Bank of America is currently fighting a case filed by a consumer that received a 1099-C form from the bank. Although BofA dodged federal claims — notably FDCPA — in the case, it will still have to defend other charges in state court. As we approach tax season, any debt firm that sends 1099-C forms to consumers should watch developments closely.

In 2010, Bank of America began internal debt collection efforts against Freddie S. Raley for two overdue credit card accounts. The consumer claimed that he never had a Bank of America credit card and insisted that the accounts were not his. He hired an attorney who directed the bank to send all communications to their legal office.

But BofA continued to contact Raley threatening legal action and referral to a collection agency.

In January of this year, Bank of America sent a 1099-C form to Raley informing him that the bank had reported nearly $7,500 in debt forgiveness to both the IRS and his state’s (Alabama) revenue department in closing the accounts. When Raley’s lawyer contacted BofA, it referred him to the bank’s fraud department.

Raley sued Bank of America in April (Raley v. Bank of America) alleging violations of the FDCPA and a host of state laws including negligence, private nuisance, and wantonness. The case was originally filed in state court, but BofA moved it to federal district court to answer the FDCPA claim.

Raley filed an amended complaint in September in response to BofA’s motion for judgment adding defamation to the list of state-level complaints. But the plaintiff did not file for leave to amend. So BofA moved to dismiss and Raley finally did file for leave to amend in October, in addition to asking for the case to be remanded to state court having dropped the FDCPA claim.

In late November, Judge William M. Acker, Jr. — in the Northern District of Alabama — ruled on the matter. Because Raley had abandoned his federal claims, under the FDCPA and under tax code prohibiting the filing of false claims, there was little for Acker to decide, other than whether to remand the case to state court, which he did.

The discussions of the state claims are very interesting and should be noted by ARM firms.

For common law negligence, Acker noted that Raley’s tax liability would almost certainly increase due to the 1099-C form and that the facts as presented are against Bank of America. “Raley alleges that his attorney repeatedly informed the Bank that Raley did not open the credit card accounts and does not owe the debt, yet the Bank still issued the 1099-C,” Acker wrote. He noted that if he was not remanding the case to state court, there is enough evidence for Raley’s common law negligence claim to survive a motion to dismiss.

Acker similarly noted that the charges of wantonness and defamation would have been allowed to proceed in his court if he was not kicking the case back to state court.

In the discussion of wantonness, Acker wrote the following passage of interest:

“Raley alleges that the Bank repeatedly contacted him and threatened collection actions against him even though he claimed to have never opened the accounts and instructed that all contact be made through his attorney. The Bank then, apparently without ever referring the matter to its Fraud Department, submitted a Form 1099-C, stating that it had forgiven the debt. While these are unproven allegations, they are sufficient at this stage to plausibly allege that the Bank acted with a reckless or conscious disregard of Raley’s rights, especially considering the repeated denials of liability and lack of a sufficient investigation into the validity of the debt.”

While this case is far from over – Bank of America could still emerge victorious in state court – it should serve as a warning over the practice of submitting 1099-C forms to consumers. The practice is already tricky and the developments in this case won’t help matters any.


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