Debt Rendered Nondischargeable Because Debtor Kept the Insurance Checks

Many Americans lack health insurance.[1] Even people with health insurance may seek care from out-of-network hospitals that don’t participate in their health plans.[2] That is what happened with the debtor in In re Dietrich, because “his health insurance carrier would not pay the Hospital directly”[3] and instead paid the debtor the cost of his hospital bills.[4] After receiving the money from the insurance company, however, the debtor never paid the hospital.[5] Consequently, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania found that his debt to the hospital was not dischargeable.[6]

Nondischargeable Debt

Section 523(a) of the Bankruptcy Code provides several exceptions to discharge.[7] Two of these are implicated in In re Dietrich.[8] First, a debtor may not discharge any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity” under § 523(a)(6).[9] To render a debt nondischargeable under this subsection, a creditor “must prove by a preponderance of the evidence that (1) [debtor’s] conduct was both ‘willful and malicious,’ and (2) injury resulted to the [creditor] from [debtor’s] conduct.”[10] To be willful, a debtor’s conduct must be “deliberate and substantially certain to cause injury to the [creditor].”[11] For the debtor’s conduct to be malicious, the debtor must act “wrongfully and without just cause or excuse.”[12]

Second, a debtor may not discharge any debt for services obtained by a false representation.[13] To meet its burden on that issue, a creditor must prove five elements.[14] The first three involve the actions and intent of the debtor: “(1) [the debtor] expressly or impliedly made a false representation; (2) [the debtor] knew, or believed, the representation was false at the time it was made; [and] (3) the representation was made with the intent and purpose of deceiving the [creditor].”[15] The last two involve the creditor: “(4) the [creditor] justifiably relied upon the representation; and (5) the [creditor] sustained damage as a proximate result of the representation having been made.”[16]

Medical Services from Non-Participating Provider

In 2016, the debtor received treatment from Lehigh Valley Hospital for a brain tumor.[17] The debtor’s insurance company was Capital BlueCross.[18] The hospital, however, “was a non-participating provider with [the debtor’s] insurance company.”[19] Thus, Capital BlueCross would not pay the hospital directly for treatment provided to the debtor. Instead, Capital BlueCross sent checks for the cost of the treatment to the debtor.[20] Those checks were sent by Capital BlueCross with the expectation that the debtor would pay the hospital for the treatment he had received with that money.[21] After receiving three checks from Capital BlueCross for over $95,000, however, the debtor “endorsed the checks, deposited the proceeds into his personal account, and spent the funds.”[22]

Even before receiving medical treatment, the debtor had agreed to pay the hospital for the treatment he received.[23] In fact, the debtor signed three Consents for Treatment.[24] The consents each required the debtor to not only pay the hospital but to also assign all insurance benefits to the hospital.[25] After the debtor filed for relief under the Bankruptcy Code, the hospital filed a complaint to exempt its claim against the debtor from discharge and moved for summary judgment on the issue of whether the debt was nondischargeable.[26] Before ruling, the bankruptcy court held a trial to resolve critical facts that were in dispute.[27]

The Debtor Acted Willfully and Maliciously

The bankruptcy court concluded that the hospital met its burden of proving that the debt was nondischargeable under both §§ 523(a)(6) and 523(a)(2)(A).[28] The bankruptcy court found that the debt was nondischargeable under § 523(a)(6) because the debtor acted willfully and maliciously in causing harm to the hospital.[29] The debtor received treatment, agreed to pay for it, and failed to do so after receiving checks to cover the cost.[30] But perhaps most damaging to the debtor’s case was the fact that “he and a friend made an anonymous phone call to Capital BlueCross using his friend’s phone to determine why he received the check”:[31]

Why did [the debtor] use this convoluted, confidential communication about the money he received? Because he wanted to keep it and did not want to give specific facts that might lead to a statement that he had to pay the money to the Hospital. This is the only explanation for his clandestine call to BlueCross.[32]

Taking the facts together, the bankruptcy court concluded that the debtor’s conduct precluded the discharge of his debt to the hospital under § 523(a)(6).[33]

The bankruptcy court also concluded that the debt was nondischargeable under § 523(a)(2)(A.[34] In support of that conclusion, the bankruptcy court found that the debtor acted with fraudulent intent based on the facts and circumstances, particularly those surrounding the receipt of the checks.[35] Each insurance check that the debtor received had an Explanation of Benefits form attached as the front sheet.[36] If the debtor did not already know that it was not entitled to keep the insurance funds (because he did nothing to receive that money), the Explanation of Benefits form would have explained it.[37] The bankruptcy court concluded that the debtor acted with intent to deceive the hospital, rendering his debt nondischargeable under § 523(a)(2)(A) as well.[38]

Conclusion

The Hospital lost over $95,000 because of debtor’s conduct.[39] The debtor received medical treatment from the hospital and agreed to pay.[40] However, the debtor never paid the hospital for the treatment — even though the debtor received the exact amount to cover the treatment from his health insurance provider.[41] Later, the debtor filed for bankruptcy and attempted to discharge the debt.[42] Because of the debtor’s actions, the bankruptcy court ruled that the debt was nondischargeable under both §§ 523(a)(6) and 523(a)(2)(A) of the Bankruptcy Code.[43]