Appeal from the United States District Court for the Southern District of Illinois. No. 09-cv-0323-MJR-Michael J. Reagan, Judge.
The opinion of the court was delivered by: Wood, Circuit Judge.
Before FLAUM and WOOD, Circuit Judges, and ST. EVE, District Judge.*fn1
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 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 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.
The facts of this case are undisputed. Meyers filed a petition for relief under Chapter 7 of the Bankruptcy Code 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
Category2007 Totals2007 Pre-Petition2007 Pre-Petition Ratio
Gross Taxable Income$44,136.00$33,855.2676.7%
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 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.