In Kunwar v. Capital One, N.A., 2017 WL 5991864, at *3–6 (N.D.Cal., 2017), Judge Koh allowed an FCRA claim past the pleading stage based on the argument that reporting a debt that was “cancelled” by issuance of a 1099-C rendered the reporting inaccurate.
Plaintiff’s complaint alleges that Defendant reported an unpaid balance in Plaintiff’s account with Defendant to the CRAs, and that this was inaccurate because the underlying debt in Plaintiff’s account was cancelled. See ECF No. 1-1 at 5. However, Defendant states that the only fact Plaintiff offers to support Plaintiff’s allegation that the debt in Plaintiff’s account was cancelled is that Defendant issued a Form 1099-C. Def. Mot. at 7. Defendant argues that “issuance of the 1099-C alone is insufficient to establish” that the debt in Plaintiff’s account was cancelled. Id. In support of its argument, Defendant points to 26 C.F.R. § 1.6050P-1, which governs when certain creditors must file a Form 1099-C with the IRS. 26 C.F.R. § 1.6050P-1(a) states that “any applicable entity…that discharges an indebtedness of any person…must file an information return on Form 1099-C with the [IRS].” However, § 1.6050P-1(a) further clarifies that “a discharge of indebtedness is deemed to have occurred…if and only if there has occurred an identifiable event described in paragraph (b)(2) of this section, whether or not an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred.” In turn, § 1.6050P-1(b)(2) lists eight “identifiable event[s]” that trigger the Form 1099-C reporting requirement in § 1.6050P-1(a). The first seven identifiable events, § 1.6050P-1(b)(2)(A)–(G), all appear to be actual discharges, cancellations, or extinguishments of indebtedness. In contrast, the eighth identifiable event, § 1.6050P-1(b)(2)(H), is “the expiration of the non-payment testing period, as described in § 1.6050P-1(b)(2)(iv).” By extension, § 1.6050P-1(b)(2)(iv) states that a “non-payment testing period” has expired “if a creditor has not received a payment on an indebtedness at any time” during a period of at least 36 months (called the “testing period”). Section 1.6050P-1(b)(2)(iv) also states that a creditor can rebut the presumption that a “non-payment testing period” has expired if the creditor shows that it “has engaged in significant, bona fide collection activity at any time during the 12-month period ending at the close of the calendar year, or if facts and circumstances existing as of January 31 of the calendar year following expiration of the 36-month period indicate that the indebtedness has not been discharged.” In sum, under 26 C.F.R. § 1.6050P-1, any one of eight “identifiable events” can trigger a duty to issue a Form 1099-C. While seven of those “identifiable events” appear to be actual discharges, cancellations, or extinguishments of indebtedness, one event—expiration of a “non-payment testing period”—does not appear to necessarily involve any cancellation of debt. Thus, because it is possible that a creditor will have to issue a Form 1099-C even when no debt has been cancelled, Defendant argues that its issuance of a Form 1099-C for the bank account Plaintiff had with Defendant is insufficient to establish that the debt in the account was actually cancelled. Defendant also cites an IRS Information Letter issued in October 2005. See I.R.S. Info. 2005-0207, 2005 WL 3561135 (Dec. 30, 2005). In that letter, the IRS addressed a creditor’s concern that filing a Form 1099-C would constitute a written admission that the creditor had discharged debt by stating that “[t]he [IRS] does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.” Id. Further, Defendant points to a published decision from the United States Court of Appeals for the Fourth Circuit holding that at the summary judgment stage, a creditor’s issuance of a Form 1099-C alone is not enough to create a triable issue of fact as to whether the creditor has cancelled any debt. Def. Mot. at 8–9. In FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013), the Fourth Circuit first noted that “there is no uniformity in how [ ] courts have resolved the central inquiry” of whether the issuance of a Form 1099-C “create[s] a genuine issue of material fact as to whether [a debt] had been cancelled or assigned.” Id. at 177. The Fourth Circuit then sided with the “approach taken by a majority of the courts to consider the matter,” and stated that “[t]he plain language of [26 C.F.R. § 1.6050P-1] leads us to conclude that filing a Form 1099-C is a creditor’s required means of satisfying a reporting obligation to the IRS; it is not a means of accomplishing an actual discharge of debt, nor is it required only where an actual discharge has already occurred.” Id. at 178–79. Cashion is the only published decision from any federal court of appeals that has spoken on this issue. However, as the Fourth Circuit noted in Cashion, some lower courts have reached the opposite conclusion. 720 F.3d at 178; see, e.g., In re Reed, 492 B.R. 261, 273 (Bankr. E.D. Tenn. 2013) (stating that “the issuance of a Form 1099-C reflects that a financial institution has, in accordance with 26 U.S.C. § 6050P and 26 C.F.R. § 1.6050P-1, discharged an indebtedness, which must then be reported by the debtor as taxable income,” and acknowledging that it is “aware that it has adopted the minority view”). Plaintiff urges the Court to follow this line of cases. Pl. Opp. at 8–9. Notably, neither the Ninth Circuit nor any court within this district has ruled on whether, at the summary judgment stage, a creditor’s issuance of a Form 1099-C alone creates a genuine issue of fact as to whether the creditor cancelled a debt. The Court need not adopt a position on this issue at this stage of the proceedings. Even assuming that a creditor’s issuance of a Form 1099-C alone cannot create a genuine issue of fact as to whether the creditor cancelled a debt at the summary judgment stage, the instant case is still only at the motion to dismiss stage. Thus, unlike at summary judgment, where the parties have had the benefit of discovery, the relevant inquiry here on a motion to dismiss is whether Defendant’s issuance of a Form 1099-C is sufficient to plausibly suggest that the debt in Plaintiff’s account with Defendant was cancelled. Given that seven of the eight “identifiable events” that can trigger a creditor’s duty to issue a Form 1099-C are all forms of debt cancellation, and that the eighth “identifiable event” can still involve a cancellation of debt, the Court finds that Defendant’s alleged issuance of a Form 1099-C is enough to plausibly suggest that Plaintiff’s indebtedness was cancelled.