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Filing Your Taxes During a Divorce: What to do? Banner Image

Filing Your Taxes During a Divorce: What to do?

Month: March 2017

Filing Your Taxes During a Divorce: What to do?

Posted on by rd_admin

April 18, 2017 is the 2016 tax filing deadline and it’s quickly approaching. The Government does not care that you are going through potentially the most difficult time period in your life. Like the Godfather, the IRS wants its money. It does not want to hear excuses. It does not want to hear that you always filed jointly and now your soon-to-be ex-spouse will not sign the joint return, or provide their W-2, or disclose the income of the closely held business because they fear it will be used against them in the divorce process.

Filing your taxes can be difficult, especially if you owe money. Trying to file when going through a divorce can be especially difficult. That is why it is important to work with your attorney and a tax professional. There are many decisions to make when filing taxes during a divorce. First, you have to determine your filing status: married filing jointly, married filing separately, or head of household. If you decide to file jointly, make sure to be extra diligent. If your spouse prepares the returns, have your own tax professional review them to ensure that they are accurate. The IRS does not care that your spouse prepared or filed the taxes. If you sign the return, you can be held liable for misreporting.

If you decide to file married filing separately or head of household (if you qualify), the following determinations have to be made (and in some instances negotiated):

1. Who gets the mortgage interest deduction(s) and other itemized deductions?

2. Who gets to claim the child(ren)?

3. Can I deduct the temporary support?

4. Can I deduct my legal expenses for the temporary support?

5. Who gets to claim the Child Tax credit and the Household and Dependent Care credit?

And if you are going to file jointly, as often occurs during a divorce, talk to your attorney and accountant as to whether this makes sense. Some questions here:

1. Should I file a joint return?

2. Will I be penalized if I don’t file a joint return?

3. What is an indemnification agreement? Should I sign one? Will it really protect me?

4. What is an innocent spouse and do I qualify?

5. How are taxes due going to be paid?

6. How are refunds going to be divided?

Some of these decisions will be made by your tax professional, but all of these questions need to be answered before filing. Since these issues can have real implications, financial and otherwise, people should make sure they speak to their legal and accounting professionals before making a final decision. Work with your attorney to prepare the information needed by the tax professional to file taxes during a pending divorce. Oftentimes, clients are able to save time and money by coming to an amicable resolution with their spouse regarding the above questions and the filing of the taxes. But there are occasions when going to court to obtain an order from a judge that determines certain tax questions is necessary. Start considering how you are going to file your taxes as early as possible, so you can avoid unnecessary delay. If need be, you can seek an order from the court making the necessary determinations to get your filing done.

New York Appellate Division Holds That Foreclosure Action Dismissed as Abandoned Can Be Recommenced by Successor Under Savings Provision

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The Appellate Division of New York, Second Department, recently affirmed the Supreme Court’s determination that a foreclosing bank’s successor in interest can recommence an otherwise time-barred foreclosure action within six months of the initial action being dismissed as abandoned.  See Wells Fargo v. Eitani, 2017 WL 507152 (2d Dept. Feb. 8, 2017).  In the case, the borrower defaulted on a mortgage in 2005.  The mortgagee accelerated the debt and commenced a foreclosure action that same year. Although the mortgagee obtained an order of reference based upon the borrower’s default, it did not obtain a judgment of foreclosure and sale.  While the action was pending, the note and mortgage were assigned to the plaintiff bank and the property was sold to the defendant.  In 2013, the judge in the foreclosure action issued an order directing dismissal of the action “as abandoned pursuant to CPLR 3215(c), without costs or prejudice.”  Three months later, plaintiff commenced the instant foreclosure action and defendant moved to dismiss the complaint on the ground that it was time-barred, arguing that the action was commenced more than eight years after the mortgage was accelerated in 2005.  Defendant also argued that plaintiff could not benefit from CPLR 205(a) because it was not the plaintiff in the first action.  Plaintiff opposed, arguing that its action is not time-barred because, pursuant to the savings provision of CPLR 205(a), this action was timely “recommenced” within six months of the prior foreclosure action’s dismissal, and that plaintiff was the prior plaintiff’s successor in interest.  The Supreme Court concluded that CPLR 205(a) was applicable and thus the action was timely commenced.

On appeal, the Appellate Division affirmed the Supreme Court’s decision.  First, it found that the facts in this case meet the requirements of CPLR 205(a) because: (1) there is no dispute that this action would have been timely commenced when the prior action was commenced in 2005; (2) the moving defendant was served within the six-month period after the prior action was dismissed; and (3) this action is based on the same occurrence as the prior action, namely the default on the payment obligations under the note and mortgage.  Although CPLR 205(a) does not apply if the prior action was terminated “by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits,” the Court rejected defendant’s argument that the dismissal was for neglect to prosecute, stating that the order of dismissal did not include any findings of specific conduct demonstrating “a general pattern of delay in proceeding with the litigation” and that the action was dismissed “without costs or prejudice.”  Second, with regard to the “more novel” question of whether plaintiff could benefit from the savings provision if it was never a plaintiff in the prior action, the Court found that the mortgage company and plaintiff bank share the same interest to enforce the rights under the note and mortgage by obtaining a judgment of foreclosure and sale.  Thus, because plaintiff was the successor in interest of the prior plaintiff, it had the right to recommence the action under CPLR 205(a).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Eleventh Circuit Affirms District Court’s Dismissal of Complaint for RESPA Violation

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The United States Court of Appeals for the Eleventh Circuit recently affirmed a lower court’s decision that a servicer did not violate the Real Estate Settlement Procedures Act (“RESPA”) by signing a certified mail return receipt card in response to a borrower’s request for information (“RFI”).  See Meeks v. Ocwen Loan Servicing LLC, 2017 WL 782285 (11th Cir. Mar. 1, 2017).  There, the borrower, through counsel, sent an RFI to the defendant servicer via certified mail.  The servicer’s agent signed the return receipt card, which was returned to counsel.  The servicer then provided a substantive response to the request nine days later.  Five months later, the borrower’s counsel sent a notice of error letter (“NOE”) to the servicer stating, “[w]e are unsure as to whether you have received our client’s [RFI].”   The borrower then filed a lawsuit, alleging that the servicer had violated RESPA and Regulation X, which require a servicer to acknowledge receipt of an RFI within five days, and that (i) the borrower had suffered actual damages of less than $100 for the mailing of the NOE, as well as attorneys’ fees and costs; and (ii) the borrower was entitled to statutory damages under RESPA. See 12 USC 2605(e); 12 CFR 1026.36(c).  The District Court dismissed the complaint, and the Eleventh Circuit affirmed.

First, the Court acknowledged that the question of whether a return receipt card qualifies as a “written response acknowledging receipt” under Regulation X is an issue of first impression.  However, because the borrower’s counsel “unquestionably received the Certified Receipt in response signed by [the servicer’s] agent,” it found that Regulation X was satisfied.  It further held that “counsel’s NOE appeared to ‘falsely question[ ] the servicer's receipt in order to create a claim for damages.’”  Second, the Court held that the borrower did not suffer a concrete injury and only suffered, at most, “a bare procedural violation” of RESPA.  Thus, the borrower did not have standing to assert the claim under the standard set by the Supreme Court in Spokeo.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Ninth Circuit Reverses District Court’s Grant of Summary Judgment in Favor of FDIC, Finding D&O Policy Does Not Cover FDIC’s Claims

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The United States Court of Appeals for the Ninth Circuit recently held that a directors-and-officers liability-insurance policy issued to a bank (the “D&O Policy”) did not cover claims made by the Federal Deposit Insurance Corporation (“FDIC”) after the bank failed.  See Federal Deposit Insurance Corp. v. Bancinsure, Inc., 2017 WL 83489 (9th Cir. Jan. 10, 2017).  In the case, the FDIC, as receiver of a failed bank, sought a declaratory judgment regarding whether the D&O Policy issued by defendant to the bank covered losses arising from the negligence, gross negligence, and breach of fiduciary duty allegedly committed by certain former directors and officers of the bank.  The D&O Policy excluded from coverage losses arising from legal actions brought “by, on or behalf of, or at the behest of” the bank, a person insured under the D&O Policy, or “any successor, trustee, assignee or receiver” of the bank (the “insured-versus-insured exclusion”).  Although the FDIC conceded that this language, on its face, appeared to bar its claims, it argued that other provisions of the D&O Policy evidenced an intent to cover the claims.  The FDIC claimed that it is not a “receiver” within the meaning of the insured-versus-insured exclusion because, by statute, it has a “unique role” representing “multiple interests,” including the bank’s shareholders.  In that vein, the D&O policy contained an exception to the insured-versus-insured exclusion for losses arising from “a shareholder’s derivative action brought on behalf of [the bank] by one or more shareholders who are not [insureds under the D&O Policy] and make a Claim without the cooperation or solicitation of” the bank or any person insured under the D&O Policy.  The District Court granted the FDIC’s motion for summary judgment, holding that the FDIC succeeded to the interests of the bank’s shareholders, that its claims were similar to those brought in shareholder derivative suits, that only the FDIC could bring an action against the bank’s former directors and officers after it was appointed receiver, and that the FDIC’s claims therefore were covered by this shareholder exception.

On appeal, the Ninth Circuit disagreed and reversed.  It held that interpreting the shareholder exception to provide coverage to the FDIC’s claims “may very well read the term ‘receiver’ out of the insured-versus-insured exclusion” and that the term “receiver” was clear and unambiguous and includes the FDIC in its role as receiver of the bank.  The Ninth Circuit further rejected the FDIC’s argument that its claims were covered by a regulatory endorsement, which deleted a standard policy provision that excluded coverage for losses arising from any action or proceeding brought by or on behalf of any federal or state regulatory or supervisory agency or deposit insurance organization.  Although the FDIC argued that this endorsement indicated an intent to cover its claims, the Ninth Circuit held that the endorsement still did not vary the express terms of the insured-versus-insured exclusion.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

New York Federal Court Dismisses Plaintiff’s FDCPA Claim, Finding Communications Regarding Hazard Insurance Were Not an Attempt to Collect a Debt

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The United States District Court for the Western District of New York recently granted defendant’s motion to dismiss plaintiff’s first cause of action alleging violations of the Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq. (“FDCPA”), on the ground that plaintiff failed to sufficiently plead that the communications from defendant were sent in an attempt to collect a debt.  See Burns v. Seterus, Inc., 2017 WL 104735 (W.D.N.Y. Jan. 11, 2017).  In 2005, plaintiff signed a note and mortgage secured by her residence.  In April 2009, plaintiff filed a Chapter 7 bankruptcy petition, and in July 2009 the bankruptcy court granted her a discharge.  In February 2014, a representative of defendant called plaintiff and advised her that defendant acquired the servicing rights to her mortgage.  Plaintiff allegedly advised the representative of her bankruptcy, that she discharged her obligation on the subject debt and that she was surrendering the mortgaged property, and requested that defendant cease communication with her.  Plaintiff alleged that from February 2014 up until the filing of her complaint, defendant continued to contact her by using an automated telephone dialing system and by mailing “unsolicited forms” in an attempt to persuade her to reinstate her mortgage.  Plaintiff then commenced her action against defendant alleging, among other things, that defendant had violated the FDCPA.  Specifically, she argued that defendant violated the FDCPA via certain letters in which defendant stated that “because we did not have evidence that you had hazard insurance on your property, we bought hazard insurance on the property and added the cost to your mortgage loan account.”

Defendant filed a motion to dismiss, arguing that its hazard insurance notices were not attempts to collect a debt and, therefore, “are not subject to the FDCPA.”  The Court agreed holding that the context of the notices, which failed to include any statement of by when, how, and to whom the alleged debt must be paid, demonstrated that they were not sent in connection with the collection of any debt.  Indeed, although the letter stated that defendant “is attempting to collect a debt,” it then stated, “if you are in bankruptcy or received a bankruptcy discharge of this debt, this letter is not an attempt to collect the debt.”   Further, the Court found that plaintiff failed to state a claim under the FDCPA stemming from an unspecified number of telephone calls that she received from defendant, and the complaint failed to assert facts sufficient to demonstrate that defendant, with the intent to annoy, abuse, or harass, was attempting to collect a debt during those calls.  Accordingly, the court dismissed plaintiff’s cause of action alleging violations of the FDCPA.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com.

Supreme Court of Arizona Holds That Credit Bid at Trustee’s Sale Is Not a Payment Under a Title Insurance Policy

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In recent years, the question of whether a full-credit bid at a foreclosure sale constitutes a payment under a title insurance policy has been the subject of widespread dispute. Jumping into the fray, the Arizona Supreme Court recently ruled on the issue and held that an insured lender’s full-credit bid at a trustee’s sale did not constitute such a payment. See Equity Income Partners, LP v. Chicago Title Ins. Co., 241 Ariz. 334 (2017). In the case, the insured lender issued two loans in the amount of $1,200,000 each which were secured by deeds of trust on two adjacent properties. The title insurance company issued a 1992 ALTA Loan Policy for each property. After discovering they could not legally access the properties, however, the borrowers defaulted on the loans. The lender acquired title to both parcels at the trustee’s sale via full-credit bids totaling $2,620,725.18. The lender then sued the title insurance company for the full amount of the policies due to the lack of access, which was insured under the policies. The title insurance company moved for summary judgment, arguing that the full-credit bids constituted “payments” under the policies that reduced the amount of insurance to nothing. The district court agreed, holding that “the amount of insurance was reduced to nil by Plaintiffs’ payments to themselves,” and granted the title insurance company summary judgment. See 2013 WL 6498144. On appeal, the Ninth Circuit certified the question of “whether a lender’s full-credit bid at an Arizona trustee’s sale constitutes payment under a lender’s title insurance policy” to the Arizona Supreme Court. See 828 F.3d 1040.

The Arizona Supreme Court first reviewed the relevant sections of the policies. Condition 2(a) states that coverage under the policies continues in favor of an insured lender who acquires title to the property through, inter alia, foreclosure or a trustee’s sale. Condition 2(c) states that the amount of insurance after the insured’s acquisition shall not exceed the least of (i) the amount of insurance stated in the policy; or (ii) the amount of the principal of the indebtedness “reduced by the amount of all payments made[.]” Finally, Condition 9 states that “[a]ll payments under this policy, . . . shall reduce the amount of the insurance pro tanto. However, any payments made prior to the acquisition of title to the estate or interest as provided in Section 2(a) of these Conditions and Stipulations shall not reduce pro tanto the amount of the insurance afforded under this policy except to the extent that the payments reduce the amount of the indebtedness secured by the insured mortgage.”

Upon review, the Court stated that the term “payment” was not defined in the policies, and therefore that any ambiguity would be construed against the insurer. It then reviewed Arizona’s public policies regarding foreclosures and insurance policies. First, it referenced the fact that Arizona’s laws generally protect borrowers from deficiency judgments. As a result of these laws, a credit bid does not have the same effect as a payment from a lender’s perspective because a lender is not necessarily made whole if it acquires a property via a full-credit bid. Second, it noted that Arizona’s public policy protects insureds, and the title insurance company’s interpretation of the policy would contravene this policy. Therefore, the Court held that a full-credit bid could not be considered a payment under the policies. Instead, the Court found that the “payment” received by the lender is the fair market value of the properties, which had not been determined.

This decision is in line with a series of other recent decisions. See, e.g., Bank of Idaho v. First Am. Title Ins. Co., 156 Idaho 618, 623 (2014); Pres. Capital Consultants, LLC v. First Am. Title Ins. Co., 406 S.C. 309, 319 (2013). However, other courts have held that credit bids are proof of a property’s value and reduce the amount of insurance accordingly. See Freedom Mortg. Corp. v. Burnham Mortg., Inc., No. 2006 WL 695467, at *11 (N.D. Ill. Mar. 13, 2006), rev’d on other grounds, 569 F.3d 667 (7th Cir. 2009) (“absent proof that a lender’s credit bid was the proximate result of fraud, the bid stands as against third parties”); Romo v. Stewart Title of California, 35 Cal. App. 4th 1609, 1615 (1995) (“The lender’s full credit bid establishes the value of the security as being equal to the amount of the indebtedness. Hence, the lender cannot establish any impairment of security.”).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Clarissa Gomez at cgomez@riker.com

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