Loan Deficiency

1099-C New Interpretations by AZ Courts, see what Doug Farnham has to say with Mortgage Mediation Group.


1099-C
New Interpretations by AZ Courts
Over the course of the past year or more there has been much discussion in the real estate community of the effect of the issuance of a 1099 by a lender(s) to the IRS following a short sale of a property and reporting the deficiency balances remaining on the loan(s). Many have openly stated that when a lender submits the 1099 to the IRS following the short sale that the lender has reported the deficiency not only as forgiven debt for tax reporting purposes but, has also forgiven the debt for purposes of legal collection against the borrower/homeowners. Many homeowners have relied upon those statements. The exact legal effect of the issuance of a 1099 by a lender on that lender’s right to legally enforce and collect upon the deficiency, however, is not so very clear. The Arizona Court of Appeals has issued an opinion in Amtrust Bank v. Fossett, No. 1 CA-C 08-0840 (Ariz. App. Dec. 15, 2009) in which the court concluded that the effect of the issuance of a 1099 upon a lenders ability to sue a borrower for a loan deficiency has not been decided.
The simple facts of this case are that Fossett had defaulted upon a car loan issued by Amtrust Bank in 2002. The bank repossessed the car and sold it in 2003 leaving a balance due on the loan of $20,000. Two years later, 2005, Amtrust filed a 1099-C with the IRS reporting the sum of $18,000 as “discharged” or a forgiven debt. As a result, Fossett reported the sum of 18,000 as income and included that amount on his income tax returns for that tax year.
Amtrust later sued Fossett for the unpaid balance due on the loan. Fossett filed a motion with the court claiming that Amtrust had “discharged” or forgiven the balance of the loan by the filing of the 1099 and therefore, should not be permitted sue him and collect upon that same debt. Amtrust replied by arguing that the filing of the 1099 was done in order to comply with Federal tax laws and accounting requirements but was not intended to release the borrower from the legal obligation to repay the balance on the loan. The Court of Appeals found that there is no clear position under Arizona law and that there is a split of authority across the country on whether the issuance of a 1099 does or does not act as a release by the lender of the ability to sue a borrower for the remaining deficiency on a loan (in Connecticut it does, but in Pennsylvania it does not). The Court of Appeals remanded the case back to Maricopa Superior Court for final determination at the trial level.

Clearly the issue of whether a lender will be legally precluded from suing a borrower to collect upon a loan deficiency after a short sale because of the filing of a 1099 remains undecided. Arizona courts could go either way on this issue. Until there is a clear and precise ruling from the Arizona courts, borrowers in short sales should not be told that the issuance of a 1099 may provide them any form of protection from legal claims by their lender to collect on any loan deficiencies.


Doug Farnham (Central/Southern AZ)
(602)774-3753
dfarnham@tcmmg.com

Bob Verbic (Northern AZ)
(928)899-5765
bverbic@tcmmg.com

www.MortgageMediationGroup.com

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