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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.

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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 [email protected]. 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.