Opinion
Case No. 05-18001, Adversary Case No. 06-1071.
December 19, 2007
MEMORANDUM OF DECISION ON TRIAL OF COMPLAINT TO DETERMINE DISCHARGEABILITY
The Plaintiff, Susan E. Sherwood, commenced this adversary proceeding seeking a determination that certain debts owed by the Defendant, Richard G. Sherwood, are nondischargeable pursuant to 11 U.S.C. § 523(a)(5) or (15). The matter was submitted for decision following an evidentiary trial.
THE DEBTS
In 1998, the parties were divorced after a ten year marriage. The divorce decree was very specific in that it required the Defendant to reimburse the Plaintiff for the following bills that she paid: (1) Citgo in the amount of $428.32; (2) Ameritech in the amount of $39.12; (3) doctor bills in the amount of $607.40; and (4) life and auto insurance bills in the amount of $184.50. Additionally, the Defendant was ordered to pay a credit card debt to Advanta and hold the Plaintiff harmless thereon. Lastly, the parties were to share equally in any future medical expenses necessary for the care of their two minor children. In 2000, the Plaintiff paid $650 in attorney's fees to defend herself in a collection action related to the Advanta debt. The Plaintiff contends that these debts are nondischargeable.
THE STIPULATION
At the outset of the trial, the Defendant stipulated that the following debts are nondischargeable under § 523(a)(5): (1) his obligation to reimburse the Plaintiff for the pre-decree doctor bills in the amount of $607.40; and (2) his obligation to pay one-half of all post-decree medical expenses necessary for the care of the two minor children.
THE ISSUE
The issue before the Court is whether, pursuant to § 523(a)(5) or § 523(a)(15), the following debts are nondischargeable: (1) the Defendant's obligation to reimburse the Plaintiff for the Citgo, Ameritech and insurance bills; (2) the Defendant's obligation to hold the Plaintiff harmless on the Advanta bill; and (3) the $650 attorney's fees.
THE LAW UNDER § 523(A)(5)
The divorce decree does not expressly identify any of the disputed debts as alimony, maintenance or support. When a debt stemming from divorce proceedings is not expressly designated as alimony, maintenance or support, bankruptcy courts within the Sixth Circuit must apply a four-part test set forth in Long v. Calhoun (In re Calhoun), 715 F.2d 1103 (6th Cir. 1983). The creditor bears the burden of proving that the obligation created by the divorce is in the nature of alimony, maintenance or support. Id. at 1111.
THE ANALYSIS UNDER § 523(A)(5)
At the close of the Plaintiff's case in chief, the Defendant moved for a "directed verdict" concerning the Advanta debt only. The Court construed the motion as one presented under Fed.R.Civ.P. 54(b) for judgment upon multiple claims for which there is no just reason for delay. The Court granted the motion on the claim asserted under § 523(a)(5) and denied the motion on the claim under § 523(a)(15). The analysis that follows serves as the Court's findings of fact and conclusions of law under § 523(a)(5). The motion for judgment on the claim under § 523(a)(15) was otherwise denied. See infra.
The first prong of the Calhoun test requires a determination of whether the parties or the state court issuing the divorce decree intended to create an alimony, maintenance or support obligation. Id. at 1109.
In fact, the Plaintiff never requested spousal support during the divorce proceedings. She testified in this Court that she "did not want anything except for my kids to be taken care of." Because the Plaintiff never intended the disputed debts to constitute spousal support, the only issue is whether the parties intended to create a child support obligation.
There are a host of factors courts have considered in making such a determination. See id. at 1107-1109. One factor is whether the obligation terminates upon the children reaching the age of majority. Id. at 1108. Another factor is whether other lump sum or periodic payments were also provided. Id. at n. 7. A third factor is whether the assumed obligations provide for daily necessities. Id.
Although there are other factors that may weigh in favor of a support obligation, the Court believes that those mentioned compel a finding that the parties did not intend to create a child support obligation through the Defendant's assumption of the debts at issue. For instance, the operative language in the divorce decree makes no reference to the termination of the obligations upon the children reaching the age of majority. Moreover, a separate paragraph in the decree requires the Defendant to make periodic child support payments. Lastly, the obligations assumed by the Defendant do not appear to provide for daily necessities. Instead, the obligations appear to constitute nothing more than general consumer debt on which the Defendant was to hold the Plaintiff harmless. At trial, the Plaintiff failed to present any proof to the contrary. Accordingly, the Plaintiff cannot sustain her burden of proof under the first prong of Calhoun by demonstrating that the parties, by assigning the debt to the Defendant, intended to create an alimony, maintenance or support obligation.
In closing argument, counsel for the Plaintiff conceded that all of the disputed debts except the attorney's fees fall outside the scope of § 523(a)(5). As to the attorney's fees, the parties could not possibly have intended for the same to constitute a support obligation when the fees did not exist at the time of the divorce but arose from a post-divorce collection action.
Accordingly, the only way that the debt under review, which arises from the couple's divorce proceeding, can be excepted from discharge is if it is nondischargeable pursuant to § 523(a)(15).
THE LAW UNDER § 523(A)(15)
This is, perhaps, one of the last cases that will be decided under the old test of the pre-BAPCPA law. Former § 523(a)(15) renders non-support, marital debt nondischargeable unless the debtor proves: (1) that he or she is unable to pay the debt; or (2) that the benefit to the debtor from discharging the debt would outweigh the detrimental consequence to the creditor. See 11 U.S.C. § 523(a)(15); Hart v. Molino (In re Molino), 225 B.R. 904, 907 (B.A.P. 6th Cir. 1998). The debtor bears the burden of proving that one of the two exceptions under § 523(a)(15) applies. Molino, 225 B.R. at 907.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
In this case, the Court finds the evidence conclusory that the Defendant has satisfied his burden of proving that he is unable to pay the debts at issue. Because the Defendant has met his burden of proof under § 523(a)(15)(A), the Court need not address whether the Defendant has proven that the exception under § 523(a)(15)(B) applies.
THE ABILITY TO PAY — § 523(A)(15)(A)
To determine a debtor's ability to pay, courts compare the debtor's disposable income — as defined by 11 U.S.C. § 1325(b)(2) — with the debt in question. See Dunn v. Dunn (In re Dunn), 225 B.R. 393, 399-402 (Bankr. S.D. Ohio 1998); see also Hammermeister v. Hammermeister (In re Hammermeister), 270 B.R. 863, 877-79 (Bankr. S.D. Ohio 2001). The debt will be discharged under subsection (A) only if payment of the debt would reduce the debtor's income below that which is reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor. Hammermeister, 270 B.R. at 877.
1. The Budget
To determine if a debtor possesses sufficient disposable income, courts must examine the debtor's budget as it exists at the time of trial. Id. However, courts should exercise discretion to ensure that a debtor does not manipulate the budget by diminishing income or inflating expenses. See id. at 878-79.
The records contain recent Schedules I and J, reporting income and expenses on the eve of trial, completed by the Defendant by order of the Court ("Trial Schedules"). When the Trial Schedules are compared with the Schedules I and J filed with the bankruptcy petition ("Petition Schedules"), twenty months earlier, a number of differences are apparent.
A. Schedule I
The Defendant is self-employed. Petition Schedule I reflects monthly income of $2,000 from the operation of the business. Trial Schedule I reflects monthly income of $6,030 from the operation of the business. This discrepancy is explained in large part by the fact that Trial Schedule J includes approximately $3,000 of business expenses that are not included on Petition Schedule J. Together, Petition Schedules I and J reflect net business income of $1,800 while Trial Schedules I and J reflect net business income of $2,841.
This difference is further explained by the fact that the business income set forth on Trial Schedule I includes income related to the building materials supplied in the Defendant's remodeling business whereas the expenses on Trial Schedule J do not include the cost of the materials.
A more accurate picture of the Defendant's current income can be obtained from the Schedule C that he filed with his 2006 federal income tax return. It reflects net monthly income of $1,859 from the operation of the business. This is consistent with the net monthly income of $1,800 reflected on Petition Schedules I and J.
Schedule C lists the Defendant's 2006 net profit as $22,309. This yields a monthly net profit of $1,859.
Trial Schedule I, however, also contains additional income for the Defendant's current spouse that is not included on Petition Schedule I.
B. Schedule J
Comparing Petition Schedule J with Trial Schedule J reveals that the Defendant's housing expense increased from $886 to $1,351 and the Defendant's auto payment has increased from $265 to $359. The housing expense changed because the Defendant rented at the time of filing and now owns a house, although the latter dwelling is smaller than the one he rented according to his unchallenged testimony. The auto installment increased because the Defendant purchased a 2006 Kia Sportage given the high mileage on his 1997 Toyota Corolla. The Plaintiff contends that these are unnecessary expenses that, although not lavish, distort the Defendant's ability to pay.
C. Reconstructed Budget
Trial Schedules I and J set forth a confusing representation of the Defendant's business income and expenses. Additionally, a comparison of Petition Schedule J with Trial Schedule J gives pause for concern in several categories, leaving the impression that some expenses may indeed have been inflated for trial purposes. Nonetheless, the record solidly reflects that the Defendant still cannot afford to pay the debt even if the budget is recast to reflect: (1) net business income consistent with tax Schedule C; and (2) the lower amount claimed for each expense category on Petition Schedule J and Trial Schedule J.
The reconstructed budget would appear as follows:Schedule I Source of Income Debtor Spouse Schedule J
Regular income from operation of business $1,859 Alimony, maintenance or support payments $195 Social security disability $599 Social security for dependent children $238 Net income from internet sales $200 Subtotal $1,859 $1,232 Rent or home mortgage $886 Electricity or heating fuel $217 Water and Sewer $60 Telephone $40 Cable TV and Internet $100 Home Maintenance $25 Food $500 Clothing $100 Medical and dental expenses $100 Transportation $130 Auto insurance $110 Auto installment payment $265 Alimony, maintenance, and support paid to others $465 Additional child expenses per decree $200 Total monthly expenses $3,198 The Court's findings with regard to the budget leaves the Defendant with net monthly income of $3,091 and monthly expenses of $3,198. Consequently, even with the revised budget the Defendant's household operates under a monthly budget deficit of $107. This is consistent with the Debtor's testimony that even prior to the purchase of his house he and his wife needed a small amount of monthly support from his mother-in-law to make ends meet.Although it does not appear as though the Defendant has the ability to pay anything, one additional source of income must be addressed.
2. The Supplemental Income
Trial Schedule I reveals that the Defendant's household is receiving a monthly contribution of $933 from the Defendant's mother-in-law, who does not live in the household. This leads to the question of whether this income can be counted toward the Defendant's disposable income.
At least one court has addressed this issue within the context of § 523(a)(15)(A), concluding that contributions from a person who does not reside in the household should not be included, absent extenuating circumstances, when determining the debtor's ability to pay. See Ramey v. Barton (In re Barton), 321 B.R. 869, 875 (Bankr. N.D. Ohio 2004); cf. Gomez v. DeDomenico (In re DeDomenico), 286 B.R. 775, 776 (Bankr. N.D. Cal. 2002) ("[Creditor] urges the court to consider his parent's wealth in determining [debtor's] ability to pay, but the statute clearly provides that the debt is discharged if the debtor has no ability to pay it from income or property of the debtor. [Debtor] has no present or contingent future interest in any of his parents' property. Their wealth alone does not make his debt to [creditor] nondischargeable."). The same conclusion has been reached under the disposable income test of § 1325(b)(2). See In re Schyma, 68 B.R. 52, 63 (Bankr. D. Minn. 1985).
These holdings are consistent with the policy for including the income of a non-debtor who resides with the debtor when computing disposable income. In these situations, courts have consistently held that it is equitable to include the non-debtor's income in the ability to pay calculus given that he or she has also contributed to the shared household expenses that would otherwise reduce the debtor's disposable income. In other words, the non-debtor's income should be included because the non-debtor's expenses are included. See e.g., In re Adams, 200 B.R. 630, 634 (N.D. Ill. 1996); In re McNichols, 249 B.R. 160, 172 (Bankr. N.D. Ill. 2000); In re Schnabel, 153 B.R. 809, 818 (Bankr. N.D. Ill. 1993). Conversely, the rule works in reverse when the person contributing to the debtor's household income does not reside there. The notion of donor making a financial contribution towards a debtor's household income indefinitely without any obligation, contractually or otherwise, to do so finds no justification under our laws.
Financial assistance that a debtor might receive from relatives during what is hoped to be a temporary period of economic distress at the time of a personal bankruptcy filing are gifts, plain and simple. The frequency, amount and duration of the financial assistance that a debtor receives in this manner is subject to change unexpectedly. What if the donor simply has a change of heart and, immediately following the conclusion of a trial determining that a divorce related debt is nondischargeable, ceases to make any more monthly contributions towards a debtor's household income? Conceivably, a debtor could be left with a hefty financial obligation that "the debtor does not have the ability to pay . . . from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor" or his or her dependents. Further, because the debt will already have been adjudicated as nondischargeable by a bankruptcy court, the debtor may be barred by the doctrine of res judicata from ever challenging the judgment obtained in the case. Were this to occur, the policies undergirding the bankruptcy laws in this country would be undermined.
A debtor filing personal bankruptcy who would have disclosed every asset, surrendered all non-exempt property owned at the time of the petition for distribution to creditors and otherwise dealt honestly with the court might not ever obtain a fresh start. Under these circumstances, the bedrock principle of giving a debtor a fresh start would be weakened, not furthered. Rather than achieving a new economic beginning, such a debtor would continue to be hampered by a preexisting debt simply because one of the debtor's relatives may be giving financial aid to the family for needed monthly expenses temporarily, or until the debtor becomes financially solvent again.
The Court affirms the principles expressed in Adams, McNichols and Schnabel. The policy underlying those decisions finds no refuge in including the non-resident, non-debtor's income in the debtor's ability to pay calculation. Therefore, the monthly contribution from the Defendant's mother-in-law will not be considered in calculating the Defendant's ability to pay.
3. Summary of Ability to Pay
Because the reconstructed budget reveals that the Defendant cannot meet even the most basic expenses, strictly construed in favor of the Plaintiff, the Court concludes that the Defendant does not have the ability to pay the debts.
THE CONCLUSION
For the reasons expressed, the Defendant has sustained his burden of proof under § 523(a)(15)(A). Having satisfied that burden, the Court need not reach the issues embraced under § 523(a)(15)(B). Consequently, the following debts will be DISCHARGED: (1) the Defendant's obligation to reimburse the Plaintiff for the Citgo, Ameritech and insurance bills; (2) the Defendant's obligation to hold the Plaintiff harmless on the Advanta bill; and (3) the $650 attorney's fees. Pursuant to the stipulation of the parties, the following debts will be deemed NONDISCHARGEABLE: (1) the Defendant's obligation to reimburse the Plaintiff for the pre-decree doctor bills in the amount of $607.40; and (2) the Defendant's obligation to pay one-half of all post-decree medical expenses necessary for the care of the two minor children, including orthodontic care which was at dispute in this proceeding. A judgment to this effect will be entered. This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio. IT IS SO ORDERED.