In re Watson

• Decision Date: 25 March 2005
• Docket Number: No. 04-9005.,04-9005.
• Citation: 403 F.3d 1
• Parties: In re Michael WATSON and Kathleen Watson, Debtors, Michael Watson and Kathleen Watson, Appellants, v. John Boyajian, Chapter 13 Trustee, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1

403 F.3d 1

In re Michael WATSON and Kathleen Watson, Debtors Michael Watson and Kathleen Watson, Appellants, v. John Boyajian, Chapter 13 Trustee, Appellee.

No. 04-9005.

United States Court of Appeals, First Circuit.

Heard January 5, 2005.

Decided March 25, 2005.

Christopher M. Lefebvre, with whom George M. Prescott Jr., was on brief, for appellants.

John P. Boyajian, with whom Boyajian, Harrington & Richardson was on brief, for appellee.

Before TORRUELLA, Circuit Judge, CAMPBELL, Senior Circuit Judge, and LYNCH, Circuit Judge.

LEVIN H. CAMPBELL, Senior Circuit Judge.

Debtors-Appellants Michael and Kathleen Watson (the "Watsons") appeal from an order of the bankruptcy court denying confirmation of their proposed Chapter 13 plan. The bankruptcy court denied confirmation on the ground the Watsons failed to establish that all projected "disposable income" received during the plan period would be applied to make payments under the plan. See 11 U.S.C. § 1325(b)(1)(B). In particular, the bankruptcy court determined that the cost of sending the Watsons' two minor children to parochial school was neither a "reasonably necessary" expense nor a "charitable contribution" — each of which is excluded from the definition of "disposable income" under 11 U.S.C. § 1325(b)(2)(A). See In re Watson, 299 B.R. 56, 58-60 (Bankr.D.R.I.2003). The bankruptcy appellate panel affirmed. In re Watson, 309 B.R. 652, 657 (B.A.P. 1st Cir.2004). This appeal followed.

Although they did not make the same argument in the bankruptcy court, the Watsons argue in this appeal that to deny confirmation of the plan because of its provision for paying the cost of sending the children to parochial school burdens the protected exercise of their Catholic faith, in contradiction of the Religious Freedom Restoration Act, as amended. See 42 U.S.C. § 2000bb-1 et seq. They also argue that the bankruptcy court erred in finding that the parochial school tuition payments were not reasonably necessary.¹ For reasons that follow, we affirm.

I. Background

On January 17, 2003, the Watsons filed a joint case under Chapter 13 of the United States Bankruptcy Code. See 11 U.S.C. § 1301 et seq. Their Schedules I and J showed net monthly income of $5,770, expenses of $4,194, and disposable income of $1,576. Their proposed Chapter 13 plan provided for thirty-six monthly payments of $1,576 (total $56,736), which would have paid to unsecured creditors twenty-five percent of their claims.

The Chapter 13 trustee, John Boyajian ("Trustee"), objected to confirmation of the plan on the ground that the Watsons were not contributing all of their disposable income as required under 11 U.S.C. § 1325(b)(1)(B).² "Disposable income" is defined as: "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, including charitable contributions." 11 U.S.C. § 1325(b)(2)(A). The Trustee objected in particular to a claimed expense of $735 per month for parochial school tuition for the Watsons' two minor children. The Watsons, who are Catholics, maintained that the expense is reasonably necessary under the circumstances. The Watsons also argued in the alternative that the expense is a "charitable contribution," hence a reasonably necessary expense under the amended definition of "disposable income" provided by the Religious Liberty and Charitable Donation Act of 1998. See supra note 1.

At a hearing before the bankruptcy court, Mr. Watson testified that he, his wife, and their two children are devout Catholics who attend church every Sunday and during all the holy days of obligation. Mr. Watson testified that he is actively involved in church ministry, and that his children have been assisting at mass since the third grade. Mr. Watson stated that he and his wife have always sent their children to parochial schools because they value the importance such schools place on God.

After further briefing and oral argument, the bankruptcy court, on September 15, 2003, issued an order denying confirmation of the plan, finding (1) that the tuition expense is not reasonably necessary, and (2) that the tuition is not a charitable contribution excluded under the Religious Liberty and Charitable Donation Protection Act of 1998. In re Watson, 299 B.R. at 57. The bankruptcy court found that the Watsons had "claimed many borderline and/or excessive expenses," that they were "unwilling to extend their plan beyond three years," and that their plan therefore failed to demonstrate good faith. Id. at 58. The order denying confirmation of the plan provided that, in accordance with the local bankruptcy rules, the Watsons had eleven days within which to file an amended plan. Id. at 60.

On September 24, 2003, the Watsons appealed from the order to the bankruptcy appellate panel ("BAP"). Thereafter, the Watsons filed in the bankruptcy court a motion to stay pending appeal. On October 27, 2003, the bankruptcy court entered an order denying the stay motion and dismissing the case. The order stated as follows:

1. The Motion for a Stay is denied and the case dismissed.

2. For administrative purposes, the underlying case shall remain open and the deadline contained in Rhode Island Local Bankruptcy Rule 3015-3(e) extended generally until 10 days after the entry of a decision on the merits of Debtors' appeal by the Bankruptcy Appellate Panel.

3. This order may be modified by any party in interest upon the filing of an appropriate motion.

On May 21, 2004, the BAP issued its judgment affirming the bankruptcy court's denial of confirmation. In re Watson, 309 B.R. at 664. The BAP concluded that the bankruptcy court's order denying confirmation of the plan was interlocutory and not final because the Watsons were "free to propose an alternate plan." Id. at 659. The BAP made no mention of the bankruptcy court's subsequent order denying the motion to stay pending appeal and dismissing the case. See id. ("Here, the Bankruptcy Court did not dismiss the case...."). In spite of its determination that the bankruptcy court's 9/15/03 order was interlocutory, the BAP exercised jurisdiction to hear the appeal under 28 U.S.C. § 158(a)(3), providing for review of interlocutory orders, and affirmed. Id. at 657, 659. On June 15, 2004, the Watsons appealed to this Court.

II. Jurisdiction

We have requested the parties to brief the question "whether the finality of the [bankruptcy court's] 10/27/03 order dismissing the case is undercut by the order's provision that the case `shall remain open' and that the deadline for filing a modified Plan shall be extended." Both parties to this appeal contend that this Court has jurisdiction pursuant to 28 U.S.C. § 158(d) to hear this appeal. We agree.

Under 28 U.S.C. § 158(d), this Court has "jurisdiction of appeals from all final decisions, judgments, orders, and decrees." Although the BAP concluded that it had jurisdiction to review the 10/27/03 order even if interlocutory, this Court has jurisdiction only if the underlying bankruptcy court order is in fact final. See In re Flor, 79 F.3d 281, 283 (2d Cir.1996) ("For purposes of § 158(d), a determination of the district court is not `final' unless the underlying order of the bankruptcy court is final."); see also In re Lievsay, 118 F.3d 661, 662 (9th Cir.1997) ("If the underlying bankruptcy court decision is interlocutory, the BAP order affirming or reversing it is also interlocutory.").

The parties concede the bankruptcy court's 9/15/03 order denying confirmation of the plan was not final at the time it was issued "because the Debtors remained free to propose an alternate plan." In re Bentley, 266 B.R. 229, 233 (B.A.P. 1st Cir.2001); see Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 283 (5th Cir.2000) (stating, "If the order was not intended to be final — for example, if the order addressed an issue that left the debtor able to file an amended plan ... appellate jurisdiction would be lacking."). But even if the 9/15/03 order denying confirmation of the plan was not final at the time it was issued, the parties assert that the order became final after October 27, 2003, when the bankruptcy court entered its order dismissing the case. See In re Bentley, 266 B.R. at 234 (holding that order denying confirmation of plan "became final when, upon being notified that the Debtors did not intend to seek confirmation of an alternate plan, the court dismissed their case").

In In re Parque Forestal, Inc., this Court held that a district court's appellate order was final and appealable, even assuming the underlying bankruptcy court order was not final at the time it was appealed, because the bankruptcy case had been dismissed before appeal to this Court, "making the orders below, in effect, final." 949 F.2d 504, 508 (1st Cir.1991).

[E]ven assuming, for purposes of argument, that the [bankruptcy court] order then lacked finality, the subsequent dismissal of the bankruptcy proceeding makes this assumption largely irrelevant. The Supreme Court has held that "the requirement of finality is to be given a `practical rather than a technical construction.'" ... Whether or not the bankruptcy court's order was final at the time it was appealed to the district court, there is no possibility now that either court's order will be changed or become moot, or that "piecemeal appeals" will waste the time of this court or the parties.

Id. (citations omitted). See also Welch v. Cadre Capital, 923 F.2d 989, 992 (2d Cir.1991) (holding that there was appellate jurisdiction under principle that "a premature notice of appeal from a nonfinal order may ripen into a valid notice of appeal if a final judgment has been entered by the time the appeal is heard and the appellee suffers no prejudice"), vacated on other grounds, 501 U.S. 1247, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991); cf. Clausen v. Sea-3, Inc., 21 F.3d 1181, 1184 (1st Cir.1994)...