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Newton v. Beneficial Financial I, Inc.

United States District Court, W.D. Virginia, Charlottesville Division

April 6, 2017

TONIA WOODSON NEWTON, et al., Plaintiffs,
v.
BENEFICIAL FINANCIAL I, INC., et al., Defendants.

          MEMORANDUM OPINION

          Hon. Glen E. Conrad Chief United States District Judge

         Tonia Woodson Newton, Michael Early Woodson, and Donald Lewis Woodson, Jr. filed this action against Beneficial Financial I, Inc. ("Beneficial") and Ditech Financial, LLC ("Ditech"). The case is presently before the court on the defendants' motions to dismiss. The court held a hearing on the motions on March 31, 2017. For the reasons set forth below, the motions will be denied.

         Background

         The following facts, taken from the plaintiffs' second amended complaint, are accepted as true for purposes of the defendants' motions to dismiss. See Erickson v. Pardus, 551 U.S. 89, 94 (2007) ("[W]hen ruling on a defendant's motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.").

         On January 26, 2005, the late Judith F. Woodson, the plaintiffs' mother, obtained a home mortgage loan (the "First Loan") from Beneficial Mortgage Company of Virginia for property located at 1967 Red Hill Road in Gordonsville, Virginia (the "Property"). The First Loan was evidenced by a loan repayment and security agreement and secured by a deed of trust on the Property (the "First Deed of Trust").

         On March 30, 2006, Ms. Woodson obtained a home equity line of credit from Beneficial Discount Company of Virginia (the "Line of Credit"). The Line of Credit was secured by second deed of trust on the Property (the "Second Deed of Trust").

         Defendant Beneficial succeeded to the interests of Beneficial Mortgage Company of Virginia and Beneficial Discount Company. Several years later, according to the plaintiffs, Beneficial cancelled or discharged the Line of Credit debt.

         For tax year 2012, Beneficial filed with the Internal Revenue Service ("IRS") a Form 1099-C (the "1099-C Form"). The 1099-C Form, titled "Cancellation of Debt, " listed Beneficial as the creditor and Ms. Woodson as the debtor. 2d Am. Compl. Ex. D, Docket No. 35-1 at 20. It also referenced the account number for the Line of Credit and identified the "Amount of Debt Discharged" as $30, 749.87. Id. Beneficial sent Ms. Woodson a copy of the 1099-C Form. The form's pre-printed "Instructions for Debtor, " provided, in pertinent part, as follows:

You received this form because ... an applicable financial entity (a lender) 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. If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less than $600, on the "Other Income" line of your Form 1040.

Id. The plaintiffs allege that the filing of the 1099-C Form subjected Ms. Woodson to additional income tax liability.

         Ms. Woodson died intestate on March 20, 2015. Prior to her death, a representative of Beneficial advised Ms. Woodson that she did not need to make any additional payments on the Line of Credit. Likewise, following Ms. Woodson's death, a lender representative advised Tonia Newton that no payments were required on the Line of Credit. Around the same time, Beneficial denied the plaintiffs' request for approval of a short sale of the Property, based on the assertion that there was sufficient equity in the Property to pay off the balance of the First Loan in full. The plaintiffs maintain that Beneficial's position on the requested short sale was consistent with their understanding that the Line of Credit debt had been discharged by Beneficial. According to the plaintiffs, the Property would have otherwise been "underwater, " if it still "had been subject to the lien of both the First Deed of Trust and the Second Deed of Trust." 2d Am. Compl. ¶ 14(E).

         Despite numerous requests from the plaintiffs, Beneficial never took any action to release the Second Deed of Trust lien. Instead, Beneficial assigned its interest in the Line of Credit to Ditech. The plaintiffs allege that if Beneficial had complied with their requests, Donald Woodson would have been able to obtain a loan to purchase the Property for an amount that would have fully satisfied the balance of the First Mortgage Loan. Because the Property remained encumbered by the Second Deed of Trust lien, he was unable to do so.

         The plaintiffs eventually fell into arrears on the First Mortgage Loan. Beneficial appointed Surety Trustees, LLC as substitute trustee for the purpose of initiating foreclosure proceedings. On May 11, 2016, the law firm of McCabe, Weisberg & Conway, LLC notified the plaintiffs, on behalf of Beneficial, that the original debt instrument could not be produced, that Surety Trustees, LLC had been appointed to conduct a foreclosure sale, and that, in fourteen days, Beneficial would ask the trustee to proceed with the sale of the Property.

         The foreclosure sale was scheduled to be conducted on July 12, 2016 at 2:15 p.m. On July 1, 2016, the plaintiffs filed suit against Beneficial and Ditech in the Circuit Court for the County of Louisa. Following a contested emergency hearing, ...


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