did not avail itself of Indiana’s user-friendly (my term) statute to domesticate the Ohio judgment: Indiana Code 34-54-11. As noted below, I’ve written about this procedure previously. The Court in Ferrand did not mention this statute, and Judgment Creditor proceeded instead to file a new cause of action seeking a judgment to domesticate. I’m not here to say that was wrong—just that the parties, the trial court, and the Court of Appeals did not address it. I suspect the reason behind Judgment Creditor’s tactic was that its action was not limited to domestication but included separate claims against third parties that warranted a new lawsuit.

Related posts.

• 6 Steps To Domesticate A Foreign Judgment In Indiana 
• Domesticating Foreign Judgments Under Indiana's New Electronic Filing System 
• Enforcement Of Wisconsin Judgment In Indiana Defeated
• New York Confession Of Judgment From Cognovit Note Enforceable In Indiana
• Indiana Court of Appeals Vacates Trial Court Order Domesticating Illinois Judgment 

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Part of my practice involves representing judgment creditors in their efforts to collect debts. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Pre-Judgment Seizure of Property: Attachment Fundamentals

Can lenders seize property of a borrower or a guarantor to ensure its availability to satisfy a subsequent judgment?  Rarely.  I touched on this area of the law back on 3/6/07.  Woodward v. Algie, 2014 U.S. Dist. LEXIS 52997 (S.D. Ind. 2014) is an excellent opinion detailing the nuts and bolts of the remedy of attachment. 

The dispute.  The heart of the Woodward case was the plaintiff’s breach of contract claim against the defendant.  The contract involved the design and building of airplanes.  The plaintiff funded the project, and the defendant was on the production side.  The plaintiff alleged that the defendant failed to produce any planes, resulting in damages.  Following the filing of the complaint, the plaintiff filed a petition for a pre-judgment writ of attachment under Ind. Code § § 34-25-2-1(b)(4)-(6) seeking the seizure of the defendant’s property connected to the airplane project.

Attachment law, generally.  In Indiana, Trial Rule 64 and I.C. § 34-25-2-1 authorize pre-judgment attachment.  The Woodward opinion dealt only with statutory attachment, however.  Indiana’s statute requires plaintiffs to file an affidavit in support of any petition showing, (1) the nature of the claim, (2) that the claim is just, (3) the amount sought to be recovered and (4) one or more of the grounds for attachment in I.C. § 34-25-2-1(b).  Indiana law also requires plaintiffs to post a bond “with sufficient surety payable to the defendant, that the plaintiff will duly prosecute the attachment proceeding and pay all damages suffered by the defendant if the attachment proceedings are both wrongful and oppressive.”  See, I.C. § 34-25-2-5. 

Grounds - § (b)(4) – asset movement.  This statutory provision mandates that the plaintiff show the defendant was removing, or was about to remove, property outside of Indiana and was not leaving enough in Indiana to satisfy the plaintiff’s claim.  Plaintiff’s supporting affidavit in Woodward did not meet this requirement.  There was no basis for the Court to find that the defendant had or would have insufficient assets to satisfy the judgment sought by the plaintiff. 

Grounds - § (b)(5)-(6) – fraudulent intent.  These rules require the plaintiff to show that the defendant had sold, conveyed or otherwise disposed of, or was about to sell, convey or otherwise dispose of, executable property with the fraudulent intent to cheat, hinder, or delay the plaintiff.  Again, the Court in Woodward concluded that there was insufficient evidence of the alleged fraudulent intent.  “This Court cannot simply assume fraud on the part of the [defendant].”  I discussed establishing fraudulent intent, through Indiana’s “8 badges of fraud,” in my post dated 12/14/06. 

Property subject to attachment, and why.  The plaintiff in Woodward sought a writ of attachment against essentially all of the defendant’s property.  The Court viewed this as seeking an order for replevin, not attachment.  The attachment remedy "is available in an action for the recovery of money.”  Replevin actions, on the other hand, seek to recover property.  “The plaintiff must aver the amount of damages that he ought to recover, and the sheriff seizes only the amount of property, by value, to satisfy the plaintiff’s averred claim, beginning with personal property.”  One seeking a writ of attachment should not identify specific goods to be seized “because the purpose of attachment is only to ensure that property, any property, will be available to satisfy a money judgment; it is not to preserve the availability of specific items of property for recovery by the plaintiff.”  Because the plaintiff made no claim for replevin, but only money damages, the proposed remedy of seizing specific property of the defendant’s was inappropriate. 

Denied.  The Court denied the petition for prejudgment writ of attachment.  The plaintiff in Woodward failed to prove he was entitled to the relief.  The plaintiff also lost because he proposed an inadequate bond of only $2,500 and submitted no explanation of the calculation, despite seeking a judgment for $475,000.  A pre-judgment writ of attachment is very difficult to obtain in Indiana.  Allegations will not be enough, and concrete proof will be needed.  In my view, an evidentiary hearing, in contested cases, will be required before an Indiana judge will grant this extraordinary relief. 

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My practice includes representing parties, including judgment creditors and lenders, in post-judgment collection proceedings. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

News Reports Regarding Increase In Foreclosure Activity Despite Government Programs

Both of the following news reports stem from the Q1 2021 Foreclosure Market Report by ATTOM Data Solutions:

• U.S. Foreclosure Activity Continues To Increase Despite Government Moratorium
• Despite Federal Actions, Q1 Foreclosures Rise

I was out last week and have been playing catch-up.  I hope to post some new material next week.  

John