Source: https://thelegaltaxi.com/Home/RSC_UniformCommercialCodeSample_2
Timestamp: 2019-02-18 03:44:58
Document Index: 760011618

Matched Legal Cases: ['§ 3', '§ 3', '§ 42', '§ 42', '§ 3', '§ 6050']

RE: Deficiency judgment
The question is whether the issuance of form 1099-c releases the debtor from a potential deficiency judgment and prevents the creditor from going forward with seeking a deficiency judgment against the debtor.
In Hathaway v. Tompkins, 2005 NY Slip Op 25160; 8 Misc. 3d 260; 794 N.Y.S.2 d 899; 2005 N.Y. Misc. LEXIS 835 was decided by Supreme Court of New York, Seneca County, on April 26, 2005, and whose facts were,
Plaintiff, the assignee of a collateral security mortgage given by defendants, who were then married, to secure repayment of consolidated business loans to a corporation owned in part by defendant husband, was entitled to summary judgment on the issue of liability in a foreclosure action despite the issuance of a 1099-c form by the assignor bank indicating that the corporation's debt had been canceled. The 1099-c form did not validly cancel defendants' obligation under UCC 3-605 (2), pursuant to which an "instrument" must be surrendered to the debtors by the "holder" of the instrument to effect a cancellation or renunciation of the debt. Here, even if the 1099-c form constituted” instrument" surrender within the meaning of the statute, it was not surrendered to the debtors until after the assignment of the debt to plaintiff. Consequently, since the assignor bank ceased to be the "holder" of the instrument upon the assignment to plaintiff of the note and mortgage; it could not thereafter cancel the debt by the issuance of a 1099-c form.
Notwithstanding, as noted by counsel for the plaintiff, even if the 1099-c is construed to be a surrender of the instrument, it was not surrendered to the debtors until after the assignment of the debt to the plaintiff. Cancellation or renunciation however can only be performed by "[t]he holder of an instrument. (UCC 3-605 [1]).
While the bank issued a 1099-c form indicating that the debt was cancelled, it appeared there was no valid cancellation of the debt because the requirements of N.Y. U.C.C. Law § 3-605(2) were not met.
Even if the 1099-c was construed to be instrument surrender, it was not surrendered to the debtors until after the assignment of the debt to the assignee. However, cancellation could only be performed by the holder of an instrument pursuant to N.Y. U.C.C. Law § 3-605(1), which the bank ceased to be upon the assignment of the note and mortgage.
The section (New York Uniform Civil Code) UCC 3-605 clearly explains the essentials of issuance of Form 1099-c which are as follows:-
(a) In any manner apparent on the face of the instrument or the endorsement, as by intentionally cancelling the instrument or the party’s signature by destruction or mutilation, or by striking out the party's signature; or
In Franklin Credit Management Corporation v. Thomas J. Nicholas et al. 2001 Conn. Super. LEXIS 1908 which was opined by Superior Court of Connecticut, Judicial District of New London, at New London , on July 12, 2001, and whose facts were,
On December 27, 1994, Brown filed for bankruptcy and listed the Coastal Savings Bank debt as a debt to be discharged. On April 14, 1995, the RTC issued an Internal Revenue Service (IRS) form 1099-C (cancellation of debt) to both Brown and Nicholas, notifying them it had discharged their debt under the note on April 14, 1995. Nicholas reported the cancellation of debt as indicated on the IRS form 1099-C in his 1995 income tax returns and incurred tax consequences.
General Statutes § 42a-3-604(a) governs the discharge of a negotiable instrument where full payment is not alleged. It provides: "A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party's signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed writing." General Statutes § 42a-3-604. On the other hand, "discharge of the obligation of a party is not effective against a person acquiring the rights of a holder in due course of the instrument without notice of the discharge. General Statutes § 3-601(b).
3. In Leonard v. Old Nat'l Bank Corp. 1 , which was decided by Court of Appeals of Indiana, Fourth District, on November 21, 2005 and whose facts were,
1. 837 N.E.2d 543, 2005 Ind. App. LEXIS 2171
“The loan was made to a corporation. Later, the guarantor sold his 50 percent interest in the corporation, and the corporation filed for bankruptcy and defaulted on the loan. Eventually, the bankruptcy was dismissed rather than discharged. However, the bank issued an IRS Form 1099-C, Cancellation of Debt regarding the loan. More than a year later, the guarantor paid the bank $ 17,000 for a release of his obligation on the note. After paying the money, the guarantor discovered the Form 1099-C. The guarantor argued that issuance of the Form 1099-C rendered the debt uncollectable. The appellate court found that there was sufficient evidence to support a finding that the Form 1099-C did not cancel the corporate debt in and of itself. It was reasonable to conclude, as the trial court did, that the bank was simply trying to follow IRS Instructions regarding Form 1099-C, which were ambiguous at best Because the bank did not cancel the debt by virtue of filing Form 1099-C, the trial court did not err in entering its judgment for the bank.”
“Federal law requires every financial institution to send a copy of Form 1099-C to a debtor and to the Internal Revenue Service when discharging, in whole or in part, the indebtedness of any person. 26 U.S.C.S. § 6050P. The instructions published by the Internal Revenue Service for filing Form 1099-C state that the form must be filed after an "identifiable event," which includes, but is not limited to, a discharge of debt in bankruptcy, an agreement between the creditor and debtor, and a cancellation or extinguishments of the debt by operation of law that makes the debt unenforceable. Form 1099-C instructs the debtor that the debtor must report the cancellation of the debt on its income tax returns.”
“Filing a Form 1099-C is merely an informational filing with the IRS done to report an event that has already happened, and thus does not operate to cancel debt itself.”
4. In SIMS v. COMMISSIONER, T.C.2 Summary, was opined by United States Tax Court, on June 26, 2002 and whose facts were,
“The taxpayer husband had a balance on a credit card in 1988. In 2001, the taxpayer was sent a letter stating that his last payment was in 1993, and that various collection attempts ceased in 1996. A Form 1099-C, Cancellation of Debt, was filed in 1999 for taxable year 1998 and had been sent to petitioner's former address in Philadelphia. The sole issue for decision was whether the taxpayers received unreported discharge of indebtedness income in taxable year 1998. The taxpayer argued that he was unaware of the credit card debt, and that he did not know when, if ever, the debt was discharged. There was nothing in the record to indicate any event between 1996 and 1998 that would have altered the status of the account as collectible or uncollectible. Based on the record before the court, the court found that there was no discharge of indebtedness income during 1998.”
“Form 1099-C does not establish that petitioner's debt was ever discharged, which necessarily means that such form did not operate to cancel such debt.”
5. In Bononi v. Bayer Employees Fed. Credit Union (In re Zilka)3 , which was decided by United States Bankruptcy Court For The Western district of Pennsylvania, on July 16th, 2009, and whose facts were,
“The debtor contended that the debts to the creditor were discharged because the creditor issued account statements indicating zero balances on loans which were charged off, and the creditor also issued tax forms to report the cancellation of the debts to the government. The bankruptcy court held, however, that the debts to the creditor were not discharged and the creditor's claims were allowable. The issuance of the account statements indicating zero loan balances was not the legal equivalent of discharging liability on the debt, and issuance of the tax forms did not accomplish a discharge of the debts. The tax forms were merely informational filings which were subject to correction by the creditor, and the creditor's issuance of the forms did not constitute an admission that the creditor discharged the debts and did not operate independently to legally discharge the debts, regardless of the creditor's reason for issuing the forms. Further, the tax forms by themselves did not satisfy the methods prescribed by state law for discharging debt instruments by a voluntary contractual relinquishment of rights to collect the debts with the intent to discharge the debts.”
“The Internal Revenue Service does not view an IRS Form 1099-C as an admission by a creditor that it has discharged the debt and can no longer pursue collection thereon.”
On the basis of the above judgments the creditor's forgiveness of the debt vis-a-vis the IRS does not prevents the creditor from going forward with seeking a deficiency judgment against the debtor and the judicial position of deficiency judgment in case where the creditors sends 1099-c does not prevent the creditor from claiming the deficiency.
2. 2002 Tax Ct. Summary LEXIS 78,
3. 407 B.R. 684, 2009 Bankr. LEXIS 1855