United States Court of Appeals
For the First Circuit
No. 04-9005
IN RE MICHAEL WATSON and KATHLEEN WATSON,
Debtors,
MICHAEL WATSON and KATHLEEN WATSON,
Appellants,
v.
JOHN BOYAJIAN, Chapter 13 Trustee,
Appellee.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
OF THE FIRST CIRCUIT
Before
Torruella, Circuit Judge,
Campbell, Senior Circuit Judge,
and Lynch, Circuit Judge.
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.
March 25, 2005
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
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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
1
The Watsons do not contend on appeal that the bankruptcy
court erred in rejecting their argument that the parochial school
tuition payments were charitable contributions within the
definition of 11 U.S.C. § 1325(b)(2)(A). We do not, therefore,
address this issue.
2
11 U.S.C. § 1325(b)(1)(B) provides:
If the trustee . . . objects to the confirmation of the
plan, then the court may not approve the plan unless, as
of the effective date of the plan--(B) the plan provides
that all of the debtor’s projected disposable income to
be received in the three-year period beginning on the
date that the first payment is due under the plan will be
applied to make payments under the plan.
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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.
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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
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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.");
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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
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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 (1991); cf. Clausen v. Sea-3, Inc., 21 F.3d 1181, 1184
(1st Cir. 1994) (holding that "by virtue of Fed. R. App. P.
4(a)(2), [appellant's] premature notice of appeal ripened when the
district court certified its December 31, 1992, amended judgment
pursuant to Fed. R. Civ. P. 54(b)").
Here, regardless whether the bankruptcy court's September
15, 2003 order denying confirmation of the plan was final when
issued, it became final in light of the bankruptcy court's October
27, 2003 order dismissing the case and the Watsons' subsequent
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failure to file an amended plan within the limited time allowed in
that order.
To be sure, the 10/27/03 order, while dismissing the
case, also stated that, "[f]or administrative purposes," the case
"shall remain open" and that the deadline contained in Rhode Island
Local Bankruptcy Rule 3015-3(e) would be extended until ten days
after the entry of the BAP's decision in the case. Local Rule
3015-3(e) provides:
Confirmation of Plan Denied. If confirmation is denied,
the Court may enter an order dismissing the Chapter 13
case, unless, within eleven (11) days after entry of the
order denying confirmation:
(1) the debtor files a modified plan;
(2) the debtor moves to convert the case to one under
another chapter of the Code;
(3) the debtor files a motion for reconsideration;
(4) the debtor appeals the order denying confirmation; or
(5) the Court otherwise orders.
It is evident from the docket entry for the hearing on the motion
for stay that the 10/27/03 order was intended to leave the Watsons
free for ten days after the BAP's decision to file an amended plan
if the BAP affirmed the bankruptcy court's denial of confirmation.
The entry states: "Trustee suggested extending the time to file an
amended plan until 10 days after a decision on the case by the BAP.
Parties consent to this and will submit an order." The Watsons,
however, never filed an amended plan within the ten-day grace
period following the BAP's judgment which was issued on May 21,
2004. Instead, on June 15, 2004, 25 days later, they filed a
timely appeal to this Court. Their appeal had the effect of
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transferring jurisdiction here from the bankruptcy court. See
Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982)
("The filing of a notice of appeal is an event of jurisdictional
significance--it confers jurisdiction on the court of appeals and
divests the district court of its control over those aspects of the
case involved in the appeal."). By this point, the window in the
10/27/03 order was closed, and, for all practical purposes, the
9/15/03 order was final.
"[T]he requirement of finality is to be given a
'practical rather than a technical construction.'" Gillespie v.
United States Steel Corp., 379 U.S. 148, 152 (1964) (quoting Cohen
v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546 (1949)). This
case, while not wholly identical, is conceptually similar to
Parque. The bankruptcy court's 10/27/03 order dismissing the case
left it open only "[f]or administrative purposes" designed to
permit the filing of an amended plan within ten days after the
BAP's decision came down. After that period had expired, the only
remaining limitation upon total dismissal was the taking of an
appeal to our court, an event which in no way compromised the
finality of the bankruptcy court's own order. Dismissal and
closure of a case are distinct events, and there is no reason why
a case cannot be dismissed but kept open for limited administrative
purposes. See Armel Laminates, Inc. v. Lomas & Nettleton Co. (In
re Income Prop. Builders, Inc.), 699 F.2d 963, 965 (9th Cir. 1982).
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We are satisfied that in the circumstances the appealed bankruptcy
court's order denying confirmation of the plan was rendered final
by the later order and occurrences. We have jurisdiction over this
appeal.3
III. Discussion
A. Religious Freedom Restoration Act
The Watsons argue on appeal that the bankruptcy court's
order denying confirmation of the plan substantially burdens the
protected exercise of their Catholic faith in violation of the
Religious Freedom Restoration Act ("RFRA"), as amended by the
Protection of Religious Exercise in Land Use and Institutionalized
Persons ("RLUIPA"). See 42 U.S.C. §§ 2000bb-1, 2000cc-2000cc-5.
This argument, however, was never made to, nor considered by, the
bankruptcy court. It is true the Watsons alluded briefly to the
RFRA in briefs submitted to the bankruptcy court and in vague
references in their second oral argument in that court. In each
instance, however, the Watsons only raised the RFRA in relation to
the argument that parochial school tuition payments constituted
charitable contributions -- an issue decided against them below and
not now appealed to this Court. See supra note 1. The bankruptcy
court did not mention the RFRA in its opinion. In a brief later
3
To avoid future questions, we suggest that such seemingly
open-ended orders add a proviso to the effect that if the debtor
does not timely take the actions in Local Rule 3015-3(e)(1), (2) or
(3), or does not take an action under (4), then the order is final
as entered.
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submitted on appeal to the BAP, the Watsons discussed the RFRA,
referenced the RLUIPA by citation, and admitted that the RFRA issue
had not been "fully briefed below." In affirming the order denying
confirmation of the plan, the BAP held that the RFRA does not
afford the Watsons the right to use disposable income for parochial
school tuition. In re Watson, 309 B.R. at 663.
A party's failure to raise an issue in the bankruptcy
court forfeits its right to raise that issue for the first time on
appeal in this Court. Evergreen Credit Union v. Woodman (In re
Woodman), 379 F.3d 1, 2 (1st Cir. 2004); Gannett v. Carp (In re
Carp), 340 F.3d 15, 25-26 (1st Cir. 2003). The Watsons' brief
references below to the RFRA, made in context of their charitable
contributions argument, were not tantamount to the RFRA and RLUIPA
arguments now advanced on appeal. Cf. McCoy v. Mass. Inst. of
Tech., 950 F.2d 13, 22 (1st Cir. 1991) (refusing to address issue
where plaintiff, in the district court, "made passing mention of
the general point - a mention which, in its entirety, comprised two
sentences and one citation (to a tangentially relevant case)").
The rule that a party may not raise an argument for the first time
on appeal is elemental. In re Carp, 340 F.3d at 26. While we have
discretion in exceptional circumstances to address an issue not
raised below, no exceptional circumstances exist here. See
Sheridan v. Michels (In re Sheridan), 362 F.3d 96, 105 (1st Cir.
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2004) (noting our discretion in "rare instances" to review an issue
not raised below).
We recognize the BAP saw fit to address the Watsons' RFRA
contention. But the BAP's action does not cure the matter from our
perspective. See In re Woodman, 379 F.3d at 3 n.1. The effective
administration of our judicial system requires that ordinarily each
and every non-jurisdictional issue to be determined be initially
presented to the nisi prius tribunal. That a separate court in the
appellate chain, for its own reasons, chose to overlook the breach
of this rule does not bind our court. As the Watsons have
forfeited the RFRA argument, we do not now consider it.
B. Reasonably Necessary Expenses
The Watsons contend that the bankruptcy court erred in
determining that parochial school tuition payments for their two
minor children are not reasonably necessary expenses within the
provisions of 11 U.S.C. § 1325(b). To qualify for confirmation,
the Chapter 13 plan must provide "that all of the debtor's
disposable income to be received in the three-year period beginning
on the date that the first payment is due under the plan will be
applied to make payment under the plan." 11 U.S.C. §
1325(b)(1)(B). "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 . . .
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11 U.S.C. § 1325(b)(2)(A). At issue here is whether the portion of
the Watsons' income devoted to pay parochial school tuition for
their two minor children is income "reasonably necessary" to be
expended for this purpose. In reviewing the bankruptcy court's
determination of this matter, we review for "clear error unless the
bankruptcy court's analysis was based on a mistaken view of the
legal principles involved." In re Carp, 340 F.3d at 22. Here, the
bankruptcy court's view of the guiding legal principles was not
mistaken and the court did not commit clear factual error.
We begin with the self-evident proposition that it is the
debtor who bears the burden of proving that an expense is
reasonably necessary. See, e.g., Lynch v. Tate (In re Lynch), 299
B.R. 776, 779 (W.D.N.C. 2003); In re Webb, 262 B.R. 685, 688
(Bankr. E.D. Tex. 2001). Here, the bankruptcy court concluded that
the debtors "have not shown that the public schools in their area
. . . are not adequate, and neither have they suggested any other
special need [to attend parochial school]." In re Watson, 299 B.R.
at 58. The court went on to allude to the general proposition
advanced in Webb and by other bankruptcy courts that "[i]n the
absence of some compelling circumstance . . . a private school
education is not reasonably necessary." In re Webb, 262 B.R. at
690; see, e.g., In re Jones, 55 B.R. 462, 467 (Bankr. D. Minn.
1985) ("An expensive private school education is not a basic need
of the Debtor's dependents . . . ."). The court then went on to
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distinguish the present case from other bankruptcy cases where
compelling circumstances for a private education have been found to
exist. See In re Watson, 299 B.R. at 58. It concluded, in effect,
that the Watsons had not shown any educational necessities or
special circumstances why their children needed to attend parochial
school in lieu of the available public school. The court went on
to say:
The only reason advanced by [the debtors] is
preferential, i.e., their children have always attended
parochial school because of the family's strong religious
ties. . . . Allowing these Debtors to pay parochial
school tuition which over the life of the Plan will
exceed the amount distributed to creditors, is to require
general creditors to fund the private education of the
Debtors' kids.
Id. at 58-59.
As noted above, we defer broadly to the bankruptcy
court's determinations in a matter of this type, which entail
balancing the creditors' rights against the appropriate basic needs
of the debtors and their dependents. We can find no clear error in
the balance the court struck here in its thoughtful opinion.
The Watsons complain that they were unfairly criticized
by the court for what it found was their unwillingness to forgo
certain "borderline and/or excessive expenses" while also claiming
the tuition expense. We have examined the record and see no clear
error in the court's overall assessment in this regard.
To allow the Watsons to pay parochial school tuition over
the life of the proposed plan would require already severely
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reduced creditors to fund the private education of the Watsons'
children. We can appreciate the importance attached by the Watsons
to the religious values of a parochial school education. Still, it
is not impossible to inculcate those values outside of a school,
and the court could reasonably conclude, in the circumstances
presented here, that it would be improper to impose the added
expense on the Watsons' unpaid creditors where the children's
educational needs could otherwise be met in the public schools.
There was no clear error in the bankruptcy court's determination.
IV. Conclusion
For the foregoing reasons, the order of the United States
Bankruptcy Court order denying confirmation of the plan is
affirmed.
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