When a Bank Files IRS Form 1099-C, the Indebtedness Is Not Cancelled
April 7, 2006
Michael Weissman - Chicago
In Leonard v. Old National Bank Corporation, 837 N.E.2d 543 (Ind. 2005), the issue was whether a guarantor was discharged from liability on his guarantee when the debtor filed for bankruptcy protection and the bank filed an IRS Form 1099-C.
Old National established a line of credit for Tile & Mastic in 1992 that was personally guaranteed by Phillip Leonard and his brother Steve. They each owned 50 percent of the stock of the corporation. In September of 1994, Phillip sold his 50 percent to Steve. In December of 1994, the corporation defaulted on its loan and filed a petition for bankruptcy relief. The corporation’s bankruptcy case was dismissed in April 1995. No discharge was granted.
In January 1996, the bank issued IRS Form 1099-C with respect to the uncollected balance of the loan. It listed April 12, 1995 – the date the bankruptcy was dismissed – as the date the loan was cancelled.
Demand was made on Phillip to satisfy his guaranty obligation. In May of 1997, he executed a repayment agreement calling for a payment of $17,000 in exchange for a release. He paid the $17,000 and then discovered the 1099-C had been filed.
In September 1998 Philip sued the bank, charging material misrepresentation and failure of consideration. He said the filing of the 1099-C cancelled the corporate debt by operation of law so it was not necessary for the court to look to the intent of the bank in filing the form.
Although the court noted that federal law requires every financial institution to send a copy of Form 1099-C to the debtor and the Internal Revenue Service when the indebtedness of any person is discharged, the court credited the testimony of the bank’s certified public accountant who characterized the Form 1099-C as an “informational filing” that, in and of itself, does not cancel the debt. With the debt not having been cancelled, the court ruled in favor of the bank and held that the guaranty was enforceable.
What’s the Point?
Cancellation of an indebtedness requires an affirmative act by the creditor that goes beyond the filing of an IRS Form 1099-C. There was no affirmative act of cancellation in the instant case. Even if an IRS Form 1099-C must be filed, it is to be noted that it is, at best, informational rather than substantive.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.