Paulo Rigg and Jodie L. Rigg

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Paulo Rigg and Jodie L. Rigg
05-10673
Minutes of Hearing Held On 9/2/05 Re: [4-1] Chapter 13 Plan . Notes of Oral
Ruling Attached.
Received on: 2005-09-02 14:30:41.000
2005-09-02 00:00:00.000
2005-09-02 00:00:00.000
James Burke
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
Clerk’s Minutes
Before the Honorable James Starzynski
James Burke, Law Clerk
Jill Peterson, Courtroom Deputy
**Hearing was Digitally Recorded
Date:
SEPTEMBER 2, 2005
In Re: Paulo Rigg and
Jodie Rigg Case 13-05-10673 SA
Oral ruling on confirmation
Debtors: Ron Holmes
Trustee: A. DeBois
_____________________________________________________________________
TIME STARTED: 11:04 TIME ENDED: 11:36
Summary of Proceedings: Exhibits ______
Testimony ______
Confirmation denied.
Debtors to file preconfirmation modification.
NOTES OF ORAL RULING ATTACHED.
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RIGG 05-10673 September 2, 2005
Ruling on Confirmation of Plan
1334 and 157; core; 7052
Allow a preconfirmation modification of the plan and filing
amended schedules I and J and noticing out the preconfirmation
modification of the plan (“amended plan”).
This is a six-person family; the children are 12, 10, 8 and 6.
Ms. Rigg is no longer employed outside the home; Mr. Rigg is
employed at Los Alamos and has take-home pay of $6885 per
month. Schedules I and J filed with the petition showed
disposable income of $1990 per month. The plan that was
noticed out commits $1990 per month for 36 months to the
trustee for distribution. At the confirmation hearing the
Debtors presented a revised expense part of the budget (Ex A).
The monthly expenses on Ex A are $5598.91 (say $6m), leaving
disposable income of $1285/month, a significant percentage
decrease from the first budget and plan. (The original budget
included income and expenses for a rental property that has
since been given up, and Ms. Rigg will no longer be working as
a substitute teacher for APS.)
The Debtors argue that this is a good faith plan – and in
particular a good faith budget scaled down from what the
debtors were spending prepetition – that ought to be approved
because it represents the Debtors’ reasonably best efforts to
cut back on their expenses in order to pay a dividend to
creditors while at the same time allowing them to spend a
reasonable amount on the necessities and some smaller amounts
on non necessities. They argue among other things that the
rent they pay is relatively low, they only drive one car (a
van which they have used the chapter 13 case to write down and
pay for over time), and they have no specific budget item for
the children’s birthdays and Xmas. The trustee argues that
the Debtors should not be allowed to present one budget at the
beginning of the case and then another when it comes to
confirmation. The Trustee also argues that the expense part
of the budget is simply too “fat” (my term). And the trustee
points out that more than 80% of the unsecured debt is
nondischargeable student loan debt, so that the Debtors are
doing themselves a big favor by paying off as much of that
debt as they can, unlike dischargeable unsecured debt.
What this case calls on me to do is in essence determine what
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is a reasonable budget in these circumstances. But first I
need to address the Trustee’s reasonable concern about a “more
accurate” expense budget being presented at the trial on
confirmation than appears in the original schedules.
First, and more important for other cases, I don’t find that
it is bad faith or a reason to refuse confirmation merely
because the Debtors’ numbers are refined or even corrected for
purposes of a hearing. No doubt the Debtors have an
obligation to be accurate the first time and every time in
schedules, SOFA, exhibits, testimony, etc. Wholesale changes
to a budget, or schedules, SOFA, etc., may suggest, without
further explanation, that the debtors and/or their counsel are
not being completely honest or careful enough. However, I
also think there is a rule of materiality, so that a small
mistake unintentionally made should not be a problem.
More important, there is a rule of practicality. When the
debtors and their counsel are first preparing schedules and
SOFA, they need make only reasonable efforts at being
accurate. To require debtors and counsel to ensure accuracy
down to the last penny or teacup would impose a burden so
exacting that filing would be virtually impractical. A test
of “the last penny and last teacup” is not of course what the
trustee is arguing for. She is merely arguing that debtors
and counsel should get it right the first time. And they
should. But requiring something close to perfection also
requires so much work that a filing becomes economically
impossible. Pointing out that debtors and counsel have some
leeway for reasonable (and unintentional) error illustrates
that often errors will not make any difference whatever in the
administration of the estate, the return (if any) to
creditors, and the integrity of the judicial process. If the
debtors were lying to begin with, that should be dealt with
for what it is – lying under oath. If the debtors were not
lying but made mistakes that materially misled the trustee or
creditors, that problem should also be dealt with in a way
that tailors the solution to the problem, which could include
not allowing amendments. If the debtors were not lying (or
being reckless with the truth) and if no prejudice results
from the misstatement of numbers, and if the figures are
material to what is going on in the case, then the figures
need to be fixed and everyone move forward.
In addition, the fact of the matter is that not everything can
be can be anticipated at the beginning of a case; it is often
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only in hindsight that parties need to focus on specific
figures and facts. If it turns out that a specific set of
numbers becomes the focus of litigation and further
examination of the numbers shows an error, then the figures
need to be corrected and the corrected figures made available
to the other parties (and filed) as soon as reasonably
possible. However, and this is important, letting the trustee
(or any other party) know only during the hearing that there
is a different expense schedule might easily prejudice the
other side, and in cases other than this one could easily
serve as a basis for not allowing the revised expense schedule
to be used at the hearing due to surprise. In turn, of
course, that could lead to nonconfirmation of the plan, and
possible conversion or dismissal.
Second, I accept that Ms. Rigg made an honest mistake in
calculating expenses based on a biweekly purchase schedule
(due to Mr. Rigg getting paid on a biweekly basis) rather than
monthly. And I also accept that Ms. Rigg was acting
sufficiently carefully at the outset in trying to figure out
what her budget was when the schedules were filed originally,
and that no one in this particular case is significantly
prejudiced by the use of Ex A (the so-called “sharp pencil
budget”) to set out the Debtors’ expenses. (In this instance,
the Trustee graciously did not object to the admission of the
exhibit; had she done so, it is entirely possible that Ex A
would never have made it into the record. And I also would
probably have precluded Ms. Rigg from testifying to the
contents of the exhibit as well.)
So, on to the merits. To begin with, there is nothing in the
Code that I can see that says the Debtors should not be able
to use chapter 13 if most of their debt is nondischargeable.
The holders of dischargeable claims will certainly benefit by
receiving at least partial payment on their claims. So will
the holders of the nondischargeable claims. And in fact 11
USC Section 1322(b)(1) precludes discriminating unfairly
against a class of unsecured claims. So that objection is
overruled.
As to the budget, most of the expenses for items such as rent
(itself fairly inexpensive for a family this size), utilities,
etc. are based on actual 12-month averages and are reasonable.
And having only one used van looks, in this society, almost
abstemious. On the other hand, I am allowing some expenses to
stay in the budget only if the Debtors extend their plan
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beyond 36 months to pay the creditors amounts equal to those
expenses. The expenses that need to be trimmed or eliminated
in a 36-month plan, or are allowed only if the Debtors make up
those amounts to the creditors by more plan payments, are as
follows (figures are annual amounts):
Clothing – $5m reduced to $3.5m: Ms. Rigg conceded that they
had already in effect reduced the school year $1200
figure by not buying each child the full complement of 5
pants and 7 shirts for the school year, and there is
certainly no need to purchase the same number of items
for summer. Further, five pairs of shoes per child seems
a bit excessive, even taking into account such things as
dance shoes or soccer boots. On the other hand, Mr. or
Ms. Rigg may well find the need to purchase more than
$300 each for clothing in the entire year.
Medical and dental – $8560 to $7360: Orthodontics is often an
optional albeit quite desirable benefit for a person;
however, in the absence of testimony that the two
children have such severe palate or other problems that
the lack of orthodontics will leave them in a very bad
way, orthodontia must be considered a luxury. The budget
is therefore reduced by $1200. The remainder of the
expenses are all allowed; in a sense, chapter 13 requires
me to “take the debtors as they are”, so that, for
example, Mr. Rigg’s oddly shaped eye justifies the
$520/year for special contacts. And the copays and
deductibles for the health and dental care, and the
amounts spent on medications, are also allowed, by the
same token.
Combined recreation and children’s sports – $6192 to $3792:
Taken alone and in isolation, both these numbers are
reasonable. And children’s sports and family activities
are quite important. However, in looking over the entire
budget, contributing the additional $200 per month to
payment of creditor claims (especially when more than 80%
of the extra payments are benefitting the Debtors because
they go to reduce nondischargeable debt) is also
reasonable. By and large, this is a relatively large
overall expense budget, especially in this state, which
is a pretty poor state in comparison with the rest of the
country. And the expense budget is probably an
illustration of the “principle of too much” as first
enunciated by the Tenth Circuit in United States v.
Dolese, 605 F.2d 1146, 1154 (10th Cir. 1979). The Debtors
can also find supplemental funds for these activities by
squeezing other categories a bit. And of course Debtors
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are also free to make the decision to fund these
activities at their own expense by extending the plan
payments.
Thus, the yearly budget needs to be reduced by the sum of
$5100 (1500 + 1200 + 2400), or $425/month, and the payment to
the trustee increased by that amount, if Debtors continue to
limit their plan to 36 months of payments. This means, for a
36-month plan, debtors need now to be paying $1710 to the
Trustee each month, instead of the $1990 originally promised
and the $1285 that Debtors have since proposed.
Debtors are also behind somewhat less than two payments as
measured by the $1990/month. Debtors need to be current under
the new numbers as ordered today, or deal with any deficiency
by requesting a moratorium, before the next confirmation
hearing.
In addition, given that the creditors will be receiving
materially less than promised originally, the preconfirmation
modification needs to be renoticed to creditors.
RH tdo
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