Opinion
Case No. 4:00 CV 1473.
October 4, 2000.
MEMORANDUM OF OPINION AND ORDER
This matter is before the Court on the Brief of Appellant in support of her appeal from an order of the Bankruptcy Court (Doc. No. 9). The brief was filed on July 24, 2000 on behalf of appellant Amy J. Verbanovic. On August 8 and 9, 2000, Appellee Jeffrey A. Garrett filed motions asking the Court to extend the time for filing his response brief until September 4, 2000. See Doc. Nos. 10, 11. The Court granted Garrett's motions in a marginal entry dated August 9, 2000. However, it is now September 28, 2000 and Garrett has neither filed his appellee's brief nor requested another extension of time to file one.
I.
Appellant Amy Verbanovic and Jeffrey Garrett were married on December 24, 1992. They had a son, Cole Patrick, on February 4, 1995, and a daughter, Clara Jo, on April 24, 1996. Verbanovic has been on permanent disability since 1988, suffering from Crone's Disease, an enlarged lung and pulmonary embolism. She wears a pacemaker. Medicare provides in-home health care for her medical condition, but she must cover the difference that Medicare does not pay. She is unemployable.
Citing incompatibility, Verbanovic and Garrett divorced in January 1997 pursuant to a divorce decree in which the couple agreed, among other things, upon a division of assets and liabilities, and provisions for maintenance, child support and alimony. By agreement, Verbanovic has primary custody of the children.
On June 26, 1998, Garrett filed a petition for relief under Chapter 7 of Title 11, United States Code (the "Bankruptcy Code"). Verbanovic, as Garrett's creditor, filed a complaint in the bankruptcy court in which she challenged the dischargeability of certain debts Garrett assumed pursuant to their divorce decree. The particular clause in the divorce decree giving rise to her complaint provides:
19. MARITAL DEBTS: The Husband shall be responsible for, and pay as due, the debt to SEARS, FIRSTCARD MASTERCARD, and NORWEST FINANCIAL, and any other debts in his name, indemnifying Wife and holding her harmless from the same. The Wife shall be responsible for and pay as due the debt to KAUFMANNS, PENNEYS, LERNERS, GANTOS, MACYS, and the HOME SAVINGS obligation for the marital residence. Each party shall pay one-half of the debt for the medical expenses of the family existing as of the 16th day of July, 1997, the whole debt which is equal to the sum of approximately $6,000 as of said date, indemnifying the other and holding the other harmless from his/her liability for the same.
The Bankruptcy Court employed the four-step test enunciated in Long v. Calhoun, 715 F.2d 1103 (6th Cir. 1983) for determining whether an obligation not designated as support in a divorce decree nonetheless constitutes support. It concluded that the medical expenses of the children and Verbanovic, accumulated prior to the divorce, were part of the property settlement as opposed to support. Because they were not support, they were dischargeable. Verbanovic challenges this determination on appeal.
Verbanovic has since remarried, living in a home owned by her new husband. She remains liable, however, for the $405 monthly mortgage payment of the parties' former residence, to which her husband relinquished his rights pursuant to the divorce decree. Verbanovic's mother currently lives in the former residence, although Verbanovic pays the mortgage and utilities. Verbanovic and Garrett currently have approximately the same monthly income ($1600) — Garrett's income is earned, while Verbanovic's is fixed.
II.
A district court must review a bankruptcy court's findings of fact under a clearly erroneous standard, while its conclusions of law de novo. In re Baker Getty Fin. Servs., Inc. v. Rafoth, 106 F.3d 1255, 1259 (6th Cir.), cert. denied, Wesbanco Bank Barnesville v. Customer Creditors, 522 U.S. 816, 118 S.Ct. 65, 139 L.Ed.2d 27 (1997).One of the primary purposes of the bankruptcy act is to "relieve the honest debtor from the weight of oppressive indebtedness" and permit him a fresh start. In re Richard Potasky Jeweler, Inc., 222 B.R. 816, 818 (Bankr. S.D. Ohio 1998) (citations omitted). However, § 523(a)(5) of the Bankruptcy Code reflects Congress' determination that the policy interest in providing for a debtor's children and former spouse takes precedence over the Code's general purpose of providing a fresh start to debtors. Cohen v. de la Cruz, 523 U.S. 213, 222 (1998); In re Akamine, 217 B.R. 104, 107 (S.D.N.Y. 1998). Thus, despite the narrow construction normally given to statutory exemptions from discharge, § 523(a)(5) exemptions from discharge for child and spousal support receive a more liberal construction. See 4 Collier on Bankruptcy 523.05 (15th ed. rev. 1997).
Specifically, § 523(a)(5) excepts from discharge any debt:
to a . . . former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a . . . divorce decree . . ., but not to the extent that —
(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise; or
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance or support.11 U.S.C. § 523(a)(5). Accordingly, debts that are "actually in the nature of alimony, maintenance or support" are not dischargeable.
In 1994, Congress expanded the exception to discharges for marital obligations by adding § 523(a)(15) to the Code. Moeder v. Moeder, 220 B.R. 52, 54 (8th Cir. 1998). This section renders nondischargeable any debt:
not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce . . . unless —
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor . . .; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.11 U.S.C. § 523(a)(15). Thus, § 523(a)(15) also excepts from discharge those marital debts that do not constitute alimony, maintenance or support (i.e., property settlements) if they fall within one of the two aforementioned exceptions.
Calhoun is the case the bankruptcy court used to determine whether the medical expenses incurred by Verbanovic and the couple's children prior to divorce were "in the nature of" support. In Calhoun, a debtor husband appealed the bankruptcy court's summary judgment ruling that the debtor's assumption of five loan obligations pursuant to a marital separation agreement were "in the nature of" support or alimony and, therefore, nondischargeable under § 523(a)(5). The loan obligations in that case consisted of a bank note financing a swimming pool, credit card debt incurred in paying for the debtor's truck driving school, credit card debt incurred in business expenses, a note for the purchase of a van in debtor's name, and a note to a third party, the proceeds from which were used to consolidate the couple's debts.
The Calhoun court reversed, articulating a four-part test to determine whether an award not characterized as a support obligation is "actually in the nature of" support: (1) whether the intent of the state court or the parties was to create a support obligation; (2) whether the support provision has the actual effect of providing necessary support; (3) whether the amount of support is so excessive as to be unreasonable under traditional concepts of support; and (4) if the amount of support is unreasonable, how much of it should be characterized as nondischargeable for purposes of federal bankruptcy law. 715 F.2d at 1109-110. If the court finds that the parties intended to create an obligation to provide support through the assumption of joint debts, the inquiry would end. 715 F.2d at 1109. If not, the court could consider "any relevant evidence including those factors utilized by state courts to make a factual determination of intent to create a support." Id. Such factors include: the nature of the obligations assumed; the structure and language of the parties' agreement or the court's decree (i.e., a label such as alimony, support or maintenance); whether other lump-sum or periodic payments were also provided; a direct payment to the former spouse; payments contingent upon events such as death or remarriage; length of the marriage; relative earning powers of the parties; age, health and work skills of the parties; the adequacy of support absent the debt assumption; and evidence of negotiation or other understandings as to the intended purpose of the assumption. 715 F.2d at 1108 n. 7.
Employing this standard, the bankruptcy court in this case found that the parties' divorce decree failed to possess the characteristics of an intent that the medical expenses be spousal support or maintenance. For example, it found that there were separate provisions of the agreement that dealt with marital debt and support; Garrett testified that the division of marital debts was never intended to be in the nature of support and that only paragraph 21 of the divorce decree dealt with spousal support; Verbanovic acknowledged on cross-examination that there was a specific provision that dealt with spousal support; payments for medical expenses were to be made to third parties (presumably the health care providers) and were not contingent upon any event such as death or remarriage; and the division of marital debt had nothing to do with either parties' income or ability to pay.
Here, there is no dispute that the claimed expenses are family medical expenses or that they were incurred during the course of the marriage. The only question is whether their characterization in the divorce decree as "marital debts" means that they are not "actually in the nature of" support.
The bankruptcy court is not required to accept as determinative those statements in the divorce decree that certain debts are in the nature of support or property settlement. In re Brace, 13 B.R. at 554; In re Smotherman, 30 B.R. at at 571. The Court should look at the substance of the decree to determine if the obligations were indeed necessary for the support and maintenance of the spouse and children. In re Brace, 13 B.R. at 554; In re Marquis, 203 B.R. at 847.
Ohio state courts and courts within the Sixth Circuit, both prior to and following Calhoun, have routinely held that medical expenses are "in the nature of" support under § 523(a)(5). In re Brace, 13 B.R. 551 (Bankr. N.D. Ohio 1981); In re Bradley, 17 B.R. 107 (Bankr. M.D. Tenn. 1981); In re Smotherman, 30 B.R. 568 (Bankr. N.D. Ohio 1983); In re Shelton, 92 B.R. 268 (Bankr. S.D. Ohio 1988); In re Wilburn, 125 B.R. 759 (Bankr. E.D. Tenn. 1991); Dozer v. Dozer, 88 Ohio App.3d 296 (1993). See also In re Marquis, 203 B.R. 844 (Bankr. Maine 1997); In re Growney, 15 B.R. 849 (Bankr. W.D. N.Y. 1981). Appellee, by failing to file a response brief, has provided no cases in Ohio or the Sixth Circuit (and the Court has found none in its own review) in which an Ohio state or federal court found otherwise.
That medical expenses constitute "support" is reinforced by the parties' provision for the childrens' future medical care in the sections of the divorce decree dealing with support issues. Paragraphs 11 and 12 require Garrett to provide, if available through his employer, health insurance coverage for the children as well as notice to his employer of this obligation. See Brief of Appellant, Exh. A. Paragraph 13 delineates the parties' respective responsibility for additional medical expenses for the children that are not covered by insurance. Id.
The Ohio legislature has deemed medical care so basic that it enacted a statute requiring one or both parents to provide for the health care needs of their children in the event of a divorce, dissolution or legal separation. See O.R.C. § 3109.05(A). That section is entitled "Child support." Id. The fact that medical bills are unpaid on the date of divorce does not alter their essential nature as support, and one should not be able to evade responsibility for these fundamental expenses by filing for bankruptcy.
The Court concludes that the medical expenses incurred in maintaining the health of a family are "actually in the nature of" support under § 523(a)(5), whether anticipated or accumulated; therefore, they are nondischargeable as a matter of law. The Court finds this case distinguishable from Calhoun in that (1) Calhoun addressed the burden of proof employed by the bankruptcy court without resolving the issue of the characterization of the underlying loan obligations, (2) Calhoun did not involve accumulated medical expenses of a family, and (3) Calhoun did not resolve the issue of whether accumulated family medical expenses characterized as marital debt are nondischargeable under § 523(a)(5). Further, past medical expenses do not fall within the parameters of Calhoun because under the second Calhoun factor, i.e., the "present needs" test, one could argue that past medical expenses characterized as anything other than maintenance or support would never be deemed "support" because they are not presently needed to support or maintain the health and welfare of the family. In short, where it is undisputed that family medical expenses constitute debt characterized in a divorce decree or separation agreement as something other than support, the Calhoun analysis is not appropriate.
Even if the Court affirmed the bankruptcy court's ruling on this issue, it would still reverse the bankruptcy court under § 523(a)(15). Nonsupport divorce debt is also nondischargeable if the creditor spouse can show by a preponderance of the evidence that the debtor has the ability to pay the debt from disposable income or if discharging the debt would result in a benefit to the debtor that does not outweigh the detrimental consequences to his nondebtor spouse or children. 11 U.S.C. § 523(a)(15).
As a preliminary matter, it is undisputed that Verbanovic is permanently disabled and living on a fixed income. She is unemployable and raising two children. Other than possible cost of living raises, Verbanovic has no potential for increasing her income, while Garret — who earns his income — does.
Given these basic facts, Garret plainly has more ability than Verbanovic to pay the medical expenses from income not reasonably necessary to be expended for his maintenance or support since he has expendable income, and he is not currently incurring any medical expenses for his ex-wife's medical care. Secondly, discharging his responsibility for this debt would not result in a benefit to him that outweighs the detrimental consequences to his former spouse or children since (1) the payment of his share of his childrens' past medical expenses outweigh any economic benefit to him, (2) the payment of his share of his disabled ex-wife's past medical expenses outweigh any economic benefit to him, and (3) the quality of future medical care his children or ex-wife will certainly need may well be compromised by his failure to pay his share of the family's past medical debts.
III.
For all these reasons, the decision of the bankruptcy court that Jeffrey A. Garrett's obligation for one-half of the medical bills incurred by his children and their mother prior to July 16, 1997 is dischargeable is hereby REVERSED.