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Health Insurance Provision “Nondischargeable.”

The U.S. Bankruptcy Court for the Western District of Missouri held that a debtor’s obligation in a separation agreement to provide health insurance for his former spouse is “in the nature of support” and thus is nondischargeable. The court concluded that the debtor’s obligation to maintain health insurance for his former wife was intended to function as support. Because his former wife incurred medical expenses that would have been covered by insurance if the debtor had provided it, the debt is nondischargeable. Furthermore, the judge concluded that the attorney’s fees incurred by the debtor’s former wife are also nondischargeable.

Facts. The wife and debtor husband were married in 1970. In 1995, the parties entered into a separation agreement, which was incorporated into a divorce decree. Under the separation agreement, the debtor agreed to pay the wife $3,000 per month in periodic maintenance and to maintain health insurance for her. The debtor is a one-third owner of Walker Loudermilk Co., which provided the wife with health insurance coverage for 18 months after the divorce. However, the debtor has not provided health insurance since 1997.

The wife was never employed outside the home during their 25-year marriage. She has had health problems, including at least three surgical procedures on her back; the first surgery took place while she was married to the debtor. The wife could not pay her medical expenses for a second back surgery. Instead of requesting reimbursement from the debtor, she filed a bankruptcy petition and received a discharge in 1999.

In 2001, she filed a motion in state court alleging that the debtor was in contempt of court for failure to provide health insurance and requested reimbursement for her medical expenses. At a hearing, the debtor admitted that he owed $27,221 for the wife’s medical expenses. The court ordered the debtor to pay for her health insurance, medical bills, and attorney’s fees of $6,000. The court also found a change in the debtor’s financial circumstances and reduced the maintenance amount he was to pay from $3,000 to $2,400 per month.

The wife later required a third back surgery and again had no health insurance to cover the expenses. The University of Kansas Hospital sued her and obtained a default judgment of $17,085 in December 2002. The debtor filed for bankruptcy protection. In his schedules, he listed his monthly income as $2,400. The wife’s only income is the $2,400 a month that she receives from the debtor. The wife brought an adversary proceeding requesting that the bankruptcy court find that the medical expenses and attorney’s fees awarded to her in the state court judgment were nondischargeable. The wife also requested payment for her attorney’s fees for the adversary proceeding.

Holding. The policy underlying the bankruptcy discharge law “favors the enforcement of familial obligations over the debtor’s fresh start,” according to the court. Three elements must be met before a marital support obligation can be determined to be nondischargeable:

(1) the debt must be in the nature of alimony, maintenance, or support;

(2) it must be owed to a former spouse or child; and

(3) it must be in connection with a separation agreement, divorce, or property settlement agreement

The court noted that the second and third elements are easily met in this case.

At issue was whether the debtor’s obligation to provide health insurance coverage for his former spouse is in the nature of support. Federal bankruptcy law governs whether an obligation is in the nature of maintenance or support. The court may consider several factors in determining whether an obligation is in the nature of support, and this court applied three factors:

(1) the language and substance of the dissolution decree or separation agreement;

(2) the relative financial circumstances of the parties at the time of dissolution; and

(3) the degree to which the obligation enables the recipient to maintain daily necessities.

The court reviewed the language of the separation agreement, which provided, under a section titled “Maintenance,” that the debtor agreed to pay “permanent statutory modifiable periodic maintenance” of $3,000 monthly and “to maintain health insurance for Wife in the same amount and under the same terms presently being maintained.” The plain language of this provision “provides ample evidence of the parties’ intent for this obligation to function as support,” according to the court.

Furthermore, in the section of the separation agreement dealing with the division of marital property, there was no mention of maintenance or the continuation of health insurance coverage. The court said that reinforced its conclusion that health insurance coverage was not intended to be part of any property division or settlement.

Next, the court considered the relative financial circumstances of the parties at the time of the dissolution. The judge noted that the wife was unemployed, while the debtor’s company was thriving. Because the wife was unemployed and was unable to work due to various permanent disabilities, the monthly maintenance and health insurance benefits were clearly meant as support, the judge said.

Finally, the court considered the wife’s requested awarded of attorney’s fees for litigating the adversary proceeding. Generally, he said, attorney’s fees are not awarded in dischargeability litigation without a basis in statute or contract. However, the judge found a basis for such an award in the dissolution decree. He noted that the separation agreement that was incorporated in the decree provided that “Husband agrees to pay the Wife’s attorney’s fees should she incur any damages due to the Husband’s breach of this agreement.” Accordingly, the judge concluded that the wife was entitled to recover for her attorney’s fees and court costs in the adversary proceeding.

Pension Plan Division “Nondischargeable”

The U.S. Bankruptcy Court for the District of North Dakota held that a pension plan participant’s obligation to pay his former spouse one-half of his monthly pension plan payments pursuant to a QDRO is a nondischargeable debt in the participant’s bankruptcy petition. It was a simple matter of timing, as the court found that the participant’s obligation arose prior to his filing of the petition.[3]

The former husband filed for bankruptcy some years after benefit payments started, and sought to avoid paying the former wife the benefit payments. The court found that, under Bankruptcy Code § 523(a)(15), marital property distributions are dischargeable in bankruptcy if the debtor does not have the ability to pay in light of the debtor’s own basic living necessities or when to discharge the debt “would result in a greater benefit to the debtor than any detrimental consequences inuring to the nondebtor spouse.”

The judge noted that, but for the timing of the petition, the debt would have been dischargeable. Because the bankruptcy petition postdated the date when he became eligible for the benefits, there could be no relief from the duty to pay.

Attorney’s Fees “Dischargeable”.

The U.S. District Court for the Northern District of Illinois held that an attorney did not prove his client fraudulently induced him to continue to work for him, and thus attorney’s fees that were to be paid out of the client’s I.R.C. § 401(k) plan are a dischargeable debt in the client’s bankruptcy and cannot be recovered.[4] The fact that the client gave the attorney the PIN number to his 401(k) account to access the funds, then changed that number before the attorney could do so, did not prove by a preponderance of the evidence that the client acted fraudulently. Furthermore, the plan could not be accessed because of ERISA’s antialienation provision, and that the attorney “sought payment in a manner prohibited by federal law, and therefore, was unable to collect his fees. Given this situation, a reasonable person could conclude that fraud was not the cause of the unpaid debt.”

Facts. The defendant retained the plaintiff in January 1998 to represent him in divorce proceedings. According to the court, the defendant used a distribution from his § 401(k) plan for the retainer and said he would make future payments from the same source. In 2001, the defendant allegedly showed the plaintiff statements from his 401(k) plan as evidence that he could continue to pay for legal services, and the plaintiff continued to represent him.

Subsequently, in November 2001, the divorce was finalized and a consent judgment was entered ordering the defendant to pay the plaintiff $22,590 in attorney’s fees and to assign the proceeds of his 401(k) plan in this amount to pay such fees. The plaintiff testified that the defendant then gave him the PIN number to access the account, but changed the PIN number before the funds could be collected.

In 2002, the 401(k) plan administrator informed the plaintiff the consent judgment was invalid because under ERISA’s antialienation provision, the defendant could not assign or transfer his 401(k) plan funds unless the assignment was specified in a qualified domestic relations order and the consent judgment did not qualify as a QDRO.

The defendant filed for bankruptcy in September 2002. He later testified he did not know his 401(k) plan could not be assigned to the plaintiff until he met with his bankruptcy attorney. The bankruptcy court found that bankruptcy law did not prevent discharge of the debt.

Holding. The district court affirmed the bankruptcy court’s ruling, finding that the debt was dischargeable. Specifically, under Bankruptcy Code § 523(a)(2)(A), a debtor is not discharged from a debt for services obtained by fraud. The plaintiff argued that the defendant’s debt should not be discharged because he fraudulently the continued representation by agreeing to assign or transfer his interest in the 401(k) plan without taking steps to make the transfer.

The district court said a “reasonable person” could find there was not enough evidence to prove by a preponderance that the defendant intended to defraud the plaintiff, noting that the defendant’s changing of the PIN number did not necessarily mean he did not intend to assign his account to the plaintiff. The court noted that the bankruptcy court’s findings were based on its determination that the defendant had testified credibly, and the district court should defer to that finding.

By Adam Hunt

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