IN RE: MEYERS (August 2, 2010)
Andrea Meyers filed a Chapter 7 petition for bankruptcy relief on September 25, 2007. Months later, she received federal and state tax refunds for the 2007 tax year totaling $3,538. The bankruptcy Trustee moved for the turnover of the pre-petition share of the refunds. Since September 25 was 73.42% into the year as a whole, the Trustee asked for 73.42% of the refunds (or $2597.60). After a reduction related to Illinois' wild-card exemption, the Trustee sought $973.60. Meyers objected. The bankruptcy court sided with the Trustee and the district court affirmed. Meyers appeals.
In their opinion, Circuit Judges Flaum and Wood and District Judge St. Eve affirmed. Allocation of assets and liabilities is generally fairly simple in a bankruptcy context. Pre-petition assets satisfy pre-petition debts. Post-petition assets are generally not at risk and post-petition liabilities are not discharged. Tax refunds, however, do not fit neatly into this generalization. Courts have long recognized that tax refunds can be pre-petition assets. The sometimes difficult question can be how to allocate a single tax refund into pre-and post-petition shares. The Court recognized that reasonable people can identify any number of methods to do so. Here, the Trustee proposed the pro-rata approach -- 73.42% of the year had passed when Meyers filed her petition so 73.42% of the refund belongs to the bankruptcy estate. Meyers, on the other hand, proposed a formula under which the Trustee received a portion of the refund but only to the extent that the taxes withheld before the petition was filed exceeded the entire year's tax liability (a formula that was adopted by a bankruptcy court in Texas in 2006). In order to select from the competing proposals, the Court turned its attention to the Trustee's burden. It adopted the approach that had been used under the old Bankruptcy Act. The Trustee first has the burden of a prima facie case. Assuming a prima facie case, the debtor has the opportunity to challenge that case. The ultimate burden of persuasion rests with the Trustee. Applying that approach to the facts of the case, the Court concluded that the Trustee had made its prima facie showing. It identified the refund, the established that Meyer's income and withholding grew relatively steadily throughout the year without any spikes, and properly calculated the estate's pro-rata share. Turning to Meyer's challenge, the Court found it wanting. She offered no evidence that suggested a pro-rata approach was unreasonable. All she did was propose an approach that had been used once before -- and used in a case where the debtors' income and withholding did not grow steadily throughout the year. The Court conceded that the pro-rata approach might not be appropriate in every case, but concluded that it was reasonable in Meyer’s case.
