Key Points

  • The First Circuit held that issuing an IRS Form 1099-C does not effect a per se discharge of the underlying debt or waive the conditions of a debt-forgiveness agreement.
  • The court read 26 C.F.R. § 1.6050P-1 to require the form whenever an identifiable event occurs, whether or not the debt has actually been discharged, joining the Fourth Circuit in Cashion and the Third Circuit in Gericke.
  • The court held that the district court properly denied Rule 56(d) discovery of Ocwen's tax filings because Deutsche Bank Trust, not the servicer Ocwen, held the loan and would receive any tax write-off.
  • The court rejected Dworman's other evidence of forgiveness, including a transfer notice that omitted the deferred balance, which PHH corrected about two months later.
  • The good-faith, Chapter 93A and declaratory judgment claims failed as unpreserved, undeveloped or derivative of the failed contract claim.

A federal appeals court ruled Wednesday that an Internal Revenue Service form titled "Cancellation of Debt" did not by itself cancel a Massachusetts homeowner's mortgage debt, rejecting his bid to have $406,714.94 of his loan balance treated as forgiven.

The U.S. Court of Appeals for the First Circuit affirmed summary judgment for PHH Mortgage Corp. and Ocwen Loan Servicing LLC, the companies that serviced Alan Dworman's home loan. Circuit Judge Aframe wrote the opinion for a three-judge panel that also included Chief Judge Barron and Judge Gelpí.

The panel held that an entity like Ocwen files a Form 1099-C, which reports a cancelled debt to the IRS because the cancelled amount may count as taxable income, to satisfy a reporting rule. The filing does not forgive the debt or excuse a borrower from the conditions of a forgiveness deal. The ruling aligns the First Circuit with the Fourth Circuit, which reached the same conclusion in F.D.I.C. v. Cashion in 2013, and with the Third Circuit, which agreed with Cashion in Gericke v. Truist in 2022.

Dworman borrowed $549,600 from First Ohio Banc & Lending Inc. in 2007 to refinance a mortgage on his Massachusetts home, the opinion said. He lost his job the following year and fell behind on payments. In November 2016, he signed a permanent loan modification with Ocwen, and the U.S. Department of the Treasury paid Ocwen a $1,200 incentive for implementing it.

The modification raised his principal to $821,864.94 and deferred $465,114.94 of that amount until the loan matured. Of the deferred sum, $406,714.94 was "eligible for forgiveness" in three equal installments over three years. Each installment depended on a condition precedent. Dworman could not fall three full monthly payments behind.

On Dec. 5, 2016, four days after the modification took effect, Ocwen sent Dworman a Form 1099-C listing $406,714.94 as the "[a]mount of debt discharged." Dworman reported that amount as income on his 2016 tax return. He then missed his first modified payment and stayed delinquent through 2019, while Ocwen sent delinquency notices, including a 2018 notice that his loan had been referred to counsel to begin foreclosure proceedings.

In a June 2019 transfer notice, PHH told Dworman that it had merged with Ocwen and was now servicing his loan. The notice omitted the deferred balance, and PHH sent a correcting letter that August, which Dworman denies receiving. In April 2020, PHH told him the deferred balance "was not forgiven." Dworman caught up on his payments in 2020 and sued in state court in January 2023. After the servicers removed the case to federal court, U.S. District Judge Margaret R. Guzman of the District of Massachusetts granted summary judgment.

On the merits, Judge Aframe began with the federal regulation that requires the form. The rule treats a debt as discharged for reporting purposes once one of seven "identifiable event[s]" occurs, "whether or not an actual discharge of indebtedness has occurred." Ocwen's form identified the event as an agreement to discharge debt "at less than full consideration," which described the 2016 modification.

"This language forecloses a conclusion that issuing a Form 1099-C effects a per se discharge of the underlying debt regardless of the debtor's compliance with the debt forgiveness agreement," Judge Aframe wrote. The regulation instead "supports our understanding that the form is a means of satisfying the IRS's reporting requirement," the opinion said. The court also cited 2005 IRS information letters, quoted in Cashion, stating that the agency "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."

Dworman argued that his case differed from Cashion, where the form was the only evidence of forgiveness. He pointed to the June 2019 transfer notice, Ocwen's issuance of one form rather than three, the $1,200 Treasury incentive and an alleged tax write-off by Ocwen. "None of these additional considerations moves the needle," the court wrote.

The transfer notice omitted the deferred amount but never said the amount had been forgiven, the panel concluded. "To the extent the June 2019 Transfer Notice introduced ambiguity about a possible discharge, PHH resolved that ambiguity by timely correcting its initial omission," Judge Aframe wrote. The panel held that Dworman forfeited the one-form argument by raising it first on appeal and waived the incentive theory by mentioning it only in passing.

The write-off theory also sank Dworman's procedural challenge. He had asked the district court, under Federal Rule of Civil Procedure 56(d), to delay ruling until he obtained Ocwen's tax filings. The panel said the theory "suffers a fatal flaw: Ocwen is not entitled to a tax write-off for any forgiveness of Dworman's loan debt." Deutsche Bank National Trust Company, as trustee, held the loan, so any tax benefit from forgiveness would have gone to the trust. Dworman never sought the trust's records. At oral argument, the opinion says, Dworman admitted that Ocwen's returns were likely irrelevant.

In a footnote, the panel acknowledged Dworman's argument that the form can confuse consumers. "The potential for consumer confusion, however, does not create a genuine dispute of material fact on whether issuance of the Form 1099-C legally discharged Dworman's debt," the court wrote.

The panel also rejected Dworman's remaining claims. It held his good-faith arguments forfeited and waived because he raised them first on appeal without developing them, and it held that his claims under Chapter 93A, the Massachusetts consumer protection statute, and for a declaratory judgment depended on the failed contract claim.

Dworman was represented by J. Mark Dickison of Lawson & Weitzen, LLP. PHH and Ocwen were represented by Marissa I. Delinks of Hinshaw & Culbertson LLP.

The decision leaves the district court's judgment for PHH and Ocwen in place. The 2016 modification defers payment of the $465,114.94 balance until the loan's maturity date. The opinion notes that Dworman voluntarily dismissed his claims against First Ohio Banc, the original lender, following the appeal.