The Utah Supreme Court Again Requires Reasonable Conduct Under the Circumstances

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The Utah Supreme Court ruled against a debtor who asserted a novel defense to repayment of a $250,000 loan in default. The case is Crapo v. Zions Bank. The debtor claimed that once the bank sent him a Form 1099-C discharging his debt, the bank could no longer attempt to collect the bad debt from him. Failure to act reasonably by the debtor, however, ultimately barred the debtor’s defense. And, while the debtor’s defense appeared a bit stronger on its face than it actually was, you can see in details are below it appeared he was gaming the system by not getting more information before purportedly relying on the bank’s conduct.


Crapo borrowed $250,000 from Zions Bank and initially made payments on it. After making no payments for 36 months, Zions Bank issued Crapo an IRS Form 1009-C which identified the comment “FORGIVEN DEBT AMT 3 YRS NO PAYMENT” in the “Debt description” field and “$250,000.00” in the “Amount of debt discharged” field. Crapo reported the $250,000 as income on his tax return, which increased his tax burden for that year.

Zions Bank then sued Crapo for the full amount due on the loan. Crapo defended the action asserting that Zions Bank’s issuance of a 1099-C was evidence of actual discharge of the loan and that the bank should be estopped from collecting on the debt. The trial court, supported on appeal by the Utah Supreme Court, disagreed with Crapo.


In Utah, the estoppel defense (which can be used in many varied situations), is “usually reserved for extreme cases” and requires fulfilling three elements:

first, a statement, admission, act, or failure to act by one party inconsistent with a claim later asserted;

next, reasonable action or inaction by the other party taken or not taken on the basis of the first party‘s statement, admission, act or failure to act; and,

third, injury to the second party that would result from allowing the first party to contradict or repudiate such statement, admission, act, or failure to act.

Id. at paragraph 27.

Crapo asserted that Zions Bank’s act of sending him a 1099-C fulfilled the first element because it was inconsistent with the bank’s later attempt to collect the debt. He asserts he reasonably relied on the 1099-C by including the alleged discharged debt on his taxes as income. Specifically, the form included the language “FORGIVEN DEBT” which was not required by the IRS code. Finally, he asserts that he would be injured (having paid higher taxes for nothing) if the bank is allowed to repudiate its prior discharge of the debt and seek collection from him.

The trial court and Utah Supreme Court disagreed with Crapo. Specifically, the courts found that the Form 1099-C was sent with a disclosure statement that informed Crapo that he may or may not have to include the 1099-C as income on his taxes and that it may represent an actual discharge or simply a required IRS disclosure that did not represent a discharge. Of note, the bank was required by IRS code to file the Form 1099-C when Crapo’s indebtedness became 36 months delinquent regardless whether the bank actually discharged the debt. The IRS code defined discharge much more broadly than typical business usage. The disclosure statement made it unreasonable for Crapo to rely on the Form 1099-C and invalidated his estoppel defense.

The Take-Away

Crapo found a novel defense to his indebtedness but found himself caught by one of the hallmarks of legitimate business dealings: reasonable conduct. The court found that a reasonable person in his situation, knowing what he knew based on the disclosure statement, would have investigated further. Had Crapo asked Zions Bank whether it had in fact discharged his debt, he would have learned that it had not (it had only transferred the debt to its recovery department). The court would not allow Zions Bank’s loan to be discharged by an IRS form that it was required to file when the 36-month non-payment date came up.

For your business dealings, the court will rightfully review all of the circumstances to determine if your conduct was reasonable and consistent with what a reasonable business person would do or say under the same or similar circumstances. This applies to your interpretation of contract provisions, dealings with employees, negotiations, and every situation that may ultimately end up in court. Also, as Crapo now knows, it is no excuse for you to not investigate further if it is unclear, depending, of course, on the circumstances. If you do not investigate further, it may ultimately cost you more (for example, interest continued to run on the debt and Crapo was ultimately liable to Zions Bank for its attorney fees at the trial court and on appeal). Be careful out there!


There are issues and nuances in contract law that are certainly not addressed here. If you have questions, you should get specific legal advice. If you would like more information about contracts or agreements of any kind, call me, Utah attorney Ken Reich, directly. I have represented both companies and individuals in business matters and disputes involving contracts of all kinds. Using my many years of experience and backed by a firm of legal specialists in nearly every legal field, I can help you or your company evaluate your situation and help you make smart decisions about your business and your life that will best fit your circumstances.

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