Hon. Amy J. St. Eve, District Judge for the Northern District



of Illinois, sitting by designation.

In the

United States Court of Appeals

For the Seventh Circuit

No. 09-3478

IN RE:

ANDREA H. MEYERS,

Debtor-Appellant.

Appeal from the United States District Court

for the Southern District of Illinois.

No. 09-cv-0323-MJR—Michael J. Reagan, Judge.

ARGUED FEBRUARY 26, 2010—DECIDED AUGUST 2, 2010

Before FLAUM and WOOD, Circuit Judges, and ST. EVE,

District Judge.

WOOD, Circuit Judge. This case involves a recurring

question under the bankruptcy laws: what belongs in

the bankruptcy estate? In general, assets that were acquired 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
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 prepetition asset pool. Meyers filed her petition approximately 73% of the way through the tax year, and accordingly, using that method, 73% of her tax refund qualified

as a pre-petition asset. In taking that approach, the bankruptcy 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 bankruptcy 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

Category

2007

Totals

2007 PrePetition

2007 PrePetition

Ratio

Gross

Income

$47,256.42 $37,133.43 78.6%

Gross Taxable Income

$44,136.00 $33,855.26 76.7%

Federal

Withholding

$5,983.00 $4,634.91 77.5%

State Withholding

$1,727.00 $1,330.00 77.0%
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, calculated 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 problem. 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 prebankruptcy past and so little entangled with the bankrupts’ ability to make an unencumbered fresh start.” Segal

v. Rochelle, 382 U.S. 375, 380 (1966). See S. REP. NO. 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 resolving 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 anticipated 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 withholding 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 establishing 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 investigations 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 opportunity 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 establish 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 Bankruptcy Code). Although we think that the default preponderance standard that the Supreme Court applied

to dischargeability in Grogan is probably the appropriate 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 bankruptcy 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 erroneously 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 bankruptcy 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 function, 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 applying a different methodology is not enough to undermine 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, because of the risk that the Donnell approach could require

the pre-petition creditors to assume post-petition tax liabilities. Expressed another way, Donnell’s approach

opens the door for the debtor to transform pre-petition

assets into post-petition income by “pre-paying” postpetition 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 consequences, not all of which would follow from a court’s

decision to apply a similar method to calculating liability. 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 withholding is optional and that the Donnell method is necessary 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-bycase 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 reasonable 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 AFFIRM the judgment of the

district court.

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