Gugger v. USAA Federal Savings Bank et al

Filing 26

ORDER denying 4 Defendant's Motion to Dismiss. The Court DENIES USAA's motion to dismiss, (Doc. No. 4), and sua sponte DISMISSES the CCRAA claim. Signed by Judge Anthony J. Battaglia on 11/17/2017. (acc)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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Paul Gugger,

Case No.: 17-cv-1518-AJB-AGS
Plaintiff,

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ORDER DENYING DEFENDANT’S
MOTION TO DISMISS (Doc. No. 4)

v.
USAA Federal Savings Bank,
Defendant.

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Before the Court is Defendant USAA’s motion to dismiss Plaintiff Paul Gugger’s

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complaint. (Doc. No. 4.) The Court heard oral arguments on November 2, 2017, and took

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the matter under submission. Upon consideration of the motion and the parties’ arguments

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in support and opposition, the Court DENIES USAA’s motion to dismiss, and sua sponte

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DISMISSES Gugger’s Consumer Credit Reporting Agencies Act claim.

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I.

BACKGROUND

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Gugger filed his complaint, alleging USAA violated the Fair Credit Reporting Act,

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(“FCRA”), 15 U.S.C. § 1681, and the California Consumer Credit Reporting Agencies Act,

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(“CCRAA”), Cal. Civ. Code § 1785.25(f). The basis of Gugger’s complaint arises from

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USAA’s issuance of a form to Gugger regarding his account’s debt. Specifically, USAA

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issued Gugger a Form 1099-C with code “G” marked. (Doc. No. 1-3 at 4.) According to

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Gugger, because USAA issued this form with code “G” marked, he believed it legally

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released him from any further obligation to pay the debt. (Id.) USAA then filed the Form

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1099-C with the IRS, obligating Gugger to pay taxes on the debt—which he thought was
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discharged. But, when Gugger received his consumer credit report, he discovered the debt

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was still being reported. (Id. at 2.)

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Gugger sent a written dispute to Trans Union regarding the inaccurate debt. (Id. at 4.)

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Trans Union forwarded the dispute to USAA, but the debt was not removed. (Id.) Gugger

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then sent a second written dispute to Trans Union. (Id.) Again, Trans Union forwarded the

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dispute to USAA, but the debt remained. (Id.) Instead, both Trans Union and USAA

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verified the disputed information as accurate. (Id. at 5.)

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Gugger now asserts the following claims: (1) USAA failed to conduct a reasonable

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investigation after receiving written disputes about Gugger’s debt, as required under the

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FCRA, and (2) USAA failed to report accurate information breaching the CCRAA.

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(Doc. No. 1-3 at 6.) After reaching a settlement, (Doc. No. 13), the Court dismissed Trans

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Union with prejudice. (Doc. No. 24.) For the reasons set forth below, the Court DENIES

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USAA’s motion to dismiss, and sua sponte DISMISSES the CCRAA claim.

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II.

LEGAL STANDARDS

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A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001). In reviewing a motion to dismiss under Rule

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12(b)(6), the Court must assume the truth of all factual allegations and must construe them

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in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d

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336, 337–38 (9th Cir. 1996). However, legal conclusions cast in the form of factual

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allegations will not be taken as true. Roberts v. Corrothers, 812 F.2d 1173, 1177

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(9th Cir. 1987). Similarly, “conclusory allegations of law and unwarranted inferences are

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not sufficient to defeat a motion to dismiss.” Pareto v. Fed. Deposit Ins. Corp., 139 F.3d

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696, 699 (9th Cir. 1998). A “motion to dismiss is not the appropriate procedural vehicle to

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test the merits of Plaintiff’s complaint.” Walker v. City of Fresno, No. 1:09cv1667, 2010

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WL 3341861, at *4 (E.D. Cal. Aug. 23, 2010) (citing Navarro, 250 F.3d at 732).

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Congress enacted the FCRA “to ensure fair and accurate credit reporting, promote

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efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. v.

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Burr, 551 U.S. 47, 52 (2007). To ensure credit reports are accurate, the FCRA imposes
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certain duties on “furnishers,” which are entities that provide credit information to

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consumer reporting agencies. Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1153

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(9th Cir. 2009). One such duty imposed on a furnisher is triggered when a furnisher

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receives notice of a dispute from a credit reporting agency, (“CRA”), stating the consumer

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disputes the information. Id. at 154; see also 15 U.S.C. § 1681s-2(b). Section 1681s-2(b)

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provides that, after receiving a notice of disputes, the furnisher shall:

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(A) conduct an investigation with respect to the disputed information;
(B) review all relevant information provided by the [CRA] . . .;
(C) report the result of the investigation to the [CRA];
(D) if the investigation finds that the information is incomplete or inaccurate,
report those results to all other [CRAs] to which the person furnished the
information . . .; and
(E) if an item of information disputed by a consumer is found to be inaccurate
or incomplete or cannot be verified after any reinvestigation . . . (i) modify
that item of information; (ii) delete that item of information; or (iii)
permanently block the reporting of that information.
15 U.S.C. § 1681s-2(b)(1).

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The CCRAA “limits the dissemination of a consumer’s credit information.”

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McClain v. Octagon Plaza, LLC., 159 Cal. App. 4th 784, 800 (2008) (internal quotations

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omitted). Section 1785.25(f) requires furnishers who receive notice of a dispute to

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investigate the disputed information and review relevant information. Cal. Civ. Code

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§ 1785.25(f); Carvalho v. Equifax Info. Servs. LLC, 629 F.3d 876, 888 (9th Cir. 2010). But,

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§ 1785.25(f) is preempted by the FCRA. See id. at 888–89. (“Section 17825(f), however,

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is not expressly saved from preemption by the FCRA.”).

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III.

DISCUSSION

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Gugger alleges that USAA violated the FCRA and the CCRAA. (Doc. No. 1.)

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Although Gugger does not bring a claim challenging the interpretation of Form 1099-C,

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USAA moved to dismiss Gugger’s claims premised on the assertion that the Form 1099-C

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did not discharge Gugger’s debt. (Doc. No. 4.) During oral arguments on November 2,

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2017, much time was spent debating whether a Form 1099-C discharges debt. Thus, the

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Court must first address Form 1099-C’s applicability and will then address USAA’s

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arguments in turn.

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A. 1099-C’s Applicability

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The Internal Revenue Code requires a creditor discharging indebtedness to file an

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“information return on Form 1099-C with the Internal Revenue Service.” 26 C.F.R.

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§ 1.6050P-1(a). Whether or not an actual discharge of indebtedness has occurred, a

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“discharge of indebtedness is deemed to have occurred” for the sole purpose of reporting

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requirements. Id.

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USAA argues the plain language of the IRS Form 1099-C sent to Gugger does not,

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alone, extinguish Gugger’s debt. (Doc. No. 4 at 6.) USAA asserts the IRS Code section

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1.6050P-1(a) requires creditors to file Form 1099-C even when the debt is not cancelled.

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(Id. at 7.) USAA relies on two IRS Information Letters explaining the IRS “does not view

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a Form 1099-C as an admission by the creditor that it has discharged the debt and can no

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longer pursue collection.” (Id. at 8.) As additional evidence, USAA cites courts in other

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jurisdictions that have followed the IRS Information Letters and concluded that the mere

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filing of a Form 1099-C does not discharge debt. (Id. at 9.)

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In opposition, Gugger argues USAA admitted to discharging Gugger’s debt by

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selecting code “G” on the Form 1099-C. (Doc. No. 11 at 7.) Gugger cites to IRS Publication

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4681 on the IRS website1 that states code “G” discontinues the debt. (Id.) Further, Gugger

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argues the IRS Information Letters do not offer any opinion on USAA’s selection of code

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“G.” (Id. at 10.) Gugger states these letters are “vague, unconvincing, and misleading.”

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(Id.)

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In USAA’s reply, it relies heavily on F.D.I.C. v. Cashion from the Fourth Circuit.

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(See generally Doc. No. 12.) Ruling on a summary judgment motion, the court held Form

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1099-C was “not a means of accomplishing an actual discharge or debt,” but, is instead a

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IRS, Publication 4681 (2016), Canceled Debts, Foreclosures, Repossessions, and
Abandonments (last updated September 11, 2017), www.irs.gov/publications/p4681.
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reporting obligation. F.D.I.C. v. Cashion, 720 F.3d 169, 179 (4th Cir. 2013). USAA argues

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the Cashion court’s decision not to discuss whether certain codes were checked reveals

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that the codes are unimportant to Gugger’s claims. (Doc. No. 12 at 3.)

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At oral argument, USAA cited to Mennes v. Capital One, N.A. as the only federal

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court case that addresses the same issue under a motion to dismiss. See Mennes v. Capital

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One, N.A., No. 13CV822BBC, 2014 WL 1767079, at *6 (W.D. Wis. May 5, 2014). The

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Mennes court granted Defendant’s motion to dismiss as to Plaintiff’s claim the Form 1099-

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C is evidence of debt cancellation. Id. Thus, USAA argues at the bare minimum, the Court

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should rule similarly and grant the motion to dismiss with leave to amend.

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Examining applicable case law and the cited publication, the Court finds a split in

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authority as to the legal effect to issuing a Form 1099-C. Compare Cashion, 720 F.3d at

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181 n.10 (affirming summary judgment against debtor offering only the Form 1099-C as

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evidence the debt was extinguished), and Ware v. Bank of America Corp., 9 F.Supp.3d

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1329, 1341 (2014) (affirming summary judgment against debtor for presenting no legal

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authority supporting the theory a 1099-C discharges debt), with In re Reed, 492 B.R. 261,

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273 (Bankr. E.D. Tenn. 2013) (holding a creditors issuance of a 1099-C reflects a discharge

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of debt). But, most of these cases are decided on summary judgment and after parties have

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had the benefit of discovery. See Cashion, 720 F.3d at 181 n.10. Also, none of these cases

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discuss code “G’s” effect on discharge.

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Here, Gugger asserts his claims on the pleadings without the opportunity to conduct

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discovery, which favors denying USAA’s motion to dismiss. Habetmariam v. Vida Capital

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Group, LLC, No. 216CV01189MCEGGH, 2017 WL 627404, at *3 (E.D. Cal. Feb. 14,

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2017) (denying defendant’s motion to dismiss because a Form 1099-C in addition to

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supporting evidence could plausibly extinguish debt and the parties should have the benefit

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of discovery). In addition, some authority suggests “a Form 1099-C may itself be prima

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facie evidence for cancellation of debt.” Id. (citing Amtrust Bank v. Fossett, 224 P.3d 935,

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936–37 (Ariz. Ct. App. 2009)).

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Furthermore, the 2015 Form 1099-C section “Instructions for Debtor,” box 6 states

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code “G” means “[d]ecision or policy to discontinue collection.”2 The Form 1099-C

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section “Instructions for Creditor,” also references 2015 Instructions for Forms 1099-C.

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These instructions state a creditor enters code “G” in box 6 to indicate “[a] discharge of

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indebtedness because of a decision or a defined policy of the creditor to discontinue

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collection activity and cancel the debt.”3 At the pleading stage, the Court is required to

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accept all material allegations in the complaint as true. Thus, the Court finds that Gugger’s

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argument that code “G” indicates a discharge of debt under the plain language of the 2015

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Form 1099-C is plausible.

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At this stage of the proceedings, the Court is unable to rely on Cashion, as this case

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is not before the court on a motion for summary judgment, but on a motion to dismiss.

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Additionally, the court in Cashion was “careful to note the specific circumstances” of the

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case and its narrow holding. Cashion, 720 F.3d at 181. The Cashion court emphasized “[i]n

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another case, where a properly authenticated Form 1099-C is introduced into evidence

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along with other circumstantial evidence of cancellation of the debt, the Form 1099-C

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could be properly considered by the trier of fact under the totality of the circumstances on

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the ultimate issue of whether the debt in question was, in fact, cancelled.” Id. Thus, it is

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possible that Gugger can discover evidence indicating his debt was actually cancelled.

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Further, the Court is also unable to rely on Mennes because Mennes relies in part on

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the IRS Information Letters. While the IRS Information Letters are persuasive, they go to

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the merits of the claim to negate Gugger’s allegations. At this stage, the Court is bound to

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draw reasonable inferences in Gugger’s favor and accept his allegations as true. Cahill,

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250 F.3d at 732. So while these letters may be relevant at some time in the future, these

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Department of Treasury, IRS, Form 1099-C (2015), www.irs.gov/pub/irs-prior/i1099c-2015.pdf.
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Department of Treasury, IRS, 2015 Instructions for Forms 1099-A and 1099-C (2015),
www.irs.gov/pub/irs-prior/i1099ac--2015.pdf.
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letters are inappropriate to resolve in a motion to dismiss. Therefore, the Court will not

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engage in the interpretation and determination as to the authority of the IRS Information

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Letters at this stage.

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Assuming all reasonable inferences in favor of the nonmoving party, the Court finds

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Gugger has sufficiently stated a complaint. The Court questions whether Gugger will

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prevail on a motion for summary judgment or at trial. However, the Court is also mindful

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that the basis of his complaint is whether an investigation was conducted and if his credit

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is being accurately reported, and the issue of whether his debt was discharged or not is part

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of that analysis—not its own cause of action. Accordingly, USAA’s motion to dismiss on

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grounds the Form 1099-C did not discharge Gugger’s debt is DENIED.

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B. Fair Credit Reporting Act—1681s-2(b)

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When a consumer disputes information on their credit report, the FCRA requires the

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furnisher to conduct an investigation as to the disputed information and take steps to ensure

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that any errors are corrected. Gorman, 584 F.3d at 1154; see also 15 U.S.C. § 1681s-2(b).

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This duty arises “only after the furnisher receives notices of a dispute from a CRA; notice

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of a dispute received directly from the consumer does not trigger furnishers’ duties under

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subsection (b).” Id.

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Here, the complaint alleges Gugger sent two written disputes to Tran Union, the

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CRA, which it forwarded to USAA, the furnisher. (Doc. No. 1-3 at 4.) Both USAA and

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Trans Union verified the information as accurate and refused to remove the balance on

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Gugger’s account. (Id.) Gugger provides little factual content to support the allegation that

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USAA willfully failed to review all relevant information. (Id. at 6.) Although the court

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cannot assume facts Gugger has not alleged, here, Gugger’s argument relies on USAA’s

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failure to act. USAA, not Gugger, would be in the best position to engage in this factual

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inquiry as USAA would have any documents—or lack thereof—regarding any

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investigation. Thus, the Court finds discovery is needed to fairly litigate this issue. See

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Habetmariam, 2017 WL 627404, at *3.

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C. California Consumer Credit Reporting Agencies Act

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Gugger alleges USAA violated Cal. Civ. Code § 1785.25(f) for failing to report

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accurate information to a CRA. (Doc. No. 15 at 7.) However, the FCRA preempts

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§ 1785.25(f). Carvalho, 629 F.3d at 888–89.

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A district court may dismiss a cause of action sua sponte even if a party does not

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make a formal motion to dismiss. Shoop v. Deutsche Bank Nat. Trust Co., 465 Fed. App’x.

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646, 647 (9th Cir. 2012). The court, acting on its own, may note the inadequacy of the

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complaint and dismiss it for failure to state a claim. Sparling v. Hoffman Const. Co., Inc.,

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864 F.2d 635, 638 (9th Cir. 1988) (internal quotations omitted).

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Since Gugger’s § 1785.25(f) claim is preempted, USAA did not address this issue

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in its motion to dismiss. Additionally, Gugger’s counsel did not object to the Court’s

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findings on preemption during oral arguments. Thus, the Court sua sponte DISMISSES

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Gugger’s CCRAA claim.

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IV.

CONCLUSION

For the reasons stated, the Court DENIES USAA’s motion to dismiss, (Doc. No. 4),
and sua sponte DISMISSES the CCRAA claim.

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IT IS SO ORDERED.

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Dated: November 17, 2017

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