In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3478
IN RE:
A NDREA H. M EYERS,
Debtor-Appellant.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 09-cv-0323-MJR—Michael J. Reagan, Judge.
A RGUED F EBRUARY 26, 2010—D ECIDED A UGUST 2, 2010
Before F LAUM and W OOD , Circuit Judges, and S T . E VE,
District Judge.
W OOD , Circuit Judge. This case involves a recurring
question under the bankruptcy laws: what belongs in
the bankruptcy estate? In general, assets that were ac-
quired before the time when the bankruptcy petition
is filed—so-called pre-petition assets—are available to
satisfy pre-petition debts. Overgeneralizing, one can
say that post-petition assets belong to the debtor and are
not encumbered by any liabilities that were discharged
Hon. Amy J. St. Eve, District Judge for the Northern District
of Illinois, sitting by designation.
2 No. 09-3478
in bankruptcy. By the same token, any liabilities incurred
by the debtor post-petition may not be discharged in
the bankruptcy proceeding, nor should the bankruptcy
process compel the pre-petition creditors to bear any
burden as a result of these post-petition obligations.
Allocating assets and liabilities to the correct side of the
pre- and post-petition line is usually a straightforward
task, but occasionally the job becomes challenging.
Debtor Andrea Meyers’s case falls in the latter category.
The question we must resolve in her appeal is how best
to allocate post-petition tax refunds when the debtor
filed her bankruptcy petition in the middle of the tax
year. The bankruptcy court used a mechanical system
known as the “pro rata by days” method to calculate
the proportion of the refunds that belonged to the pre-
petition asset pool. Meyers filed her petition approxi-
mately 73% of the way through the tax year, and accord-
ingly, using that method, 73% of her tax refund qualified
as a pre-petition asset. In taking that approach, the bank-
ruptcy court followed a well-trodden path. Meyers,
however, thought that it was the wrong path and took
an appeal to the district court. That court affirmed the
bankruptcy court, and now Meyers is before this court
seeking to persuade us that the estate received too
much. While we recognize that the pro rata method may
not be appropriate for all cases, we find that the bank-
ruptcy court properly applied it here, and so we affirm.
I
The facts of this case are undisputed. Meyers filed a
petition for relief under Chapter 7 of the Bankruptcy Code
No. 09-3478 3
on September 25, 2007. September 25 was the 268th day
of 2007, meaning that approximately 73.42% of the year
had passed by then. At that point, Meyers’s pay stub
indicates that she had earned $37,133.43 in 2007, with
gross taxable income of $33,855.26. Meyers’s total 2007
income turned out to be $47,256.42 and total 2007 gross
taxable income was $44,136; the September 25 figures
therefore represent about 78.6% and 76.7% of the
annual totals, respectively. Meyers’s federal and state
withholding tracked her income; her September 25 pay
stub reflects that about 77% of her total 2007 withholding
accrued prior to that date. For ease of reference, we
have presented this information about Meyers’s 2007
income and withholding in the table below:
Meyers’s 2007 Income and Withholding
2007 Pre-
2007 2007 Pre-
Category Petition
Totals Petition
Ratio
Gross
$47,256.42 $37,133.43 78.6%
Income
Gross Tax-
$44,136.00 $33,855.26 76.7%
able Income
Federal
$5,983.00 $4,634.91 77.5%
Withholding
State With-
$1,727.00 $1,330.00 77.0%
holding
4 No. 09-3478
The next important step for our purposes occurred
when Meyers filed her 2007 federal and state income
tax returns. Meyers’s federal tax return reported that she
owed $2,661 and had withheld $5,983. On that basis, she
requested a refund of $3,322. Her Missouri tax return
reported an overpayment of $216 for which she also
requested a refund. (Meyers works in Missouri, but she
is a resident of Illinois and filed her bankruptcy petition
in Illinois, which explains why this case ended up here
rather than the Eighth Circuit.) In 2008, months after
filing her bankruptcy petition, Meyers received federal
and state tax refunds for 2007 totaling $3,538.
This $3,538 is the subject of Meyers’s appeal. In
August 2008, Trustee Laura K. Grandy (the “Trustee”) filed
a motion for turnover of the bankruptcy estate’s share
of Meyers’s 2007 federal and state tax refunds. See 11
U.S.C. § 542. Conceptually, the Trustee regarded the
amounts withheld in excess of the taxes due as a form
of enforced savings; if Meyers’s withholding had been
exactly equal to the taxes she owed, and she had put the
remainder in a savings account during the pre-petition
period, it would be plain that the amount saved would
belong in the bankruptcy estate. Relying on this theory,
the Trustee asserted that the bankruptcy estate was
entitled to the pre-petition portion of each refund, calcu-
lated based on the pro rata by days method. Since Meyers
filed for bankruptcy 73.42% of the way through the tax
year, this method yielded $2,597.60 as the portion of the
refunds that belonged to the estate. The Bankruptcy
Code allows states to pass laws creating exemptions
from the bankruptcy estate. 11 U.S.C. § 522(b)(2). Illinois’s
No. 09-3478 5
exemptions include a “wildcard” for any property up
to $4,000. 735 ILCS 5/12-1001(b). At the time of the
Trustee’s request, Meyers had $1,624 remaining in her
“wildcard” exemption, and so the estate’s share had to
be reduced by that amount. The Trustee, therefore,
claimed $973.60 ($2,597.60 less $1,624) of the 2007 tax
refunds.
Meyers objected to the Trustee’s motion, arguing that
the proper method for calculating the estate’s share
(described in further detail below) would result in the
estate’s claiming only $349.91 after the wildcard was
applied. Both the bankruptcy court and the district court
agreed with the Trustee, and ordered Meyers to turn
over the $973.60 that the Trustee requested.
II
A
Before analyzing Meyers’s specific situation, we step
back to discuss why tax refunds pose a particular prob-
lem. Under the Bankruptcy Code, a trustee is assigned
to administer the bankruptcy estate; to that end, the
property of the estate must be turned over to the trustee.
11 U.S.C. § 542. Property of the bankruptcy estate is
defined to include “all legal and equitable interests of
the debtor in property as of the commencement of the
case.” Id. § 541(a)(1). As noted earlier, the time of
the petition (the “commencement of the case,” id.
§ 301(a)) is the key point for identifying the assets of
the estate.
6 No. 09-3478
Courts have recognized that tax refunds received after
the petition may, in some cases, represent pre-petition
assets and thus are part of the bankruptcy estate. See,
e.g., In re Barowsky, 946 F.2d 1516, 1518 (10th Cir. 1991)
(collecting cases). The background rule under the old
Bankruptcy Act, to which courts still refer in the era of
the Bankruptcy Code, defines the bankruptcy estate to
include property that is “sufficiently rooted in the pre-
bankruptcy past and so little entangled with the bank-
rupts’ ability to make an unencumbered fresh start.” Segal
v. Rochelle, 382 U.S. 375, 380 (1966). See S. R EP. N O . 95-989,
at 82 (1978) (noting that, with reference to § 541 of the
Code, “[t]he result of Segal v. Rochelle . . . is followed, and
the right to a refund is property of the estate”) (internal
citation omitted).
These general rules provide the background for re-
solving disputes over tax refunds, but they are only a
starting point. The fact that reasonable people can
identify competing methods for calculating the pre-petition
share of the refunds betrays the incompleteness of a rule
that simply calls for identifying at what time an asset
became “rooted.” In this case, the parties proffer two
competing calculations. As described above, the Trustee
argues that the best method for this case is the pro rata
by days calculation. The Trustee recognizes that this
method is not appropriate in all cases—for example, for
debtors whose income fluctuates widely from month to
month throughout the year—but given the steady rate
with which Meyers’s income, withholding, and antici-
pated refunds grew, it works here. Bankruptcy courts
often have approved turnover orders based on the
No. 09-3478 7
pro rata by days method for this type of debtor. See, e.g.,
In re Trickett, 391 B.R. 657, 660 (Bankr. D. Mass. 2008);
In re Marvel, 372 B.R. 425, 433-34 (Bankr. N.D. Ind. 2007).
Meyers urges us to select a different methodology,
one articulated by the U.S. Bankruptcy Court for the
Western District of Texas in In re Donnell, 357 B.R. 386
(Bankr. W.D. Tx. 2006). Donnell began as this case did:
the debtor filed for bankruptcy mid-year; a tax refund
for that year was issued post-petition; and the trustee
requested the pro rata by days share. The bankruptcy
court rejected this request. It noted that the pro rata
method assumed that “the debtor had a steady income
during the tax year, had regular withholding of income
taxes throughout the tax year, and had an interest in
any refundable tax credits that grew regularly over the
tax year.” Id. at 396. The Donnells did not. Id. at 396-97.
Therefore, the court concluded that it had to “examine
each of the components of the tax refund to determine
whether, on the petition date, the debtor possessed a
legal or equitable interest in that component.” Id. at 397
(emphasis in original). Most importantly for Meyers’s
case, the court in Donnell held that the bankruptcy
estate was entitled to the debtor’s tax refund only to
the extent that the pre-petition withholding amount
exceeded the tax liability for the entire year. Id. at 398-400.
It is this formula that Meyers asks us to apply to her case.
We note for completeness that various other methods
for calculating the estate’s share of the refund are also
available—most obviously, the court could endeavor to
calculate the pre-petition withholding less the pre-petition
8 No. 09-3478
liability, rather than comparing the pre-petition with-
holding to the full-year liability as the Donnell court did.
But we do not need to theorize about the ideal method
for calculating these amounts. Our role is only to
evaluate the evidence presented by the Trustee and to
determine whether she met her burden to show the
amount that should be included in the bankruptcy
estate. It is to that burden we now turn.
Under the defunct Bankruptcy Act, we laid out the
burdens of persuasion in turnover actions as follows. The
trustee must bring the action to claim property for the
bankruptcy estate, and she bears the burden of estab-
lishing a prima facie case for turnover. Gorenz v. Ill. Dep’t
of Agric., 653 F.2d 1179, 1184 (7th Cir. 1981) (citing
Maggio v. Zeitz, 333 U.S. 56 (1948)). Once a prima facie
case is established, the debtor must provide a reason
for going forward with the case, but the ultimate burden
of persuasion remains with the trustee at all times. Id.
See In re U.S.A. Diversified Products, Inc., 196 B.R. 801,
805 (N.D. Ind. 1996) (applying this approach under the
Code); In re Schneider, 417 B.R. 907, 919 (Bankr. N.D.
Ill. 2009) (same). We take this opportunity to place our
imprimatur on this approach under the Bankruptcy
Code. Asking the trustee to engage in extensive inves-
tigations and complicated calculations before filing a
turnover order will necessarily result in increased costs
to the bankruptcy estate, see 11 U.S.C. § 507(a)(1)(C)—
costs that we do not believe are necessary unless and
until the debtor provides a reason to go forward. At the
same time, our approach gives every debtor the oppor-
tunity to challenge the trustee’s proposed assessment of
No. 09-3478 9
the estate’s interest. The weaker the trustee’s case, the
easier it will be for the debtor to upset it.
There is some dispute whether the trustee must estab-
lish the estate’s right to the property by a preponderance
of the evidence or by the more demanding standard
of clear and convincing evidence. Compare In re Quality
Health Care, 215 B.R. 543, 549 (Bankr. N.D. Ind. 1997)
(adopting the preponderance-of-evidence standard based
on Grogan v. Garner, 498 U.S. 279, 286 (1991), which
applied that standard to dischargeability exceptions)
with Evans v. Robbins, 897 F.2d 966, 968 (8th Cir. 1990)
(applying the clear-and-convincing-evidence standard).
See also Oriel v. Russell, 278 U.S. 358 (1929) (applying
the clear-and-convincing standard to a turnover action
almost half a century prior to the adoption of the Bank-
ruptcy Code). Although we think that the default pre-
ponderance standard that the Supreme Court applied
to dischargeability in Grogan is probably the appro-
priate one also for turnover actions, because we
would come to the same conclusion in this case under
either evidentiary standard, we need not resolve that
issue today.
B
With this background established, we are ready to
look at the Trustee’s prima facie case in support of her
assertion that $973.60 from Meyers’s 2007 refunds should
be turned over to the estate. The Trustee identified the
value of the 2007 tax refunds, properly calculated the
10 No. 09-3478
pro rata by days share, and asked the district court to
accept this calculation. This evidence alone may be
enough for a prima facie case, but the Trustee went
further here. She noted, as described above, that the
debtor’s income and withholding advanced at a fairly
steady rate throughout the tax year, and there were no
income or withholding spikes after she filed her bank-
ruptcy petition that would be swept in unfairly by the
pro rata method. The district court noted, for example,
that Meyers’s pre-petition and post-petition withholding
represented similar percentages of her taxable earnings
(17.6% versus 16.9%). (Meyers disputes this calculation
in her briefs to this court, but her alternative erron-
eously used gross income rather than taxable income.)
In fact, as our table above indicates, the pro rata by
days method represents a smaller request (73.42% of the
refunds) than a calculation based on the pre-petition
proportion of Meyers’s total income, gross taxable
income, or federal and state withholding (ranging from
76% to 78%). These data were good enough for the bank-
ruptcy court and the district court, and they are good
enough for us.
Having established the prima facie case for turnover,
we look to the debtor for reason to go forward. Meyers
did not meet this obligation. One would have expected
a debtor in her position to present specific facts showing
where and how the progression of her income, liabilities,
and withholding deviated from a perfectly linear func-
tion, thus making the pro rata by days method a poor
fit. Meyers took a different tack, arguing vociferously for
an alternative calculation of the estate’s share, without
No. 09-3478 11
much attention paid to the specifics of her case. Meyers
wants us to apply Donnell, and that is nearly all she has
to say on the matter. (Meyers has long since abandoned
any claims regarding potentially different allocation
rules for tax credits.)
Pointing to a single bankruptcy court decision ap-
plying a different methodology is not enough to under-
mine the Trustee’s calculations. Meyers’s position is
particularly weak because the court in Donnell based its
conclusion on the fact that the Donnells’s income and
withholding varied. Meyers presents no evidence of
such variability here; to the contrary, the Trustee’s data
show that Meyers’s financial picture was reasonably
stable through the year. There may be a deeper problem
with Donnell. Both the Trustee and the bankruptcy
court expressed skepticism about its soundness, be-
cause of the risk that the Donnell approach could require
the pre-petition creditors to assume post-petition tax lia-
bilities. Expressed another way, Donnell’s approach
opens the door for the debtor to transform pre-petition
assets into post-petition income by “pre-paying” post-
petition taxes. This result can be avoided by requiring
the parties to present evidence about the specific facts
of the case and then determining pre-petition assets
with reference to those facts.
Meyers also suggests that looking at tax liability on
the date of the petition improperly requires the debtor to
make a “short-year election.” See 26 U.S.C. § 1398(d)(2)
(allowing a debtor to split the tax year at the bankruptcy
commencement date). We do not find that analogy to be
12 No. 09-3478
apt. The short-year election comes with many conse-
quences, not all of which would follow from a court’s
decision to apply a similar method to calculating lia-
bility. See, e.g., id. § 1398(d)(2)(E) (requiring separate
tax returns for the two-parts of the tax year). Using a
calculation that parallels the short-year election has no
tax consequences for the debtor. Under the Bankruptcy
Code, the court must decide what property belongs in
the bankruptcy estate; if the best method happens to
look like an involuntary option under the Tax Code,
so be it.
Finally, at oral argument Meyers insisted that tax with-
holding is optional and that the Donnell method is neces-
sary to avoid penalizing the debtor for withholding
income. We dispute both the premise and the conclusion.
Withholding is not always optional, see id. § 3402(a)(1)
(“Except as otherwise provided in this section, every
employer making payment of wages shall deduct
and withhold upon such wages a tax determined
in accordance with tables or computational procedures
prescribed by the Secretary.”), and in any event, a case-by-
case calculation of pre- and post-petition assets should
avoid any outcome that would properly be seen as a
penalty.
In sum, the Trustee presented a prima facie case for the
pro rata by days method. None of Meyers’s arguments
persuades us that this approach is a bad fit for her case.
Evidence is clear and convincing if it “leave[s] no rea-
sonable doubt in the mind of the trier of fact as to the
truth of the proposition in question,” Davis v. Combes,
No. 09-3478 13
294 F.3d 931, 936-37 (7th Cir. 2002) (internal quotation
marks omitted), and proof by a preponderance of the
evidence means that the “trier of fact must believe that it
is more likely than not that the evidence establishes
the proposition in question,” American Grain Trimmers,
Inc. v. Office of Workers’ Compensation Programs, 181 F.3d
810, 817 (7th Cir. 1999). While we agree that the pro rata
by days method may not be a one-size-fits-all solution,
by any standard the Trustee has met her burden in
this case.
For these reasons, we A FFIRM the judgment of the
district court.
8-2-10