In re Watson

• Decision Date: 21 May 2004
• Docket Number: BAP No. RI 03-078.,Bankruptcy No. 03-10179-ANV.
• Parties: Michael WATSON and Kathleen Watson, Debtors. Michael Watson and Kathleen M. Watson, Appellants, v. John Boyajian, Chapter 13 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit

309 B.R. 652

Michael WATSON and Kathleen Watson, Debtors.

Michael Watson and Kathleen M. Watson, Appellants, v. John Boyajian, Chapter 13 Trustee, Appellee.

BAP No. RI 03-078.

Bankruptcy No. 03-10179-ANV.

United States Bankruptcy Appellate Panel of the First Circuit.

May 21, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Christopher M. Lefebvre, Pawtucket, RI, on brief for Appellants.

John Boyajian, Providence, RI, on brief for Appellee.

Before DE JESUS, HILLMAN, and ROSENTHAL, U.S. Bankruptcy Appellate Panel Judges.

PER CURIAM.

The United States Bankruptcy Appellate Panel for the First Circuit (the "Panel") has before it Michael and Kathleen Watson's (the "Appellants") appeal of the September 15, 2003 order of the United States Bankruptcy Court for the District of Rhode Island (the "Bankruptcy Court") denying confirmation of their Chapter 13 plan (the "Order"). We affirm.

BACKGROUND

On January 17, 2003, the Appellants filed a joint petition under Chapter 13 of the United States Bankruptcy Code;¹ shortly thereafter, they filed their Chapter 13 plan. The Appellants' Schedules I and J showed net monthly income of $5,770 and expenses of $4,194, leaving $1,576 a month in disposable income. The plan provided for thirty-six monthly payments of $1,576 (totaling $56,736), which would have paid unsecured creditors twenty-five percent of their claims. The Chapter 13 trustee objected to confirmation on the grounds that the Appellants were not contributing all of their disposable income as required under 11 U.S.C. § 1325(b)(1)(B). Specifically, the trustee objected to a claimed expense of $735 per month for Catholic school tuition for the Appellants' two minor children. The Appellants maintain the expense is reasonably necessary under the circumstances, or that the expense is a "charitable contribution" and is therefore de facto reasonably necessary under the Religious Liberty and Charitable Donation Protection Act of 1998. Lastly, the Appellants argue that the Religious Freedom Restoration Act ("RFRA") protects their use of disposable income for payment of their children's private religious school tuition.

The Bankruptcy Court held an evidentiary hearing that focused primarily on the issue of the Appellants' $735 monthly expense for private religious school tuition. See App. at tab 3, page 1. At the hearing, Mr. Watson testified that the $735 figure includes the tuition for his two minor children to attend local Catholic middle and high schools, plus an additional $40 per month for "miscellaneous school activity" such as materials for take-home projects. Id. at 5. Mr. Watson further testified that he, his wife, and both children are practicing Roman Catholics who attend church every Sunday and during all of the holy days of obligation. Id. at 7-8. Mr. Watson testified that he is actively involved in church ministry, and that his children have been assisting at mass since the third grade. Id. at 8-9. Mr. Watson explained that the Appellants have always sent their children to Catholic schools because they value the importance such schools place on God. Id. at 7. The tuition is less than fifteen percent of the Appellants' gross annual income.

At the conclusion of the hearing, the Bankruptcy Court took the matter under advisement, and requested written submissions from the parties. Further oral argument was heard at a later date. On September 15, 2003, the Bankruptcy Court issued the Order denying confirmation of the Appellants' Chapter 13 plan, (1) finding that the private school tuition expense is not reasonably necessary, and (2) concluding that the Religious Liberty and Charitable Donation Protection Act of 1998 does not apply in this case. The Order was accompanied by a written opinion in which the Bankruptcy Court found that the Appellants had claimed many borderline and/or excessive expenses, that they were unwilling to extend their plan beyond three years, and that the Appellants' plan therefore failed to demonstrate good faith. App. at tab 8, page 6. The Bankruptcy Court further found that the Appellants had not shown that the public schools in their area were inadequate, or that their children had special needs that the public schools could not meet. Id. Lastly, the Order provided that, in accordance with local rules, the Appellants had eleven days to file an amended plan. This appeal followed.

JURISDICTION

A bankruptcy appellate panel may hear appeals from "final judgments, order and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]." Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). "A decision is final if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. at 646 (citations omitted). An interlocutory order "`only decides some intervening matter pertaining to the cause, and requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.'" Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. See In re George E. Bumpus, Jr. Constr. Co., 226 B.R. 724 (1st Cir. BAP 1998).

STANDARD OF REVIEW

Appellate courts reviewing an appeal from a bankruptcy court generally apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See T I Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20, n. 8 (1st Cir.1994). In the present case, the Bankruptcy Court rendered its decision based in part upon a determination that the private schooling of the Appellants' two minor children was not reasonably necessary under the circumstances. The Bankruptcy Court's determination turned on a finding of a lack of good faith with regard to the Appellants' expenses and proposed plan, as well as findings of fact with regard to the educational needs of the Appellants' children. We apply the clearly erroneous standard to such findings.

The clearly erroneous standard requires us to give great deference to the Bankruptcy Court as the trier of fact. Under this standard, a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); Cabral v. Shamban (In re Cabral), 285 B.R. 563, 571 (1st Cir. BAP 2002); Gray v. Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 830 (1st Cir. BAP 1999). If the trial court's account of the evidence is plausible in light of the record reviewed in its entirety, a reviewing court may not reverse even if convinced that it would have weighed the evidence differently as a trier of fact. Anderson, 470 U.S. at 574, 105 S.Ct. 1504.

The Bankruptcy Court also based its decision on interpretation of the "charitable contribution" exception to § 1325(b)(2)(A). Where the issue on appeal is essentially one of statutory construction the Panel reviews the issue de novo. Therefore, the "charitable contribution" issue is a conclusion of law that we review de novo. See Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995); In re SPM Mfg. Corp., 984 F.2d 1305, 1311 (1st Cir.1993).

DISCUSSION

A. Interlocutory Appeal

Denial of confirmation of a proposed Chapter 13 plan is not a final order where the debtor is free to propose an alternate plan. See Bentley v. Boyajian (In re Bentley), 266 B.R. 229 (1st Cir. BAP 2001). Here, the Bankruptcy Court did not dismiss the case when it denied confirmation of the Appellants' proposed plan, and the Appellants were therefore free to propose an alternate plan. Indeed, the Order directed the Appellants to file an amended plan within eleven days of the Order. Thus, the Order was clearly not intended to serve as an end to ligation on the merits of confirmation. See Bank of New England, 218 B.R. at 646. Instead, the Order is an interlocutory order that only decided an intervening matter pertaining to confirmation. Further steps were required in order to enable the Bankruptcy Court to adjudicate the matter of confirmation. See id. Accordingly, the Order is not appealable as of right. See id. at 647.

Although the Order is interlocutory, the Panel may nonetheless find that it has jurisdiction over this appeal.² The Panel has discretionary authority to grant leave to appeal from interlocutory orders under one of three precepts conferring appellate jurisdiction over interlocutory appeals: (1) the collateral order doctrine, (2) the application of the criteria governing § 158(a)(3) review of interlocutory orders, or (3) the Forgay-Conrad doctrine. See 28 U.S.C. § 158(a)(3). For the reasons set forth below, the Panel finds that the Order satisfies the criteria governing § 158(a)(3) review of interlocutory orders.

Application of § 158(a)(3) review of interlocutory orders mirrors application of § 1292(b). Bank of New England, 218 B.R. at 652. "Section 158 provides no express criteria to guide our discretion, but most courts utilize the same standards as govern the propriety of district courts' certification of interlocutory appeals to the circuit courts under § 1292(b)." Id. (citations omitted). "Section 1292(b) permits appellate review of `certain interlocutory orders, decrees and judgments [...] to allow appeals from orders other than final judgments when they have a final and irreparable effect on the rights of the parties.'" Id. at 652 n. 17. "To ascertain whether we should exercise our discretion [...] we will consider whether (1) the `order involves a...