In re Saturley, Bankruptcy No. 91-10072.
| Decision Date | 06 September 1991 |
| Docket Number | Bankruptcy No. 91-10072. |
| Citation | 131 BR 509 |
| Parties | In re Howard C. SATURLEY and Geraldine F. Saturley, Debtors. |
| Court | U.S. Bankruptcy Court — District of Maine |
COPYRIGHT MATERIAL OMITTED
Kim M. Vandermeulen, Vandermeulen, Goldman, Allen & O'Brian, Augusta, Me., for debtors.
Charles H. Abbott, June Zellers (Schau), Skelton, Taintor & Abbott, Auburn, Me.
Gary M. Growe, Bangor, Me., trustee.
Pending are the Chapter 7 debtors' former counsels' fee application and the trustee's responsive motion seeking a determination that the fees presently sought, and those previously paid, are excessive. For the reasons set forth below, the fee application is disapproved, with exceptions for certain, limited reimbursement requests; and the applicant is ordered to surrender a portion of its pre-petition fees and all unapplied retainer funds to the trustee.1
In October 1990, Howard and Geraldine Saturley retained Attorney Charles H. Abbott and his firm, Skelton, Taintor & Abbott ("Skelton, Taintor") of Auburn, Maine. The Saturleys were headed for personal bankruptcy. Casco Northern Bank ("Casco") had called loans to several Saturley-owned corporations and was pursuing the Saturleys' personal guaranties.
When they first met, Howard Saturley, who had already spoken with other attorneys, told Attorney Abbott that a Chapter 7 filing appeared "inevitable." Attorney Abbott explored alternatives to straight bankruptcy, including a Chapter 11 filing, negotiating releases of guaranty obligations, and obtaining Casco's commitment to forbear. He negotiated terms for surrender of the Saturley corporations' assets to Casco.
Research commenced on bankruptcy issues no later than October 14, 1990.2 As late as October 29, however, the Saturleys were still searching for options other than Chapter 7. On November 6, Casco attached the Saturleys' personal assets, including funds held by Skelton, Taintor as its retainer. The die was cast.
On approximately December 20, 1990, Attorney June Z. Schau, a Skelton, Taintor associate, researched dischargeability issues and commenced preparing the Saturleys' bankruptcy schedules.3 She complained that the information Howard Saturley gave her was incomplete and that he eventually became uncooperative, failing to return her calls. Attorney Schau found the records relating to the Saturleys' real estate interests particularly confusing.4 Ultimately, she ordered title searches at each county deed registry in the state of Maine and in one New Hampshire registry.
Howard Saturley expressed dissatisfaction with Skelton, Taintor's efforts at completing the bankruptcy schedules. He asserted that documents were lost or misplaced and that the firm's attorneys and paralegals refused to act upon the information he supplied. He claimed that the information set forth in the schedules untimately filed "came right out of" the records he provided to the firm. In the end, having decided to engage new counsel, he ceased returning calls to Attorney Schau and her staff.
Howard and Geraldine Saturley filed their joint Chapter 7 petition on January 29, 1991. Attorney Schau appeared as the Saturleys' counsel. The petition was unaccompanied by schedules or by a Rule 2016(b) disclosure of attorney compensation.5 Schedules were filed, but Skelton, Taintor's Rule 2016(b) statement was not forthcoming.6 Several weeks later, when another attorney appeared for the Saturleys, Skelton, Taintor sought leave to withdraw.7 Leave was granted forthwith.8
On March 18, 1991, Skelton, Taintor filed its application seeking approval and payment of $27,209.00 in fees for services rendered and reimbursement of $4,584.55 in expenses incurred while representing the Saturleys in the pre-petition and post-petition periods. The application represented that the firm had received and was then holding $26,009.42 as a retainer. The firm subsequently supplemented its application, seeking an additional $768.00 in fees and an additional $2,199.88 in expenses. Thus, the application now addresses $27,977.00 in professional fees and $6,784.43 in expenses.
The fee application references pertinent bankruptcy rules,9 and represents that the firm commenced representation of the Saturleys on November 6, 1990, continuing through February 14, 1991.10 Although it disclosed the unapplied retainer, it did not indicate that any fees were paid to the firm by the Saturleys in the year preceding the filing.11 Contemporaneously with the application for compensation, the firm filed a motion "seeking authority to use cash collateral."12
The Chapter 7 trustee objected to the fee application and sought a determination that Skelton, Taintor's fees and expenses were excessive.13 At the first hearing on the application for compensation and the trustee's counter-motion, Attorney Schau appeared on behalf of Skelton, Taintor. In response to the court's inquiries, she acknowledged that the firm had already received $10,371.30 from the debtors14 and that its retainer had been substantially more than the reported $26,009.42. The court set the application for an evidentiary hearing and ordered Skelton, Taintor to revise its itemized billings to comply with the requirements of the local bankruptcy rule.15
Skelton, Taintor subsequently filed itemized bills dating back to October 5, rather than November 6, 1990.16 The evidence disclosed that, through the first week in November, the firm received four separate retainer payments from the Saturleys, totalling $36,380.72.17 The firm applied $10,371.30 to the Saturleys' bill in four separate transactions prior to November 6.18
Contemporaneously with its application for compensation, Skelton Taintor filed a motion seeking leave to use cash collateral so that, notwithstanding Casco's attachment, it could apply the retainer funds against its fees. The motion alleges that Casco's attachment lien on the Saturleys' retainer is junior to the firm's own possessory lien and, in any event, that Casco's attachment was preferential.19 Casco, the debtor, and the Chapter 7 trustee, understandably, have ignored the motion.
Section 363(c) addresses use, sale or lease of property by a trustee20 and expressly conditions post-filing use of "cash collateral"21 in the operation of a debtor's business.
This is a Chapter 7 bankruptcy. The debtors are not operating their business as they might under other chapters. There is no order authorizing the trustee to conduct the debtors' business.22 The cash collateral motion is patently inappropriate. To obtain a declaration of priority over the claims of Casco, or to see Casco's lien avoided, alternative remedies must be invoked23 by the proper parties.24
The fee application, as originally filed and as supplemented, represented that the Saturleys "provided a retainer to counsel in the amount of $26,009.42."25 However, Skelton, Taintor later disclosed that it had received over $36,000.00.26
At the initial hearing, and in its first memorandum supporting its application, counsel urged that the retainer it received from the debtors was an "advance payment" retainer, fully-earned pre-petition and, therefore, not property of the estate. See In re McDonald Bros. Constr., Inc., 114 B.R. 989, 997-1000 (Bankr.N.D.Ill.1990) (). Thus, it claimed that application for leave to apply the retainer was unnecessary. See Stewart v. Law Offices of Dennis Olson, 93 B.R. 91, 93-94 (N.D.Tex.1988). Skelton, Taintor declared that it was prompted to file a fee application merely on account of the "uncertainty created by the attachment lien of Casco Northern Bank...."27
Whatever may be said about the force of the argument28, it was merely a convenient fallacy. By the time of the evidentiary hearing, Skelton, Taintor had wisely abandoned its "earned on receipt" contention. Attorney Abbott's testimony and the firm's records established that the retainer was a "security retainer" kept in the firm's trust account pending application against invoices for fees. Funds yet to be applied to billings constitute funds "belonging in part to a client and in part presently or potentially to a lawyer or law firm" under pertinent bar rules.29 See In re McDonald Bros. Constr., Inc., 114 B.R. at 999. The debtors retained an interest in the unapplied retainer as of the date their case commenced, and that fund is part of the bankruptcy estate. 11 U.S.C. § 541(a)(1). See Id. at 1000.
The $10,371.30 applied to the firm's bills before filing is not part of the estate. When those funds were removed from the firm's trust account and applied to the balances due for services rendered and expenses incurred, Saturleys ceased to have an interest in them. Cf. In re Bicoastal Corp., 118 B.R. 855, 857 (Bankr.M.D.Fla. 1990) (). However, such funds are subject to an order for disgorgement if the court finds the payments were "excessive."30
Whether by fee application filed under § 330 and B.R. 2016 or by motion brought pursuant to § 329(b) and B.R. 2017, Skelton, Taintor's compensation, including its proposed application of the retainer, is subject to scrutiny. See In re Chapel Gate Apartments, Ltd., 64 B.R. 569, 574 (Bankr. N.D.Tex.1986). In re Bader, 118 B.R. 817 (Bankr.N.D.Fla.1990). Cf. Me.B.R. 2016(b) ().
In a Chapter 7 case, it is not necessary that the court approve the retention of debtor's counsel. In re Trinsey, 115 B.R. 828, 832 (...
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