Amtrust Bank v. Fossett – 12/15/2009

December 30, 2009

Arizona Court of Appeals Division One Holds That a 1099-C Cancellation of Debt Form Is Prima Facie Evidence of Cancellation of a Debt That May Be Rebutted by Evidence Showing that the Lender Did Not Intend to Forgive the Debt.

A car belonging to the Appellants, the Fossetts, was repossessed and sold in January 2003 by Appellee, Amtrust Bank, because the Fossetts had ceased making payments on their car loan. The sale of the car left a deficiency of $19,727.86 on the loan. In February 2005, Amtrust sent to the Fossetts a form 1099-C, a federal tax form titled “Cancellation of Debt.” The 1099-C listed $17,594 in a box labeled “Amount of debt cancelled.” Believing that their debt had been canceled, the Fossetts listed the amount as discharged debt in their tax filing for the year. Amtrust later sued the Fossetts in superior court, alleging breach of the loan agreement and seeking repayment of the deficiency. The Fossetts moved for summary judgment, arguing that the 1099-C form had cancelled the debt. The superior court denied the Fossetts’ motion and entered judgment for Amtrust.

The Arizona Appeals Court affirmed the denial of the Fossetts’ motion for summary judgment but reversed the superior court’s judgment in favor of Amtrust. A.R.S. § 47-3604(A)(2) states that debt is discharged when the lender “agree[s] not to sue or otherwise renounce[s] rights against the party by a signed writing.” Amtrust argued that sending the 1099-C form to the Fossett’s did not constitute a signed writing renouncing its rights. Instead, Amtrust argued that it issued the 1099-C form because federal regulations required that the form be issued after a certain time period and that federal regulations allow a lender to issue the form without actually canceling the underlying debt. The Court held that while the 1099-C form was prima facie evidence that Amtrust had discharged the debt under A.R.S. § 47-3604(A)(2), Amtrust could rebut the evidence by showing that it did not intend to cancel the debt. The Court held that the record before the superior court presented questions of fact that precluded it granting judgment in favor of Amtrust. Some of these questions of fact were whether federal law required that Amtrust issue the 1099-C form when it did, and Amtrust’s policies and practices regarding debt cancellation.

Judge Johnsen authored the opinion; Judges Portley and Barker concurred.