In re Printing Dimensions, Inc., Bankruptcy No. 90-4-2589-SD.
| Decision Date | 04 May 1993 |
| Docket Number | Bankruptcy No. 90-4-2589-SD. |
| Parties | In re PRINTING DIMENSIONS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Maryland |
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Alan S. Kerxton, Bethesda, MD, Janet M. Nesse, Washington, DC, for debtor.
James P. Koch, Baltimore, MD, Chapter 7 Trustee.
Roger M. Whelan, Washington, DC, for amicus Bankruptcy Bar Ass'n of Maryland.
Clifford J. White, III, Asst. U.S. Trustee, Kenneth Hoefer, Staff Atty., Rockville, MD, for U.S. Trustee.
Debtor's counsel has moved for reconsideration of an order that prohibited counsel from using a retainer before it had been earned and before the fees to which the retainer would be applied had been approved by the court. In denying reconsideration, the court concludes it is not proper for Debtor's counsel to use or apply a retainer paid by Debtor before the court has allowed fees to counsel.
Shortly after filing this case under Chapter 11, the Debtor filed an application to employ attorneys, namely, Alan S. Kerxton, Esquire and the law firm of Alan S. Kerxton, Chtd., and Janet M. Nesse, Esquire and the law firm of Gins & Seeber, P.C., as co-counsel. The case has since been converted to Chapter 7. However, the instant retainer was for services to be rendered in seeking reorganization under Chapter 11, and it is considered here, as such.
The Application disclosed that Debtor had paid an engagement retainer fee of $20,000. The full disclosure was as follows:
8. The debtor has paid an engagement retainer fee of $20,000 prior to filing the petition. Additional fees will be charged if the retainer is exhausted. The fees are to be divided between the counsel based on a combination of time and results, subject to Court approval.
Counsel's disclosure statement under 11 U.S.C. § 329 and Bankruptcy Rule 2016(b) described the compensation agreement with Debtor similarly.
The debtor has paid an initial engagement retainer of $20,000, plus $500 for the filing fee. Final fees will be based on hourly rates and results. Rates are then set forth. . . . The primary source of the compensation paid was from the debtor\'s general funds.
In due course, the court entered an order authorizing the employment of Debtor's attorneys. Co-counsel was justified because lead counsel, Mr. Kerxton, was a sole practitioner and required assistance, in part to avoid scheduling conflicts involving hearing dates. However, the court modified the proposed retention order by adding that the payment and division of fees between counsel was subject to review of the court ". . . to avoid duplication of effort." The court also added the language at issue here: "The retainer may not be applied until fees or expenses are approved by the Court."
Co-counsel for Debtor filed an application for reconsideration of the order requesting deletion of the quoted language. The U.S. Trustee was requested, pursuant to 28 U.S.C. § 586(a)(3)(H) and (A), to comment on the application for reconsideration. The U.S. Trustee has opposed modification of the order as entered.
The Bankruptcy Bar Association for the District of Maryland was also invited to respond. The Bar Association urged the court to adopt a flexible approach that would allow an attorney to draw down on a retainer if there was an arm's length agreement between a debtor and the attorney for an advance fee for services to be rendered. With such an agreement, the Bar Association suggests that the retainer would not be property of the estate. The court, however, would still consider the reasonableness of the attorney's compensation. On the other hand, if a retainer agreement required the retainer to be escrowed, the court should be willing to exercise discretion under 11 U.S.C. § 328(a) to modify the terms and conditions of an attorney's compensation. Such an approach would permit the court to allow debtor's attorney to draw against an escrowed retainer if it was in the best interests of all the parties. Factors to be considered could include debtor's ability to pay fees from cash flow, the duration and complexity of the case, the anticipated amount of fees to be incurred, the size of the law firm and the expected delay in compensation awards.
While the court agrees it has discretion to approve reasonable terms and conditions of employment for a debtor's counsel, including payment terms, it should not exercise that discretion either to deprive the debtor-in-possession of property prematurely or to abrogate the court's responsibility and authority to supervise the allowance of attorney's fees effectively.
The Bankruptcy Code requires the court to supervise a debtor's attorney-client relationships. Counsel for debtors may only serve with court approval. 11 U.S.C. § 327(a). Only a disinterested person who does not hold or represent an interest adverse to the estate may serve as counsel to a debtor-in-possession. Id. at §§ 101(14), 327(a). This oversight specifically includes legal fees. Counsel's fees must be allowed by the court; and to be allowed, fees must be reasonable and for actual and necessary services. Id. at §§ 328(a), 329(b), 330(a). Other provisions of the Code further define and restrict attorney fee arrangements.
All representation of a party in interest and fee arrangements, including retainers and sources of payment, must be disclosed by a debtor's counsel to the court and creditors. 11 U.S.C. § 329(a); Bankr.Rules 2014(a), 2016. The Bankruptcy Rules also require the filing of a supplemental statement within 15 days after an agreement or payment not previously disclosed. Bankr. Rule 2016(b). A request for an award of attorneys fees in an adversary proceeding must be pleaded. Id. at Rule 7008(b). The court may also determine if a pre- or post-petition transfer to an attorney, direct or indirect, in contemplation of, or related to, a case is excessive. If the compensation paid or agreed by a debtor within one year prepetition exceeds the reasonable value for the attorney's services, the court may cancel the agreement and order the return of excessive payments. 11 U.S.C. § 329(b); Bankr.Rule 2017.
Certain fee arrangements by attorneys are expressly forbidden. Fee splitting is prohibited, except within a law firm. 11 U.S.C. § 504. There is also a criminal penalty for fee fixing agreements. 18 U.S.C. § 155.
Counsel may file interim fee applications only once every 120 days, unless the court permits more frequent applications. 11 U.S.C. § 331. The U.S. Trustee must monitor the applications of attorneys for both employment and compensation. 28 U.S.C. §§ 586(a)(3)(A) and (3)(H). However, the court may ultimately award only reasonable compensation for actual and necessary services based on the nature, extent, and value of such services, the time spent, and the cost of comparable services, plus actual and necessary expenses. Id. at 330(a).
One way or another, the bankruptcy court must supervise retainer agreements between debtor and counsel. The bankruptcy court may:
Most bankruptcy courts have concluded that a prepetition retainer paid by a debtor to counsel for services in connection with a case is security for, or held in trust for, payment of fees and costs to be incurred. In re Kinderhaus Corp., 58 B.R. 94 (Bankr.D.Minn.1986); In re Chapel Gate Apartments, Ltd., 64 B.R. 569 (Bankr. N.D.Tex.1986); Matter of Colin, 44 B.R. 709 (Bankr.W.D.Mo.1984); Matter of Independent Sales Corp., 73 B.R. 772, 774-75 (Bankr.S.D.Iowa 1987); In re Chicago Lutheran Hosp. Ass'n., 89 B.R. 719, 734 at n. 21 (Bankr.N.D.Ill.1988); In re Burnside Steel Foundary Co., 90 B.R. 942, 945 (Bankr.N.D.Ill.1988); In re Tri-County Water Ass'n, Inc., 91 B.R. 547, 551 (Bankr. D.S.D.1988); In re Leff, 88 B.R. 105, 107 (Bankr.N.D.Tex.1988); affirmed sub nom. Stewart v. Law Offices of Dennis Olson, 93 B.R. 91 (N.D.Tex.1988); In re C & P Auto Transport, Inc., 94 B.R. 682 (Bankr. E.D.Cal.1988); Matter of K & R Mining, Inc., 105 B.R. 394, 396-98 (Bankr.N.D.Ohio 1989); In re Crimson Investments, N.V., 109 B.R. 397, 402 (Bankr.D.Ariz.1989); In re NBI, Inc., 129 B.R. 212 (Bankr.D.Colo. 1991); In re Hathaway Ranch Partnership, 116 B.R. 208, 216-218 (Bankr.C.D.Cal. 1990). The retainer is characterized as property of the estate variously under § 541(a)(3) (); under § 541(a)(1) () (In re Tri-County Water Ass'n, Inc., supra, 91 B.R. at 551; In re Leff, supra, 88 B.R. at 107); under § 541(d) () (In re Kinderhaus Corp., supra); or under § 541(a)(7) when from third party and not disclosed. In re Crimson Investments, N.V., supra, 109 B.R. at 402. Accord, In re Chicago Lutheran Hosp. Ass'n., supra, 89 B.R. at 734, n. 21; In re Burnside Steel Foundary Co., supra, 90 B.R. at 944; Matter of K & R Mining, Inc., supra, 105 B.R. at 396.
Approval of the bankruptcy court must be obtained before the retainer may be applied. Matter of Colin, supra, 44 B.R. at 712; In re Kinderhaus Corp., supra, 58 B.R. at 97; In re Tri-County Water Ass'n, Inc., supra, 91 B.R. at 550; In re C & P Auto Transport, Inc., supra, 94 B.R. at 691. To allow application of...
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