Morgan v. Woods

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE
WESTERN DISTRICT OF MISSOURI

IN RE:
BRIAN C. WOODS, Case No. 03-22236

Debtor.

MELY NDA MORGAN, Adversary No. 03-2065
Pantift,

V.

BRIAN C. WOODS,

NN

Defendant.

MEMORANDUM OPINION

Melynda Morgan (“Morgan”) filed a conplaint seeking a determination that certain debts of Bian
C. Woods (“Debtor”) should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(5) on the
grounds that those debts constitute child support and maintenance. In his answer, Debtor denied that the
debts were for maintenance or support and alleged that they are dischargeable pursuant to 11 U.S.C. §
523(a)(15). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) over which the Court has
junisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a) and (b)(1). ‘The following constitutes my Findings
of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as
made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the
reasons set forthbelow, I find that the debtrelatingto the children’s medical costs is inthe nature of support
and is non-discharyeable pursuant to § 523(a)(5). 1 further find that the debt relating to attomey’ s fees is

not in the nature of maintenance or support under§ 523(a)(5); however, Debtor did not meet his burden

1 Plaintiff’s Ex. 2.
2
of proof under § 523(a)(15) and the attorney’s fees debt is therefore non-dischargeable pursuant to §
523(a)(15).
I. FACTUAL BACKGROUND
On August 13, 1999, the Circuit Court of Henry County, Missouri, entered an Amended
Judgment Entry (the “Judgment”) that dissolved the marriage of Morgan and Debtor1. The Judgement
ordered, inter alia, the following:
1. Debtor was ordered to pay Morgan on the 15th day of each month, the sum of $832.00 as
child support for the four minor children.
2. The marital residence was to be sold and the net proceeds thereof be split equally between
the parties.
3. Debtor was awarded certain items of marital property and ordered to pay marital debts
totaling $24,291.00.
4. Morgan was awarded certain items of marital property and ordered to pay marital debts
totaling $43,305.00, of which $27,000 was for the marital home mortgage only until the home was
sold.
5. Morgan was awarded a judgment in the amount of $1,000.00 against Debtor for a part of
Morgan’s attorney fees incurred in the divorce proceeding.
6. Neither party was awarded maintenance.
The Court attached a Parenting Plan to the Judgment as Exhibit A. The Parenting Plan
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2 Plaintiff’s Ex. 3.
3 Plaintiff’s Ex. 4
3
provided that the parties were to have joint legal custody of the children. Under the heading “Child
Support,” the court found that the presumed correct child support was $832.00 per month.
Immediately following, under the heading “Health Insurance,” the court ordered the Debtor to maintain
health insurance on the children and pay 70% with Morgan to pay 30% of the costs, expenses or
charges for all medical, dental, orthodontic, endodontic, prescription, optical, psychiatric,
psychological, nursing, counseling and other health care expenses incurred by or on behalf of the
children to the extent that such “medical costs” are actually incurred and are not fully covered or not
fully paid or reimbursed by the health benefit plan. The parent obtaining the non-covered care was to
provide a bill to the other parent with such bill to be paid within 30 days of receipt.
In a Modification Judgment Entry entered on May 2, 2001, the court amended the monthly
child support amount to $562.00 per month due to a substantial and continuing change in the
circumstances of the parties. The court also ordered that Morgan was to maintain the medical and
dental insurance on the children through her employer. In all other respects, the court’s prior orders
and judgments remained in effect.2 There was no indication in the modified judgment or at the trial on
this matter of the nature of the change in circumstances or the reason for the modification.
Morgan submitted evidence that Debtor owed her a total of $2,109.42 for non-covered
medical expenses for their children. The exhibit she submitted showed that Debtor had made seven
$50 payments leaving a balance owed of $1,759.42.3 Debtor was ordered to pay $1,000 of Morgan’s
attorney’s fees in the divorce decree. Morgan submitted evidence that Debtor had paid $550 toward
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4 Plaintiff’s Ex. 5.
5 Debtor’s Ex. A. Expenses: Rent $500; electricity/gas $185; telephone $60; food $150;
clothing $25; medical and dental expenses $10; laundry and cleaning $20; transportation $100;
recreation, clubs, entertainment $20; auto insurance $85; taxes $5; installment payments to Jeff’s
orthodontist $53; child support $562.
4
the attorney’s fees and that $450 remained unpaid.4 Thus, Morgan contended that Debtor still owed
her a total of $2,209.42 for the non-covered medical costs and attorney’s fees.
Debtor testified that his current monthly take-home income is $1,213.10 and his monthly
expenses total $1,775.00.5 Debtor also testified that he is currently living with his girlfriend and that she
contributes to and shares certain expenses.
On September 24, 2003, Debtor filed a Chapter 7 bankruptcy petition. On December 22,
2003, Morgan filed a Complaint to Determine Dischargeability of Debt. In the Complaint, Morgan
contended that the attorney’s fees and medical costs not covered by insurance that Debtor was
ordered to pay her in the divorce proceeding Judgment are non-dischargeable pursuant to § 523(a)(5)
on the grounds that those debts constitute maintenance and child support. Debtor denied these
allegations and asserted that the debts are in the form of a property settlement and should not be
excepted from discharge. Debtor also argued that the debts are dischargeable pursuant to §
523(a)(15) because Debtor does not have the ability to pay them.
II. DISCUSSION
A. 11 U.S.C. § 523(a)(5)
11 U.S.C. § 523(a)(5) provides that a debtor is not discharged from any debt-
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for,
or support of such spouse or child, in connection with a separation agreement, divorce
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decree or other order of a court of record. . ., but not to the extent that- (A) . . .
(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.
Whether a particular debt is a support obligation or part of a property settlement is a question
of federal bankruptcy law, not state law. See Williams v. Williams (In re Williams), 703 F.2d 1055,
1056 (8th Cir. 1983). A divorce decree’s characterization of an award as maintenance or alimony
does not bind a bankruptcy court. Id. In order to determine whether an award represents a property
settlement or a maintenance obligation, a court must look to the function an award was intended to
serve. See Kruger v. Ellis (In re Ellis), 149 B.R. 925, 927 (Bankr. E.D. Mo. 1993). The burden of
proof under section 523(a)(5) is on the party asserting that the debt is nondischargeable. Lineberry v.
Lineberry (In re Lineberry), 9 B.R. 700, 706 (Bankr. W.D. Mo. 1981).
Factors considered by the courts in making this determination include: the language and
substance of the agreement in the context of surrounding circumstances, using extrinsic evidence if
necessary, the relative financial conditions of the parties at the time of the divorce; the respective
employment histories and prospects for financial support; the fact that one party or another receives the
marital property; the periodic nature of the payments; and, whether it would be difficult for the former
spouse and children to subsist without the payments. In re Tatge, 212 B.R. 604, 608 (B.A.P. 8th Cir.
1997); Schurman v. Schurman (In re Schurman), 130 B.R. 538, 539 (Bankr. W.D. Mo. 1991)
(citing In re Gianakas, 917 F.2d 759 (3d Cir. 1990)). Exceptions from discharge for spousal and
child support deserve a liberal construction, and the policy underlying § 523 favors the enforcement of
familial obligations over a fresh start for the debtor, even if the support obligation is owed directly to a
third party. See Holliday v. Kline (In re Kline), 65 F.3d 749 (8th Cir. 1995); Williams v. Kemp (In
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6The court amended the child support amount to $562.00 in May 2001.
7Mo. Rev. Stat. 452.340 contains the relevant factors the state court should consider in
awarding child support: (1) the father’s primary responsibility for support of his child; (2) the financial
resources of the child; (3) the financial resources of the custodial parent; (4) the standard of living the
child would have enjoyed had the marriage not been dissolved; (5) the physical and emotional condition
of the child, and his educational needs; and (6) the financial resources and needs of the noncustodial
parent.
6
re Kemp), 242 B.R. 178, 181 (B.A.P. 8th Cir. 1999), aff’d 232 F.3d 652 (8th Cir. 2000).
1. Child Support
The Parenting Plan entered by the Circuit Court provided that Debtor was to pay $832.006
per month for child support pursuant to Mo. Rev. Stat. § 452.340.8.7 The Plan went on to order that
Debtor pay 70% and Morgan pay 30% of the medical costs not covered by the health benefit plan on
behalf of the children. The procedure established for reimbursement of non-covered medical costs
requires the parent obtaining the non-covered care to provide the other parent a copy of the bill with
the bill to be paid within 30 days of receipt either by paying the medical provider or reimbursing the
other parent. These provisions for health care cost reimbursement immediately follow the monthly child
support provision in the Parenting Plan. Morgan testified at the hearing that it was her understanding at
the time of the dissolution that the non-covered medical costs provision was meant to constitute child
support.
The placement of the specific non-covered medical costs provisions immediately following the
child support provision within the Parenting Plan indicates that the payment was intended as child
support. See In re Rice, 94 B.R. 617, 618 (Bankr. W.D. Mo. 1988) (taking into account the
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8Plaintiff’s Ex. 2, Ex. B (child support amount calculation workseet indicates that Debtor’s
proportionate share of the combined adjusted monthly gross income was 71.4%. Morgan’s share was
28.6%).
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placement in the decree of the support provision in determining its function). The fact that both parents
were required to pay a portion of such costs based on their respective incomes also indicates that the
payment was intended as child support.8 See Lineberry, 9 B.R. at 706. The Court infers, based on
the evidence before it, that the Circuit Court was concerned with balancing the income of the parties
and with providing for the proper care and support of the four children. See Moeder v. Moeder (In re
Moeder), 220 B.R. 52, 55 (B.A.P. 8th Cir. 1998) (finding divorce court order that ordered debtor to
pay monthly child support plus 78% of all unreimbursed medical expenses intended as support).
Debtor asserts that his income is now more limited than at the time of the divorce and that he is no
longer able to pay 70% of the children’s non-covered medical expenses. The Debtor’s current
financial situation is not, however, relevant to the determination under § 523(a)(5). See Draper v.
Draper, 790 F.2d 52, 54 (8th Cir. 1986) (court to determine only whether obligation “actually in nature
of alimony, maintenance, or support”; statutory language does not contemplate ongoing assessment of
need as circumstances change).
Clearly, as other courts have held, medical, dental, orthodontic, endodontic, prescription,
optical, psychiatric, psychological, nursing, counseling and other health care expenses are “the
necessities and ordinary staples of everyday life.” Thus, the non-covered medical costs constitute
support in this case. See Spurgeon v. Spurgeon (In re Spurgeon), 80 B.R. 477, 479 (W.D. Mo.
1986) (citing In re Williams, 703 F.2d 1055, 1057 (8th Cir. 1983) for the proposition that provisions
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to pay expenditures for the necessities and ordinary staples of everyday life may reflect a support
function).
2. Attorney’s Fees
An award of attorney’s fees in a dissolution proceeding can be non-dischargeable if the court
determines that the award was in the nature of support. See Rump v. Rump (In re Rump), 150 B.R.
450, 454 (Bankr. E.D. Mo. 1993). The evidence submitted by Morgan, however, does not
demonstrate that the award of attorney’s fees was intended as maintenance. Although some courts have
found that an award of attorney’s fees in a dissolution decree served as maintenance, there is no per se
rule to that effect. The courts tend to look at factors such as the disparities in the parties education,
training, employment history or earning capacities. See, e.g., Williams, 703 F.2d at 1057 (evidence
spouse in poor health, had not worked for 8 years, high expenses, little income); Rump, 150 B.R. at
453 (evidence attorney’s fee award “in lieu of” direct maintenance payment; disparity in income,
expenses, education, job skills and training); Kline, 65 F.3d at 750 (specific language in divorce decree
that circuit court considered the “financial resources of both parties” when awarding attorney’s fees and
sought to equalize disparity in income).
This Court cannot infer that the fees were intended as support from the placement of the
provision in the dissolution decree. There was likewise no specific language contained in the dissolution
decree indicating that it was the circuit court’s intent that the fees be non-dischargeable. The fact that
the circuit court put such language in paragraph 8 of the dissolution decree indicates that the court
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9Plaintiff’s Ex. 2 (“Husband shall pay to Wife the sum of $578.00 as maintenance in gross. . .
This judgment for maintenance is specifically given to secure Husband’s faithful and timely payment of
the debts and fulfills a support obligation. This judgment for maintenance in gross shall not be
dischargeable in bankruptcy.”)
9
would have used similar language for the attorney’s fees if that was its intent.9 There is also no
indication in the dissolution decree that the support awarded to Morgan was otherwise inadequate so
that the court was awarding attorney’s fees in order to compensate for such inadequacy.
Furthermore, Morgan failed to present any evidence at the trial that she gave up something else
at the time of the dissolution in order to be awarded attorney’s fees. There was also no evidence
presented regarding the parties’ education, training, employment history or future earning capacities
which would indicate that the attorney’s fees award was made to balance any such disparities between
the parties. The only evidence presented regarding a disparity in the parties income at the time of the
dissolution was the child support worksheet which indicated that Debtor earned approximately 70% of
the total income while Morgan earned approximately 30% of the total income. However, there was no
further evidence submitted to support Morgan’s assertion that the circuit court judge made the
attorney’s fee award to balance the income disparity.
Therefore, based on the lack of evidence presented by Morgan to establish that the attorney’s
fee award was intended as support or maintenance, such debt is not excepted from discharge pursuant
to § 523(a)(5). However, the attorney’s fee debt may still be excepted from discharge pursuant to 11
U.S.C. § 523(a)(15), as discussed in more detail below.
B. 11 U.S.C. § 523(a)(15)
Section 523(a)(15) provides:
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A discharge under section 727. . . does not discharge an individual debtor from any
debt
not of a kind described in paragraph (5) [alimony, maintenance or support] that is
incurred by the debtor in the course of a divorce or separation or in connection with a
separation agreement, divorce decree or other order of a court of record. . . 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 a dependent of the debtor and , if the debtor is engaged in a business, for
the payment of expenditures necessary for the continuation, preservation, and operation
of such business, 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.
Section 523(a)(15) is essentially an exception to an exception to discharge. The section
creates a rebuttable presumption that debts incurred in the course of a divorce are nondischargeable,
subject to two exceptions: the debtor’s inability to pay the debt or that the benefit to the debtor of
discharging the debt outweighs any detriment to the ex-spouse. O’Shaughnessy v. O’Shaughnessy
(In re O’Shaughnessy), 301 B.R. 24, 29 (Bankr. N.D. Iowa 2003). Lumley v. Lumley (In re
Lumley), 258 B.R. 433, 436 (Bankr. W.D. Mo. 2001).
Initially, the creditor must establish that a debt is one that falls within the scope of paragraph
(15), that it was incurred in the course of a divorce or separation. The burden of proof then shifts to the
debtor to establish that the debt is dischargeable because the conditions set forth in either subparagraph
(A) or subparagraph (B) exist. See Fellner v. Fellner (In re Fellner), 256 B.R. 898, 902 (B.A.P. 8th
Cir. 2001); Moeder, 220 B.R. at 56; Kirchner v. Kirchner (In re Kirchner), 206 B.R. 965, 970
(Bankr. W.D. Mo. 1997); Florio v. Florio (In re Florio), 187 B.R. 654, 657 (Bankr. W.D. Mo.
1995); Lumley, 258 B.R. at 436. Here, Morgan submitted a copy of the Judgment at the trial which
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Debtor did not dispute as a judgment that was entered in the course of the parties’ divorce. Therefore,
I find that the creditor has established that the debt was incurred in the course of a divorce, and the
burden of proof thus shifts to Debtor to establish that the debt is dischargeable under § 523(a)(15)(A)
or (B).
The first defense available to a debtor is that the debt is dischargeable because he lacks the
ability to pay the debt from income not reasonably necessary for the support of the debtor or a
dependent of the debtor. See 11 U.S.C. § 523(a)(15)(A). The inquiry focuses primarily on a
comparison of the debtor’s income and expenses and whether the debtor’s expenses are reasonably
necessary. See In re Jodoin, 209 B.R. 132 (B.A.P. 9th Cir. 1997). An inability to pay exists if
excepting the debt from discharge would “reduce a debtor’s income to below a level necessary for the
support of the debtor and debtor’s dependents.” Brown v. Brown (In re Brown), 302 B.R. 637, 641
(Bankr. N.D. Iowa 2003). A debtor’s present and future circumstances may be examined in
determining disposable income for purposes of § 523(a)(15), and the court’s inquiry is not limited to the
debtor’s financial strength at any single moment in time. See Grunwald v. Beck (In re Beck), 298
B.R. 616, 623 (Bankr. W.D. Mo. 2003); Fureigh v. Haney (In re Haney), 238 B.R. 432, 435
(Bankr. E.D. Ark. 1999) (“The appropriate analysis includes a view of the debtor’s future financial
situation, including an ability to make minimal monthly payments on the debt, rather than a static view of
the debtor’s current ability to pay the debt.”); Johnson v. Rappleye (In re Rappleye), 210 B.R. 336,
340 (Bankr. W.D. Mo. 1997) (“Ability to pay under § 523(a)(15) does not necessarily mean at the
time of trial, but requires the Court to consider debtor’s future earning capacity.” (citing Florio, 187
B.R. at 656-658)).
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10That section provides:
“[D]isposable income” means income which is received by the debtor and which is not
reasonably necessary to be expended-
(A) for the maintenance or support of the debtor or a dependent of the debtor. . . and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for
the continuation, preservation, and operation of such business.
11 U.S.C. § 1325(b)(2).
12
Because the language of § 523(a)(15)(A) is substantially the same as § 1325(b)(2)10, most
courts use the same disposable income test for both sections. Moeder, 220 B.R. at 54-55. Thus, in
assessing the debtor’s ability to pay, the court should determine whether, after paying “reasonably
necessary” expenses, the debtor has assets or income sufficient to pay the obligation in question by
taking into consideration the debtor’s entire economic circumstances. Stuart v. Koch (In re Koch),
109 F.3d 1285, 1289 (8th Cir. 1997). In determining the extent of the debtor’s disposable income, the
Court may also consider any income earned by a spouse or live-in companion. Brown, 302 B.R. at
642; In re Eiklenborg, 286 B.R. 718, 722 (Bankr. N.D. Iowa 2002); Shea v. Shea (In re Shea), 221
B.R. 491, 499-500 (Bankr. D. Minn. 1998) (“When supplemental income from a new spouse or live-in
companion serves to alter the debtor’s financial prospects, the Court must factor that consideration into
its evaluation of [the debtor’s] ability to pay” . . . “Absent consideration of a new spouse’s income and
its debt-absorbing impact upon the family’s finances, . . . the Court cannot determine exactly what
quantum of the debtor’s own income truly is “necessary” for the support of himself and his
dependents.”)
1. Debtor’s Ability to Pay
The Court finds that Debtor has not established his inability to pay the Debt. The Debtor failed
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11Defendant’s Ex. A.
13
to give this Court a complete picture of his income and expenses from which to determine whether he
has disposable income which could be used to pay the Debt. Initially, the Debtor attempted to frame
the income and expense picture solely in terms of his own income. Debtor also testified, however, that
his live-in girlfriend has an income and in fact does contribute towards some of his monthly expenses.
The Court has no evidence as to Debtor’s live-in girlfriend’s net take-home pay or her gross monthly
pay or the specific amount that she contributes toward the monthly expenses. To the extent any of
Debtor’s income goes to the support of his live-in girlfriend, it is obviously not for a reasonable and
necessary expense for the support of Debtor or one of his dependents.
The evidence with regard to the allocation of joint household expenses is equally incomplete.
Debtor’s monthly take home pay is $1,213.10. He testified to monthly expenses which total
$1,775.0011. Debtor also testified that his live-in girlfriend pays some of the bills and helps him cover
expenses, but did not provide evidence as to her income and expenses or the total amount that she
contributes to his expenses. Debtor did testify that the $185 for utilities and $150 for food was
attributable to both him and his live-in girlfriend. Thus, if he and his live-in girlfriend were to divide the
utility and food expenses equally, his monthly expenses would be reduced by $167.50 per month. He
also testified that he pays the full $500 per month for rent. If Debtor and his girlfriend were to split this
rent and further reduce his monthly expenses by $250 his total monthly expenses would be reduced to
$1,357.50. That does not take into account the unspecified other expenses Debtor testified his
girlfriend also pays each month. The Court also notes that Debtor could pay off the debt in two years
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by making payments of less than $100 per month. In the absence of further evidence of the combined
income and expenses of the household, Debtor has failed to meet his burden of proving that he is
unable to pay the debt to his ex-spouse. See Eiklenborg, 286 B.R. at 723 (“Debtor testified that she
and her husband shared the expenses equally. Schedules I & J, however, do not include debtor’s
husband’s income and expenses. As debtor has failed to present evidence necessary to establish a
complete picture of her financial condition, the Court concludes that she has failed to meet her burden
of proof regarding her inability to pay.”)
2. Balance of Hardship
The second defense available to a debtor is that the benefits to the debtor of discharging the
debt outweigh the detrimental consequences to the creditor. See 11 U.S.C. § 523(a)(15)(B). An
assessment of the benefits and detriments under § 523(a)(15)(B) requires an analysis of the totality of
circumstances, not just a comparison of the parties’ net worth. Florio, 187 B.R. at 658. The test
necessitates comparing the lifestyles of both parties and making a determination to measure the benefit
of discharge to the degree of harm. Schaefer v. Deppe (In re Deppe), 217 B.R. 253, 261 (Bankr. D.
Minn. 1998).
In this case, Debtor did not present any evidence at the trial of Morgan’s financial situation or
lifestyle. There is no evidence of her income, expenses, assets, liabilities, education, health or marital
status. This does not meet Debtor’s burden of proof under § 523(a)(15)(B) as it does not permit the
Court to weigh Morgan’s current and likely future financial situation and lifestyle against those of the
Debtor. The Court finds, therefore, that Debtor failed to establish entitlement to discharge under §
523(a)(15)(B).
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III. CONCLUSION
For all the reasons described above, this Court finds that the non-covered medical expenses
Debtor was ordered to pay in the dissolution proceeding were intended to and served the function of
child support. The record does not, however, support a finding that the award of attorney’s fees was
intended as support. As to the fees, the Court finds that Debtor has not met his burden of proving that
he lacks the ability to pay them or that the balance of hardship favors granting him a discharge of that
debt. It is therefore
ORDERED that the debt for non-covered medical costs be and is hereby excepted from
discharge pursuant to 11 U.S.C. § 523(a)(5). It is further
ORDERED that the attorney’s fees debt Debtor was ordered to pay in the dissolution
proceeding be and is hereby excepted from discharge pursuant to 11 U.S.C. § 523(a)(15).
SO ORDERED this 12th day of April, 2004.
/s/ Dennis R. Dow
Bankruptcy Judge
Copies to:
William A. Spencer
Gary William Smith
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