WALKER et al v. OCWEN LOAN SERVICING, LLC et al
OPINION. Signed by Judge Madeline Cox Arleo on 07/11/2017. (ek)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
EMMETT WALKER and JANNETTE
Civil Action No. 16-9157
OCWEN LOAN SERVICING, LLC, et al.,
ARLEO, UNITED STATES DISTRICT JUDGE
THIS MATTER comes before the Court by way of Defendant Ocwen Loan Servicing,
LLC’s, (“Ocwen”) motion to dismiss pro se Plaintiffs Emmet and Jannette Walker’s (“the
Walkers”) Complaint. ECF No. 7. For the reason explained below, the motion is GRANTED.
Nine years ago, the Walkers took out a mortgage of around $290,000 to buy their house in
Union, New Jersey. Compl. ¶¶ 3, 9. The mortgage was eventually transferred to Ocwen. Id. ¶ 9.
In April 2012, the Walkers modified their mortgage loan, which raised their principal to around
$322,000 and contained a deferred principal balance of $134,068.89. Id. ¶ 11.
The Walkers attached the loan modification agreement (the “Agreement”) to the
Complaint. See Compl. Ex. 1, Agreement, ECF No. 1-1. The Agreement explains that it is a
“Shared Appreciation Modification,” which allows debtors to make payments on the amount their
home is actually worth and possibly forgive the rest of their debt—this remainder is called the
“Deferred Principal Balance.” See Agreement § 2(A)-(B). In exchange, the debtor will pay the
creditor up to 25% of any increase in the house’s value from the date of the modification to the
date of maturity or when a refinance or sale occurs. Id. § 3(A). So for example, if a loan is
modified to $150,000 and the debtor sells the house for $200,000, then the creditor will receive
25% of $50,000. See Offer Letter at 2, ECF No. 1-1. The Agreement also explains that the
Deferred Principal Amount can be completely forgiven in one-third installments over three years
as long as the debtor stays current on their payments. Agreement § 2(C). The Agreement provided
by the Walkers corroborates the figures for the modified principal and deferred amount stated in
the Complaint. See id. § 2(A), (B).
In 2013, Ocwen filed an IRS Form 1099–C, Cancellation of Debt, reporting a cancellation
of $134,068.89. Id. ¶ 12. The Walkers allege that Ocwen’s filing of the Form 1099–C “require[ed]
[the Walkers] to include this alleged loss in [the Walkers’] 2012 income.” Id. The same thing
happened in 2015: Ocwen again reported a “cancellation” for $134,068.89 and filed another Form
1099–C, which “requir[ed]” the Walkers to include that amount in their income. Id. ¶ 13.
The Walkers allege, however, that Ocwen did not cancel the Walker’s debt. That means,
they claim, the reported cancellations were false and misleading because they still have to pay the
deferred balance. Id. ¶¶ 12-13. They also allege that they were harmed because they were
“wrongly subject to federal tax liability in the amount of $134,068.99,” they “satisf[ied] their
federal tax obligations pursuant to the cancellation of debt reported by [Ocwen],” and they were
“subjected to a higher income from which [they] did not actually derive any benefit.” Id. ¶¶ 16,
In December 2016, they filed a three-count Complaint against Ocwen for (1) violation of
the New Jersey Consumer Fraud Act (“NJCFA”), (2) fraud, and (3) misrepresentation.
When considering a Rule 12(b)(6) motion to dismiss, the court accepts as true all of the
facts in the complaint and draws all reasonable inferences in favor of the plaintiff. Phillips v. Cnty.
of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008). Dismissal is inappropriate “merely because it
appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits.”
Id. The facts alleged, however, must be “more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007). The allegations in the complaint “must be enough to raise a right to relief above
the speculative level.” Id. Accordingly, a complaint will survive a motion to dismiss if it provides
a sufficient factual basis such that it states a facially plausible claim for relief. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
In addition, where the plaintiff is proceeding pro se, the Court construes the pleadings
liberally and holds them to a less stringent standard than those filed by attorneys. Giles v. Kearney,
571 F.3d 318, 322 (3d Cir. 2009) (citing Haines v. Kemer, 404 U.S. 519, 520-21 (1972)).
Nevertheless, “pro se litigants still must allege sufficient facts in their complaints to support a
claim.” Mala v. Crown Bay Marina, Inc., 704 F.3d 239, 245 (3d Cir. 2013).
Ocwen asserts first that the NJCFA claim fails, and argues that the same reasons preclude
the other claims too. “To state a cause of action under the CFA, a plaintiff must allege: (1) an
unlawful practice by the defendants; (2) an ascertainable loss by plaintiff; and (3) a causal nexus
between the first two elements . . . .” Maniscalco v. Brother Int’l Corp. (USA), 627 F. Supp. 2d
494, 499 (D.N.J. 2009).
Ocwen argues that none of the three elements is met. The Court agrees that there is no
unlawful practice here, so it ends its analysis at the first element.
The NJCFA defines “unlawful practice” as an “unconscionable commercial practice,
deception, fraud, false pretense, false promise, [or] misrepresentation . . . .” N.J.S.A. § 56:8–2.
Where, as here, the alleged violation involves an affirmative act, “intent is not an essential element
and the plaintiff need not prove that the defendant intended to commit an unlawful act.” Cox v.
Sears Roebuck & Co., 138 N.J. 2, 17-18 (1994) (citation omitted). Ultimately, a practice is
actionable if it is “misleading and . . . outside the norm of reasonable business practice in that it
will victimize the average consumer . . . .” New Jersey Citizen Action v. Schering-Plough Corp.,
367 N.J. Super. 8, 13 (App. Div. 2003) (citation and quotes omitted).
The Walkers claim that it was an unlawful practice for Ocwen to report cancellations of
debt on the Form 1099–Cs. It was unlawful, they contend, because Ocwen did not actually cancel
the debt and the amount is still due. See, e.g., Compl. ¶ 15. Their theory fails to state a claim. As
explained below, the IRS requires Ocwen to file a Form 1099–C to disclose that the parties reached
an agreement to forgive the debt, even though the debt was not yet forgiven. Since the Walker’s
theory of liability stems solely from the fact that Ocwen filed the Form 1099–C, but Ocwen was
required by law to file it, Ocwen did not commit an “unlawful practice” under the NJCFA.
The Court’s finding requires discussion of the Internal Revenue Code’s (the “Code”)
reporting requirements and the IRS regulations behind the Form 1099–C. Thankfully, the Court
of Appeals for the Fourth Circuit has already explicated the issue, see F.D.I.C. v. Cashion, 720
F.3d 169, 178 (4th Cir. 2013), so the Court need not enter this thicket alone. In Cashion, the Fourth
Circuit explained as follows: The Code sets forth certain reporting requirements to the IRS, 26
U.S.C. § 6050P, which the IRS regulations have implemented through the Form 1099–C filing
any applicable entity . . . that discharges an indebtedness of any
person . . . must file an information return on Form 1099–C with the
Internal Revenue Service. Solely for purposes of the reporting
requirements of [the applicable statute and this regulation], 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.
26 C.F.R. § 1.6050P–1(a) (emphasis added). Subsection (b)(2) of 26 C.F.R. § 1.6050P–1 lists
eight “identifiable events” that trigger the reporting obligation. One of the identifiable events is
discharge by agreement of the parties at less than full consideration. § 1.6050P–1(b)(2)(i)(F). 1
There are three main takeaways from these regulations: a creditor “must” file a Form
1099–C when one of several events occur; one of those events is an agreement between the parties
to discharge the debt at some point in the future; and when a creditor files the form, they are
satisfying an IRS reporting obligation, but they are not necessarily discharging the debt. Cashion,
720 F.3d at 178-79. Consistent with that reading, the IRS has explained that it “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. at 179 (quoting I.R.S. Info. 2005–0207, 2005 WL 3561135 (Dec. 30,
Here, the Walkers claim that Ocwen’s filings of the Form 1099–Cs were “false, inaccurate,
misleading, and illegal . . . .” Compl. ¶ 15. They claim so because the deferred principal amount
was not actually canceled and they still owe it. Based on Cashion’s discussion of the regulations,
however, neither theory is actionable. In their Agreement, Ocwen promised to forgive the
Walker’s deferred balance over three years as long as they were up to date on their payments. As
such, one of the “identifiable events” in the regulation occurred—i.e., an agreement to discharge
a debt at less than full consideration. Since one of the events occurred, section 1.6050P–1(a)
required Ocwen to file the Form 1099–C to report the event, even though the debt was not
There are seven events that exempt a creditor from filing a Form 1099–C, see 26 C.F.R. §
1.6050P-1(d)(1)-(7), but none appears relevant. The events include, for example, discharge of
investment debt, discharge of interest alone, and release of a co-obligor. Id.
discharge at that moment. And Ocwen was still allowed to collect on the deferred balance after
filing the Form 1099–C. See I.R.S. Info. 2005–0207. Based on these requirements, Ocwen’s Form
1099–C was not false, inaccurate, or misleading. It was a required business practice.
That is not to say that these technical rules are easily understood by the common consumer.
But the Form 1099–C tries to mitigate the confusion. In particular, it contains an instructions
section that attempts to decipher the rules. The one-page form Ocwen sent to the Walkers contains
a section marked “Instructions for Debtor.” Compl. Ex. 3. The section states, “You received this
form because . . . an applicable financial entity (a creditor) has discharged (canceled or forgiven)
a debt you owed, or because an identifiable event has occurred that either is or is deemed to be a
discharge of a debt of $600 or more.” Id. It then explains when the debtor does and does not have
to report the discharged amount as income: “If a creditor has discharged a debt you owed, you are
required to include the discharged amount in your income,” but “you may not have to include all
of the canceled debt in your income . . . If an identifiable event has occurred but the debt has not
actually been discharged, then include any discharged debt in your income in the year that it is
actually discharged . . . .” Id. Thus, the form contemplates a situation where a creditor could list
an amount in the Form 1099–C but that amount would not yet count as taxable income to the
debtor. In other words, it attempts to avoid the exact misunderstanding that befell the Walkers by
warning them that their debt may not have been forgiven yet.
Importantly, there does not appear to be any surrounding circumstances that could have
misled the Walkers into thinking their debt was actually discharged and no longer owed. There
are no allegations that Ocwen had any other contact with the Walkers about the discharge beyond
the Agreement itself. And the Agreement’s explanation of the discharge is relatively clear and
concise. The Agreement and the FAQ section discuss the deferred principal, explain that it could
be forgiven, and say how that could happen. See Agreement § 2(c); FAQ at 2. The documents
also explain that the forgiveness would not occur right away, but over three years. Moreover, none
of the documents discusses early forgiveness of the debt. So when the Walkers received the first
Form 1099–C in 2013—only a year after they signed the Agreement—it was not possible for the
entire debt to be forgiven. Yet they claimed the full amount as income. See Compl. ¶ 12.
In their brief, the Walkers concede that the Form 1099–C does not say that the creditor
actually canceled the debt. They argue instead that the form evidenced Ocwen’s fraudulent intent.
They state, “though it is true that a debt does not have to be discharged to be reported on a 1099C
[sic], there has to be some intention to discharge on the creditor’s part. Ocwen clearly does not
have any intention to cancel the debt.” Opp’n Br. at 4 (original emphasis), ECF No. 9. There are
two problems with their argument. First, it is a different theory from the one in their Complaint.
Whereas the Complaint states that the Form 1099–C was false because the debt was not canceled,
the brief states that it was false because Ocwen will not honor its agreement to discharge the debt
in the future. The Court’s review is limited to the allegations in the Complaint; it cannot consider
new theories that are raised for the first time in opposition briefs. Com. of Pa. ex rel. Zimmerman
v. PepsiCo, Inc., 836 F.2d 173, 181 (3d Cir. 1988). Second, nothing in the Complaint or brief
suggest that Ocwen intends to renege on its promise to discharge the debt if the Walkers satisfy
their payment obligations.
In sum, it appears that Walker’s overpayment of income tax did not flow from anything
Ocwen did. Rather, it flows from the complicated rules of the Code and the IRS regulations, and
the Walkers’ misreading of the instructions on the Form 1099–C itself.
understandable, but it is not actionable under the NJCFA.
Their mistake is
For the same reasons, the Walker’s fraud and misrepresentation claims fail. Under New
Jersey law, both causes of action require some form of misrepresentation or incorrect statement.
Kaufman v. i-Stat Corp., 165 N.J. 94, 109 (2000) (citing elements for both claims). Since Ocwen’s
Form 1099–C contains neither a misrepresentation nor incorrect statement, those counts are
dismissed as well.
For the reasons set forth herein, the motion to dismiss is GRANTED. The Complaint is
DISMISSED WITHOUT PREJUDICE.
Date: July 11, 2017
/s Madeline Cox Arleo______
Hon. Madeline Cox Arleo
United States District Judge
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