In re Chapel Gate Apartments, Ltd.

• Decision Date: 29 April 1986
• Docket Number: Bankruptcy No. 386-31035-A-11.
• Citation: 64 BR 569
• Parties: In re CHAPEL GATE APARTMENTS, LTD., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Texas

64 B.R. 569 (1986)

In re CHAPEL GATE APARTMENTS, LTD., Debtor.

Bankruptcy No. 386-31035-A-11.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

April 29, 1986.

COPYRIGHT MATERIAL OMITTED

John B. Atwood, III, L.E. Creel, III, Paul B. Geilich, Creel & Atwood, A Professional Corp., Dallas, Tex., for movant.

Mary Frances Welch, for trustee.

OPINION AND ORDER DENYING MOTION OF CREEL & ATWOOD FOR RECONSIDERATION OF ORDER CONCERNING TREATMENT OF RETAINER, DENYING APPROVAL OF FUNDS DRAWN TO DATE, AND DIRECTING RESTORATION OF FUNDS DRAWN

HAROLD C. ABRAMSON, Bankruptcy Judge.

On 28 March 1986 Debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. On 10 April 1986 the law firm of Creel & Atwood filed its application for approval of employment as counsel for Debtor and Debtor-in-Possession. On 30 April 1986 the Court entered an order approving Creel & Atwood as counsel for the Debtor-in-Possession only.¹ The order required counsel to file and circulate the disclosure contemplated by Code § 329 and Bankruptcy Rule 2016(b); required that any retainer or payment received in connection with or in contemplation of the bankruptcy be placed in trust; prohibited counsel from drawing on said funds; and required counsel to obtain a Rule 2017(a) hearing, and to give appropriate notice of the setting. On 8 May 1986 Creel & Atwood filed a Motion for Reconsideration and for Authorization of Attorney's Fees, in which Creel & Atwood requested that employment be approved on behalf of the Debtor, as well as the Debtor-in-Possession; that Creel & Atwood be allowed to draw against the retainers received, as they were paid by the general partner of the Debtor and were, according to Creel & Atwood's agreement with that general partner, "fully earned and nonrefundable";² and that the fees already and unilaterally drawn by Creel & Atwood from that retainer be retroactively ratified. The motion also outlined a proposed procedure whereby future draws from the retainer would be documented and disclosed to the United States Trustee, any official committee, and any other party designated by the Court. On 16 May 1986 the motion was considered by the Court, and after entertaining the argument of Creel & Atwood, the Court denied the relief requested. This opinion represents the Court's finding of fact and conclusions of law under Rules 9014 and 7052.

1. USE OF RETAINERS BY COURT-APPOINTED COUNSEL IN BANKRUPTCY CASES

The Court has on several occasions raised the questions the subject order was intended to address, both formally (during fee hearings in various cases) and informally (in conversations with members of the local bar). The concept embodied by the subject order has understandably generated concern. The Court will undertake to repeat its concerns and the procedures intended to allay those concerns.

In a number of cases pending before this Court and throughout this District, large retainers have been required by counsel for debtors-in-possession. Given the proliferation of bankruptcy filings and the increased complexity of the newer Chapter 11 filings here and elsewhere in the Southwest, it is neither surprising nor unreasonable that such retainers would be required before counsel would undertake the arduous task of guiding a debtor through a complicated reorganization laden with risk. This Court does not intend to require counsel to shoulder the financial burden of expending considerable professional effort without some mechanism for compensation on a regular basis. It is on this point that some members of the local bar, including Creel & Atwood, have misperceived the focus of the Court's concern and of the subject order. When read carefully, it is clear that the order restricts an attorney's access to the retainer only temporarily, and only until an opportunity arises to explain a proposed schedule of draws against the retainer. The emphasis of the order is disclosure; paraphrased, the order requires only that an attorney disclose the amount and source of a retainer and obtain a hearing before drawing against the retainer. The Court contemplates a fairly informal proceeding, without need for preparation of further applications or entry of further orders, involving mere oral explanation to the Court and any parties sufficiently interested to attend, after notice to those parties typically playing a watchdog role in reorganization proceedings.

a) The Statutory Framework

The relevant statutory provisions are not ambiguous. Bankruptcy Code § 329 leaves no doubt that counsel for a debtor must disclose the compensation paid or agreed to be paid, regardless of the source. In addition, § 329 unequivocally grants the Court the power to review and order the return of any payment made within one year of the filing of the petition, regardless of the source. Moreover, any agreement concerning compensation executed may be cancelled by the Court.³

The legislative history of § 329 sets forth the basic premise of the grant of such powers to the Court. "Payments to a debtor's attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor's attorney, and should be subject to careful scrutiny." S.Rep.No. 95-989, 95th Cong., 2d Sess. 39 (1978), U.S.Code Cong. & Admin. News 1978, pp. 5787, 5825 (emphasis added). See also In re Furniture Corporation of America, 34 B.R. 46 (Bkrtcy.S.D. Fla.1983) (fees paid to debtor's counsel may be reviewed regardless of their source, as the source determines only the party to whom the Court may order a refund); In re Perros, 14 B.R. 515, 517 (Bkrtcy.E.D.N. Y.1981) ("the power of this court to review attorney's fees is . . . expressly authorized under § 329 of the Bankruptcy Code . . . the policy underlying this authority is to prevent overreaching by the debtor's attorneys and to protect creditors"); In re Swartout, 20 B.R. 102, 105 (Bkrtcy.S.D. Ohio 1982) ("the traditional elements of the bargaining process do not typically exist in the formation of contracts between debtors and their attorneys; and, therefore, the role of the court . . . is to protect the interests of creditors of the estate by allowance of compensation allegedly due an attorney only to the extent actually and reasonably compensable for the services provided"); In re Crestwell, 30 B.R. 619 (Bkrtcy.D.D.C. 1983). In sum, these principles are neither new⁴ nor difficult to understand, given the clarity of § 329 and its predecessors.⁵

Because this case was filed under Chapter 11, it is also instructive to examine the criteria by which a proposed plan of reorganization must be tested. One such criterion, set forth in § 1129(a)(4), as recently amended,⁶ requires that any payment made under a plan for "services or for costs and expenses in or in connection with the case, has been approved by or is subject to the approval of the Court as reasonable." Before counsel can expect to have a plan confirmed, there must be a provision for review by the Court of any professional compensation. This requirement further reinforces what has been the clear philosophy of bankruptcy jurisprudence since 1898, i.e., that any fees promised or received to or by debtor's counsel in connection with or in contemplation of bankruptcy are subject to review by the Court. See In re Southern Industrial Banking Corporation, 41 B.R. 606 (Bkrtcy.E.D.Tenn.1984) ("Because the applicants seek payment for services rendered in connection with the debtor's plans, or incident to the debtor's case, this court clearly has jurisdiction to rule on the reasonableness of the payments sought, even though the source of payment is. . . . not the debtor's estate" (citing § 1129(a)(4)(B))).

It should also be noted that to allow an attorney for a debtor to draw against a retainer at will and without prior Court approval is a de facto emasculation of § 331, which sets forth precise criteria concerning an application for and payment of interim compensation.⁷ Any payment to counsel before the closing of the case is by definition interim compensation, and to allow counsel to receive payments, whether consisting of unilateral draws from a prepetition retainer or outright postpetition cash transfers, without notice to the creditors and approval by the Court, is blatantly inconsistent with the statute, and such practices will be neither condoned nor permitted by this Court.

(b) The Procedural Framework

Code § 329 is implemented by Bankruptcy Rule 2017.⁸ Consistent with the terms of that statute and its underlying policy, an examination of transactions between a debtor and the attorney for the debtor may be requested by a party in interest or required by the Court sua sponte. Subsection (a) of the Rule, by its terms, grants the Court the power to examine any prepetition payment or transfer to an attorney, made in contemplation of the filing, by or for the benefit of the debtor, for services rendered or to be rendered. Similarly, subsection (b) of the Rule empowers the Court to examine postpetition payments or transfers to an attorney, by or for the benefit of the debtor, for services "in any way" related to the case. When considered in conjunction with § 329, Rule 2017 clearly permits the Court to inquire into, examine, and if appropriate, set aside any prepetition transfer from a debtor to debtor's counsel if such transfer was made in connection with or in contemplation of the filing of the petition. The Court also has the power to inquire into, examine, and if appropriate, cancel any agreement entered by debtor and debtor's counsel in contemplation of services to be rendered in connection with bankruptcy. The terms of the agreement between Creel & Atwood and this Debtor or this Debtor's principals are not binding upon the Court or its rulings concerning the disposition of the retainer, as a matter of law. Describing the retainer as "fully earned and...