KAY WOODS, Bankruptcy Judge.
Debtor Karen Elaine Neal
At Trial, Frederic P. Schwieg, Esq., appeared on behalf of the Plaintiff. Bruce Martin Broyles, Esq., and Samuel G. Amendolara, Esq., appeared on behalf of the Defendant. The Court received testimony
This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the general order of reference (General Order No. 84) entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The following constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
The parties filed the Joint Statement of Facts on November 2, 2011, which included the following relevant facts (numbers below reflect the numbered paragraphs in the Joint Statement of Facts):
(Jt. Stmt. of Facts, ¶¶ 6-14, 16 and 18-20).
At Trial, Ms. Ross testified that although she took care of the household finances, the Defendant had his own credit cards for approximately four of their joint credit card accounts. She further testified that the monthly account statements for each of these credit cards were mailed to the Marital Residence until approximately one year prior to the dissolution of the parties' marriage, at which time Ms. Ross had the statements forwarded to her parents' address. Ms. Ross testified that she used the credit cards primarily to pay for day-to-day expenses for herself and the Defendant including purchasing groceries, personal items, paper goods, clothing, cleaning supplies, as well as tickets for an occasional concert. In addition, the Debtor testified that she utilized the home equity line of credit to pay for day-to-day living expenses, just as she used the credit cards. She further testified that she, individually, borrowed $28,000.00 from her parents in order to pay off the home equity line of credit.
Ms. Ross also stated that, at the Defendant's request, she had the Defendant's name removed from two credit card accounts several months prior to September 4, 2008 ("Date of Dissolution"). Ms. Ross stated she requested removal of the Defendant's name from these accounts in an attempt to "help him out" because she knew he was trying to refinance the Marital Residence. Moreover, Ms. Ross testified that the credit card debt, home equity line of credit and her UPS pension were all discussed with Mr. Bruno during the dissolution process and when the Separation Agreement was negotiated. Ms. Ross stated that she accepted financial responsibility for the credit card debt because she wanted to avoid a long, contested divorce. The Debtor testified she had met another man and she wanted to get out of the marriage in order to move on with her life.
Mr. Suhar testified that, as of the Date of Dissolution, the present value of the Debtor's UPS pension plan was $18,434.04, using the American Experience Table of Mortality for Ms. Ross's life expectancy and the treasury bill rate as the discount rate. Because the full amount of the pension was earned during the marriage, Mr. Suhar testified that, in a contested divorce, the Defendant would likely have been entitled to one-half of the present value of the Debtor's UPS pension account. Mr. Suhar noted that, as of the Date of Dissolution, Ms. Ross was insolvent because her liabilities far exceeded her assets.
Ms. Ross's mother, Shirley Neal, testified that she lent $28,000.00 to her daughter so that Ms. Ross could pay off the home equity line of credit, which was secured by the Marital Residence. Ms. Neal explained that she made the loan because her daughter said the Defendant refused to assume responsibility for the home equity debt in the dissolution.
Mr. Bruno also testified that, during the marriage, (i) the Debtor was solely in charge of the couple's finances; (ii) he had no idea how much the couple spent each month on household expenses; and (iii) the mortgage payment for the Marital Residence was directly debited from the Debtor's checking account.
On September 4, 2008, the Debtor and the Defendant were granted a dissolution of their 13-year marriage. The Decree incorporated the parties' Separation Agreement, signed by the Debtor and the Defendant on July 30, 2008. The Separation Agreement provided for the division of all marital assets and debts of the Debtor and the Defendant. The pertinent terms of the Separation Agreement are summarized as follows:
The terms of the Separation Agreement left the Debtor with the following marital assets: (i) a single nine-year old vehicle; (ii) unspecified personal property; (iii) unspecified bank accounts; and (iv) her retirement account from her former employer, UPS, the present value of which as of the Date of Dissolution was calculated by the Plaintiff to be $18,434.04. In addition, the Debtor paid off the secured home equity line of credit in the amount of $28,000.00 and had liability for all credit card debt incurred during the marriage, which the parties stipulated to be $60,743.48. The Defendant, on the other hand, received the following marital assets
Mr. Suhar asserts that the Debtor received less than reasonably equivalent value for the assets she transferred to the Defendant pursuant to the Separation Agreement. As a consequence, he seeks to recover the value of the alleged fraudulent transfer
The Plaintiff seeks to avoid the transfer of certain of the marital property received by the Defendant as a result of the Decree and the Separation Agreement. The Plaintiff's Complaint contains two counts: Count I alleges that the transfers constituted implied fraudulent transfers under 11 U.S.C. § 548(a)(1)(B); and Count II alleges that the transfers constituted implied fraudulent transfers under O.R.C. §§ 1336.04 and 1336.05 and are thus recoverable
Section 548 provides:
11 U.S.C. § 548 (West 2010).
To prevail on a claim under § 548(a)(1)(B), the Plaintiff must show: (i) the Debtor transferred an interest in property; (ii) the transfer occurred within two years before the date the bankruptcy petition was filed; (iii) the Debtor received less than reasonably equivalent value in exchange for the transfer; and (iv) the Debtor was insolvent on the date of the transfer or became insolvent as a result of the transfer
Ohio law provides similar guidance regarding the determination of whether a conveyance was fraudulent in Sections 1336.04 and 1336.05 of the Ohio Revised Code. Section 1336.05 provides, in pertinent part
O.R.C. § 1336.05(A) (Page's 2010).
Here, there is no dispute that the Plaintiff has established three of the four elements of both 11 U.S.C. § 548(a)(1)(B) and O.R.C. § 1336.05(A). The first two elements—i.e., that the Debtor transferred an interest in property within two years of the bankruptcy petition date are established by the Joint Statement of Facts, which shows that the Debtor transferred property to the Defendant on the Date of Dissolution—September 8, 2008—and subsequently filed her bankruptcy petition on March 11, 2009, which was approximately six months later. The evidence supports the fourth element that the Debtor was insolvent as of the date of transfer or became insolvent as a result of the transfer. As a result of the division of marital property in the Separation Agreement and the Decree, the Debtor's debts of approximately $100,000.00 ($11,000.00 car debt plus $28,000.00 debt to her parents plus more than $60,000.00 in credit card debt) far exceeded her interest in the UPS pension account and the 1999 Pontiac. Moreover, the Debtor filed her bankruptcy petition in close temporal proximity to the
In Ohio, there is a presumption that all assets acquired during a marriage are marital assets to be equally divided. In addition, all debt is presumed to be marital debt if acquired during the marriage.
Machesky v. Machesky, 2011 WL 686180 at *2-3, 2011 Ohio App. LEXIS 753 at *5-6 (Ohio Ct.App., Feb. 23, 2011) (internal citations and quotation marks omitted).
It is clear from the face of the Separation Agreement that the Debtor and the Defendant did not equally divide their assets. Not only were the assets not equally divided, they were not equitably divided. Both the Debtor and the Defendant were healthy, able-bodied adults, capable of earning a living and supporting themselves. There was no evidence of any special circumstances that would mandate anything other than an equal division of property by and between the Debtor and the Defendant. From an objective perspective, it is inexplicable why the Debtor would pay off the home equity loan (thus increasing the equity in the Marital Residence by $28,000.00) and then waive all rights to any equity in the Marital Residence. Although the Debtor claims she agreed to whatever the Defendant asked for to avoid a protracted, contested divorce, any benefit the Debtor may have received in foregoing a protracted, contested divorce does not and cannot constitute reasonably equivalent value.
The Defendant made three arguments that the Separation Agreement provided the Debtor with what she would have received in a contested divorce. First, he argued that, absent the agreements in the Separation Agreement, he would have asked for spousal support and continued health insurance from the Debtor. However, there was no evidence or other indication that the Defendant would have been awarded spousal support. The Debtor and the Defendant were each capable of supporting themselves. The Defendant argued that the Debtor was voluntarily underemployed because she voluntarily terminated her employment at UPS and was subsequently earning less money. From the Court's perspective, however, it is the Defendant who appears to have been voluntarily underemployed. Although the Defendant is a licensed cosmetologist who rents a chair in a salon, his net earnings for the three years prior to the divorce never exceeded $2,000.00 per year. (See Pl. Ex. E, F and G.) The Defendant gave no reason why he earned so little nor did he argue that he was incapable of earning more money. He merely asserted that he was "used" to having the Debtor be the breadwinner during the marriage, and that
Next, the Defendant stated that he would have asked for one-half of the Debtor's vested pension rights from her employment at UPS. Because the Debtor's UPS pension was earned during the marriage, it constitutes a marital asset. It is very likely that a trial court would have awarded the Defendant one-half of the Debtor's UPS pension benefits. The evidence indicates that the present value of the Defendant's potential interest in the Debtor's pension account as of the Date of Dissolution was $9,217.02, which the Plaintiff factored into his analysis that the Debtor did not receive reasonably equivalent value in the dissolution.
The last argument made by the Defendant is that all of the credit card debt assigned to the Debtor in the Separation Agreement was her individual debt rather than marital debt and/or that the Debtor hid such debt from him. Accordingly, the Defendant argued that it was appropriate for the Debtor to assume liability for all credit card debt. The Court notes that the Separation Agreement is ambiguously worded, in that it provides, "Except as provided herein there is no joint marital debt." (Sep. Agmt. Art. 6) (emphasis added). Despite this wording, no marital debt was "provided herein." Both parties testified that only the Debtor had credit cards in her name (although the Defendant was an authorized user on these credit card accounts), which may be the reason the Separation Agreement refers to no "joint" marital debt. The Debtor testified that even though the credit cards were in her name, they were used for purchases that constituted marital debt, such as groceries, clothes and personal items for herself and for the Defendant, eating in restaurants, etc. She said that there were no large purchases on the credit cards.
The Debtor further testified that the Defendant knew about the credit cards even if he did not know the specific amount owing on each card. To the contrary, the Defendant stated that he was aware of only the one credit card that he carried in his wallet. He stated, however, that he did not use that credit card. The Defendant further testified that the Debtor did not disclose the number of credit cards or the amount of the credit card debt when the Separation Agreement was being negotiated and that he did not find out about the credit card debt until after the Debtor filed for bankruptcy protection. The Defendant argued that, because the Debtor had certain credit card statements mailed to her parents' address instead of the Marital Residence, he could not have known about the credit card debt. Mr. Bruno posited that, in a contested divorce, the Debtor's conduct in hiding the debt would be sufficient for a trial court to find that the Debtor was solely responsible for such debt.
The Court finds the Defendant's testimony to be self-serving, inconsistent with his exhibits and not credible. First, the
More significantly, nothing in the record rebuts the presumption that the Debtor's credit cards were used for purchases that constituted marital debt.
Smith v. Smith, 190 Ohio App.3d 335, 344-45, 941 N.E.2d 1233 (Ohio Ct.App.2010) (quoting Nemeth v. Nemeth, 2008 WL 2582517 at *8-9, 2008 Ohio App. LEXIS 2803 at *21-22 (Ohio Ct.App. June 27, 2008)) (internal citations and quotation marks omitted, emphasis in original). The Plaintiff and the Defendant stipulated that the Debtor's Schedule F listed credit card debt of $60,743.48. Schedule F lists a total of $89,098.41 in unsecured debt. Of the unsecured debt, all but the following are listed as credit card debt: ADT (Security)—$99.25; First Federal Credit Control (Medical)—$235.68; Larry & Shirley Neal (Loan)—$28,000.00. The Debtor scheduled Seven Seventeen as a checking account; however, Ms. Ross testified that a credit card was issued in connection with this account. The Defendant professed not to know if there was a credit card issued in connection with the Seven Seventeen checking account. If the Seven Seventeen debt is included with the other credit card debt, the total comes to $60,763.48, which is $20.00 more than the stipulated amount of $60,743.48. The Debtor further testified that the Capital One credit card debt in the amount of $2,558.91 was incurred subsequent to the dissolution. As a consequence, this Court calculates that, pursuant to the Separation Agreement, the Debtor assumed liability for credit card debt in the amount of $58,204.57 ($60,-763.48 less $2,558.91 Capital One debt).
Financial misconduct usually requires some action to dissipate, destroy, conceal or fraudulently dispose of assets.
Smith v. Smith, 190 Ohio App.3d 335, 345, 941 N.E.2d 1233 (Ohio Ct.App.2010) (internal citations omitted). In the Smith case, the wife, without the consent of the husband, sold stock inherited by the husband and which at all times remained the husband's separate property. The wife also forged the husband's signature on the disbursement check and spent the proceeds without the husband's knowledge or consent. As a consequence, the appellate court upheld the trial court's finding the wife guilty of financial misconduct and required the wife to make the husband whole. In this case, the circumstances described by the Defendant of Ms. Ross having certain credit card statements sent to her parents' house does not rise to the level of financial misconduct found by the Smith Court.
The Defendant argued that a trial court would find financial misconduct because the Debtor had some credit card statements sent to her parents' home rather than the Marital Residence. The Debtor's mother, Shirley Neal, testified that, for approximately one to one-and-a-half years prior to the divorce, the Debtor received some mail at her parents' house. Mrs. Neal stated that she could not recall any of the return addresses on such mail, but she thought they were credit card statements. Other than this testimony, there was no evidence about the kind of mail the Debtor had delivered to the home of Mr. and Mrs. Neal. Most notably, there was no evidence that the mail sent to the home of the Debtor's parents constituted new credit card accounts
The Decree provides, "[T]he Separation Agreement entered into by and between the Petitioners, having been found to be fair and equitable, is hereby approved and incorporated into this Decree in its entirety." (Am. Jt. Ex. A at 3.) Although not raised by the Defendant, it is clear that, despite this quoted language, the Decree does not preclude the Plaintiff's causes of action.
Corzin v. Fordu (In re Fordu), 201 F.3d 693, 707-08 (6th Cir. 1999) (citing Ohio Rev. Code Ann. § 3105.171(F) (Anderson 1996)).
Thus, this Court must look at the actual division of property to determine if the Debtor received reasonably equivalent value for the assets she transferred to the Defendant and the liabilities she retained as a result of the Decree. In order to do
We begin by comparing the value of the assets the Defendant received with the value of what the Debtor received in the divorce. As set forth above, the Debtor received the following: (i) a single nine-year old vehicle, which was encumbered by a lien in the approximate amount of $11,000.00; (ii) unspecified personal property; (iii) unspecified bank accounts; and (iv) her retirement account from her former employer, UPS, the total present value of which was $18,434.04. In addition, the Debtor paid off the home equity line of credit in the approximate amount of $28,000.00 and she was responsible for all credit card debt incurred during the marriage in the amount of $58,204.57. Thus, the Debtor received, on a net basis, negative equity in the approximate amount of $78,770.53 (($11,000.00 + $28,000.00 + 58,204.57) less $18,434.04). The Defendant, on the other hand, received the following marital assets: (i) all equity in the Marital Residence, valued at $27,500.00 (after taking into account the first mortgage on the Marital Residence); (ii) at least four vehicles (to which no value was assigned); (iii) unspecified personal property; (iv) unspecified bank accounts; and (v) no marital debt other than the mortgage secured by the Marital Residence. Thus, the Defendant received at least $27,500.00 in net value.
The Plaintiff ignores the negative equity in the vehicle retained by the Debtor and, as set forth above, no value was attributed to any of the vehicles the Defendant retained. It is appropriate to disregard the $11,000.00 debt secured by the Debtor's Pontiac because there was no testimony or other evidence about why the Debtor incurred this debt or for what purpose the funds were used. The Debtor acknowledged that the original auto loan for the Pontiac had been paid off and there was no evidence that this second loan was used for purposes that would constitute marital debt. With the elimination of the vehicles from the Court's analysis, the Debtor's negative equity is $67, 770.53
If the marital assets (excluding vehicles) and debts of the Debtor and the Defendant were split equally, the Debtor and the Defendant each would have received assets in the amount of $22,967.02, consisting of (i) one half of the net equity in the Marital Residence in the amount $13,750.00; and (ii) one-half of the present value of the
The Plaintiff established that the Debtor did not receive reasonably equivalent value when she relinquished all equity in the Marital Residence and took on all unsecured marital debt, even when the value of the Debtor's retirement plan is taken into consideration. The Plaintiff has established all elements for this Court to avoid a fraudulent transfer under 11 U.S.C. § 548 and O.R.C. § 1336.05. The reasonably equivalent value of the voidable transfers the Debtor made to the Defendant in the divorce is $47,635.27. The Plaintiff is entitled to recover this amount from the Defendant.
An appropriate order will follow.
Debtor Karen Elaine Neal filed a voluntary petition pursuant to chapter 7 of the Bankruptcy Code on March 11, 2009 (Doc. # 1, Main Case), and received a discharge on July 7, 2009 (Doc. #24, Main Case). On June 18, 2010, Plaintiff Andrew W. Suhar, Trustee, filed Adversary Proceeding to Determine the Validity, Priority or Extent of a Lien or Other Interest in Property; to Avoid a Preferential Transfer, [sic] to Recover Money or Property; to Obtain a Declaratory Judgment Relating to the Foregoing and Other Relief (Doc. # 1). On July 20, 2010, Defendant Craig Bruno filed Answer to Complaint Filed by Craig Bruno (Doc. #7). Trial was held on October 31, 2011.
For the reasons stated in this Court's Memorandum Opinion entered on this date, the Court finds that the Plaintiff established that the Debtor did not receive reasonably equivalent value when she relinquished all equity in the Marital Residence and took on all unsecured marital debt, even when the value of the Debtor's retirement plan is taken into consideration. The Plaintiff has established all elements for this Court to avoid a fraudulent transfer under 11 U.S.C. § 548 and O.R.C. § 1336.05. The reasonably equivalent value of the voidable transfers the Debtor made to the Defendant in the divorce is $47,635.27. The Court hereby awards the Plaintiff $47,635.27 to be paid by the Defendant.
