In re Randall Wade Blackburn And Lisa Ann Blackburn

• Decision Date: 26 January 2011
• Docket Number: No. 10–01532–TLM.,10–01532–TLM.
• Citation: 448 B.R. 28
• Parties: In re Randall Wade BLACKBURN and Lisa Ann Blackburn, Debtors.
• Court: U.S. Bankruptcy Court — District of Idaho

448 B.R. 28

In re Randall Wade BLACKBURN and Lisa Ann Blackburn, Debtors.

No. 10–01532–TLM.

United States Bankruptcy Court, D. Idaho.

Jan. 26, 2011.

OPINION TEXT STARTS HEREWest CodenotesLimited on Preemption GroundsWest's I.C.A. §§ 28–9–203(b), 28–9–313

D. Blair Clark, Jeffrey Philip Kaufman, Law Office of D. Blair Clark, PLLC, Boise, ID, for Debtors.

MEMORANDUM OF DECISION

TERRY L. MYERS, Chief Judge.

Before the Court in this chapter 7 ¹ case is an Amended Motion for Turnover filed by the chapter 7 trustee (“Trustee”). Doc. No. 37 (“Motion”). Trustee seeks an order directing Debtors' bankruptcy counsel to turnover or disgorge a cash retainer received as prepayment for legal services to be rendered in this case, and to disgorge funds received for services rendered in Debtors' prior chapter 13 case.²

BACKGROUND AND FACTS

The following facts were drawn from Exhibit Nos. 200–206 admitted by agreement at the hearing; a transaction detail attached to the Objection to the Trustee's Amended Motion, Doc. No. 41, which the parties agreed may be considered as part of the evidentiary record; and the testimony of Debtor Randall Blackburn and Debtor's counsel, Jeffrey Kaufman. In addition, the Court takes judicial notice of the filings of record in both this case and Debtors' prior chapter 13 case, Case No. 09–03779–TLM. See Fed.R.Evid. 201.

A. Chapter 13 Case (Case No. 09–03379–TLM)³

In October 2009, Randall and Lisa Blackburn (“Debtors”) hired attorney Richard Himberger of Himberger Law Offices, Chtd. to represent them in a chapter 13 bankruptcy. Debtors paid Himberger $7,500—$2,500 as a flat fee for handling their bankruptcy case, and $5,000 to be held in trust as prepayment for legal services incurred, if any, to defend an expected adversary proceeding. ⁴ On November 30, 2009, Debtors filed a voluntary petition for relief under chapter 13, with the requisite schedules and statement of financial affairs (“SOFA”). In their SOFA, Debtors disclosed the $7,500 prepetition payment to Himberger as three separate payments of $2,500, made on October 22, 24, and 27, 2009. See Ex. 200. Three days later, Himberger filed a statement of compensation with the Court, as required by § 329(a) and Rule 2016(b), wherein he disclosed he had received $7,037 for services rendered or to be rendered on Debtors' behalf in connection with the bankruptcy case. Ex. 201. ⁵

Debtors soon became dissatisfied with Himberger's services and began seeking new counsel to represent them in their bankruptcy case. They contacted and retained the services of the Law Offices of D. Blair Clark PLLC (“Law Firm”). And, on January 29, 2010, Jeffrey Kaufman, one of the Law Firm's attorneys, substituted as counsel of record for Debtors in their chapter 13 case. See Doc. No. 31. With Debtors' consent and authorization, Kaufman contacted Himberger to obtain any “unearned” portion of the $7,500 prepetition payment Himberger had received from Debtors. On February 11, Kaufman received a cashier's check from Himberger for $4,700, representing that allegedly unearned portion. The cashier's check was deposited in the Law Firm's trust account, to be used for payment of fees and costs incurred in representing Debtors. The Law Firm failed to file a 2016(b) statement in Debtors' chapter 13 case after substituting in as counsel and did not otherwise disclose this payment. ⁶

On March 3, the chapter 13 trustee filed a motion to dismiss Debtors' chapter 13 case. Doc. No. 35. In response, on March 12, Debtors filed a chapter 13 plan, Ex. 203, which amended the chapter 13 plan Himberger had filed on Debtors' behalf earlier in the case. The amended plan referenced a $4,700 prepetition fee retainer (presumably the $4,700 the Law Firm received from Himberger) from which Debtors' attorney's fees would be paid as approved by the Court. See id.⁷

The motion to dismiss and confirmation of Debtors' amended plan came on for hearing on April 19. Debtors did not oppose the trustee's motion to dismiss, and the Court granted the same. See Doc. No. 52. An order dismissing Debtors' chapter 13 case was entered on April 23. Doc. No. 53. And, on June 7, the chapter 13 trustee was discharged and the case was closed. Doc. No. 56.

B. Post–Dismissal and Chapter 7 Case (Case No. 10–01532–TLM)⁸

Following the dismissal of Debtors' case, the Law Firm applied the $4,700 it had received from Himberger to the Law Firm's fees incurred in relation to the chapter 13 case. Those fees exhausted the $4,700 and left a remaining unpaid balance of $2,892.50, which the Law Firm eventually wrote off. See Doc. No. 41 at pp. 4–5.

On May 19, less than a month after the chapter 13's dismissal, Debtors filed a voluntary petition for chapter 7 relief. Doc. No. 1. The day before filing the petition, Debtors entered into a “Chapter 7 Fee Agreement” with the Law Firm. Ex. 205 (“Fee Agreement”). The Fee Agreement indicated that Debtors had paid the Law Firm $7,500, to be allocated as follows—$1,500 for prepetition services, $299 for prepetition costs (which consisted of the chapter 7 filing fee), and the remaining $5,701 to be retained in the Law Firm's trust account for post-petition fees and costs, which Debtors and the Law Firm believed would be incurred in defending an anticipated adversary proceeding.⁹ The Fee Agreement further granted the Law Firm a “security interest” in the trust account funds.

Kaufman signed, and the Law Firm filed, a 329(a) and Rule 2016(b) statement of compensation with Debtors' chapter 7 petition. Ex. 206 (“2016(b) Statement”). Therein, the Law Firm stated that it had agreed to accept $1,500 for legal services and that it had received $1,500 from Debtors prior to filing the 2016(b) Statement. The Law Firm also represented that it and Debtors had agreed that the $1,500 fee did not include the “[r]epresentation of the debtors in any dischargeability actions, judicial lien avoidances, relief from stay actions or any other adversary proceeding.” Id.¹⁰ The 2016(b) Statement contained no mention whatsoever of the $5,701 in the Law Firm's trust account.

On June 2, Debtors filed their schedules and SOFA. Ex. 204. In their SOFA, Debtors disclosed the $4,700 Kaufman received from Himberger and the $7,500 Debtors paid the Law Firm just prior to filing this chapter 7 case, in addition to disclosing the $7,500 Debtors had paid Himberger before their chapter 13 case. See id.

Trustee now moves for turnover or disgorgement of the $5,701 retainer, and disgorgement of the $4,700 the Law Firm received from Himberger during Debtors' chapter 13 case. The Law Firm and Debtors object.

DISCUSSION AND DISPOSITIONA. Turnover

Trustee first argues that the $5,701 retainer in the Law Firm's account must be turned over as property of the estate pursuant to § 542.¹¹ Specifically, he contends that on the date of filing the right to terminate the Fee Agreement as well as the right to receive any unearned portion of the retainer became property of the estate and that, because he as trustee could exercise the right to terminate the Fee Agreement, he is entitled to the $5,701 portion of the retainer that was unearned on the petition date.

1. The retainer is property of the estate

Commencement of a bankruptcy case creates an estate comprised of all legal or equitable interests of the debtor in property as of the date of filing. Section 541(a)(1). The scope of § 541 is intended to be broad. United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Whether a debtor's interest in property is property of the estate is a question of federal law. First Fed. Bank of Cal. v. Cogar, 210 B.R. 803, 809 (9th Cir. BAP 1997). However, the extent of the debtor's property interests is controlled by state law. Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

To determine the extent of Debtors' interest in the retainer at the time of filing, and thus the estate's interest, the Court must first determine the nature of the retainer at issue. “In general, three types of retainers exist: (1) classic or true retainers, (2) security retainers, and (3) advance payment retainers.” Rus, Miliband & Smith, APC v. Yoo (In re Dick Cepek, Inc.), 339 B.R. 730, 736 (9th Cir. BAP 2006) (citations omitted); see also In re Dearborn Constr., Inc., 03.1 I.B.C.R. 17, 20 & n. 15 (Bankr.D.Idaho 2003); 3 Collier on Bankruptcy ¶ 328.02[3] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).

A “security” retainer is one held to secure payment of fees for future services the attorney is expected to render. Such funds do not constitute present payment for future services, but, rather, remain property of the client until the attorney applies charges for services rendered against the retainer. Any funds not earned by the attorney are returned to the client. Dick Cepek, 339 B.R. at 736 (citing 3 Collier on Bankruptcy ¶ 328.02[3][b] [i] (15th ed. 2005)). This Court has held that security retainers, which are unearned on the petition date, are estate property. Dearborn Constr., 03.1 I.B.C.R. at 20 & n.15.

The Law Firm and Debtors have treated the funds at issue as a security retainer. Since their receipt, those funds have been held in Debtors' names in the Law Firm's client trust account. The Fee Agreement grants the Law Firm a security interest in the funds and provides that those funds may be applied to post-petition fees and costs as incurred, on a monthly basis. Clearly, the yet to be earned funds were intended to operate as security for payment of the Law Firm's future claims to compensation. The Court finds that the $5,701 in funds unearned on the date of filing constituted a security retainer. The $5,701 retainer is therefore estate property as Debtors have and retain an interest in those funds under applicable nonbankruptcy law.

2. The right to terminate the Law Firm is not property of the estate

Trustee asserts that Debtors' right to discharge the Law Firm, and thus to trigger return of any unearned retainer, is also...