UNITED STATES BANKRUPTCY JUDGE

____________________________________________________________

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

OPINION ON CROSS-MOTIONS

FOR PARTIAL SUMMARY JUDGMENT

This proceeding is before the Court on the plaintiff-trustee's motion for partial

summary judgment and the defendants' response and counter-motion for partial summary

judgment. The plaintiff-trustee was originally represented by counsel Christopher J.

Redmond and Brian M. Devling; after the motions were filed, Mr. Devling withdrew and

Jacob W. Stauffer entered his appearance for the trustee. The defendants are represented

by counsel Carl R. Clark and Jeffrey A. Deines. The Court has reviewed the relevant

pleadings and is now ready to rule.

Before filing for bankruptcy, debtors Max R. and Georgia A. Wagers (Debtors)

gave the law firm of Lentz & Clark, P.A. (Firm) $5,000 in cash and an assignment of any

tax refunds they might be entitled to, all as deposits for payment of fees to be incurred

representing them in dealing with financial difficulties and, ultimately, filing a Chapter 7

bankruptcy. After the case was filed, the trustee for the Debtors' bankruptcy estate1

(Trustee) brought this adversary proceeding2 in an effort to require the Firm to turn the

assigned tax refunds over to the estate, even though the Firm is continuing to represent

the Debtors. Relying on the facts that (1) the Kansas Supreme Court has declared that

1Strictly speaking, a married couple's joint bankruptcy petition creates two estates that can be

consolidated or jointly administered only by order of the Court. See 11 U.S.C.A. § 302(a) & (b); Fed. R. Bankr. P. 1015(a) & (b) & 2009. The practice in this district, however, as in most of the country, is to administer joint petitions jointly without entering an order to do so. See 2 Collier on Bankruptcy, ¶302.02[1][b] (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 15th ed. rev. 2005) (hereafter cited as [vol. no.] Collier ¶ __). The practice here is also to refer to the joint estates in the singular, rather than the plural.

2The Court has jurisdiction. 28 U.S.C.A. § 1334. This is a core proceeding which the Court may hear and determine as provided in 28 U.S.C.A. § 157(b)(1) and (b)(2)(E).

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advance payments held by a lawyer or law firm remain the client's money and (2) Chapter

7 debtors' attorneys not employed pursuant to § 327 of the Bankruptcy Code3 cannot be

paid from property of the estate, the Trustee seeks partial summary judgment requiring the

Firm to deliver the tax refunds to him based upon counts I and IV of his Complaint.

For the reasons discussed below, the Court denies the Trustee's motion and

concludes the advance payments, including the assignment of future tax refunds, are not

property of the estate. The estate's interest in the assigned cash and tax refunds on the date

of filing was limited to the contingent right to receive any balance remaining after the

Firm's prepetition and postpetition fees and expenses are paid from the retainer.4 Further,

the Court holds that § 329 is the Code section that controls the payment of attorney fees

from the retainer.

FACTS.

The material facts are uncontroverted. At the end of May 2003, the Debtors hired

the Firm to provide them with legal advice about their financial situation. In June 2003,

the Debtors signed a letter agreement (Legal Representation Agreement) specifying the

terms of the representation. That same month, they paid a $5,000 retainer that the Firm

deposited in its trust account. Over the next several months, the Firm billed the Debtors

311 U.S.C.A. § 327. This case was filed before October 17, 2005, when most provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 become effective. All statutory references to the Bankruptcy Code are to 11 U.S.C.A. §§ 101 to 1330 (2004), unless otherwise specified. All references to the Federal Rules of Bankruptcy Procedure are to Fed. R. Bankr. P. (2004), unless otherwise specified.

4The meaning of retainer as used in this opinion is explained at pp. 19-22.

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for $2,866 in fees and expenses. It charged this amount against the retainer, leaving a

balance of $2,134. On October 22, 2003, the Debtors executed an Assignment of Tax

Refunds and Limited Power of Attorney which assigned to the Firm any refunds they

might obtain by filing original or amended tax returns for 2003 and prior years as an

additional retainer for services rendered or to be rendered. With the Firm's help, the

Debtors filed a joint Chapter 7 bankruptcy petition the day after assigning the refunds.

The Debtors have testified that they intended for the assignment to pay the fees and

expenses the Firm would charge for representing them in their bankruptcy case, with any

remaining balance to be paid into the bankruptcy estate.

A few weeks before filing for bankruptcy, the Debtors filed a 2002 federal income

tax return that generated a refund. A couple of weeks after filing for bankruptcy, they

filed amended federal tax returns for 1997 through 2001; these returns all generated

refunds. The Debtors received these refunds (along with a state refund for an unspecified

year) after they filed for bankruptcy and, following through on the assignment, they

delivered the refunds to the Firm. The Firm deposited the refunds, a total of $51,660, in

its trust account. Late in 2004, the Debtors filed 2003 federal and state income tax returns

that should also generate refunds totaling $5,475, although the Debtors had not yet

delivered them to the Firm when the summary judgment motions were filed in this

proceeding. In January 2004, the Debtors paid the Firm $1,000, and in September

another $500; the Trustee does not contend the estate has any interest in these postpetition

payments.

4

From October 2003 through September 2004, the Debtors incurred a total of

$14,361.60 in fees and expenses with the Firm. The Firm applied the $2,134 balance of

the cash retainer to the October and November 2003 fees. Relying on records supplied by

the Firm, the Trustee asserts that only $1,084.75 of this amount was applied to fees

earned before the Debtors filed for bankruptcy; he does not claim the estate has any

interest in this portion of the cash retainer.

The Firm's records show the remaining $1,049.25 of the cash retainer was applied

to postpetition fees. Although the Trustee does not appear to have previously claimed

that the estate's interest in that portion precludes the Firm from keeping that money, he

has made that claim in his reply to the Firm's brief opposing his motion. Through

September 2004,5 the Firm was owed $13,276.25 in fees and expenses, all incurred

postpetition, that the Trustee argues cannot be paid from the cash retainer and the

assigned tax refunds, despite the assignment. Adding the $1,049.25 of the cash retainer to

the $51,660 in tax refunds and subtracting agreed expenses of $2,881.176 leaves a balance

of $49,828.08 that the Trustee claims the Firm must turn over to him.7

5The Court is certain the Debtors have incurred additional fees and expenses since then, adding to the Firm's claim against the retainer.

6During 2004, with the Trustee's consent, the Firm disbursed a total of $2,881.17 from its trust account to pay certain expenses that the estate would otherwise have incurred. The Trustee agrees this amount should be subtracted from the money he claims on behalf of the estate.

7Of course, the Trustee also claims the estate's interest in the 2003 refunds is superior to any

claim the Firm can make against them, but the Firm had not yet received that money when the summary judgment motions were filed.

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The Parties' Positions.

In June 2004, the Trustee brought this proceeding against the Firm and the Debtors,

seeking to recover the assigned refunds from the Firm. In January 2004, the Supreme

Court had decided Lamie,8 which held that § 330, the main statute governing compensation

of officers of bankruptcy estates, does not allow debtor's counsel in a Chapter 7 proceeding

to be compensated from estate assets unless the attorney is employed by the trustee with

approval of the court. The Trustee alleges in his Complaint that Lamie has created

confusion about the ability of debtor's counsel in a Chapter 7 proceeding to apply funds

from the assignment of income tax refunds to payment of fees.9

The Complaint alleges six counts.10 The Trustee seeks summary judgment on count

I, claiming the tax refunds are property of the estate, and count IV, claiming the tax refunds

are property which the trustee may use, sell, or lease under § 363, so they must be turned

over to the Trustee under § 542. The Trustee's summary judgment motion seeks to recover

8Lamie v. United States Trustee, 540 U.S. 526, 124 S. Ct. 1023, 157 L. Ed.2d 1024 (2004).

9See Adversary Complaint, Dkt. no. 1 at ¶22.

10The first count alleges the Debtors' assignment gave the Firm only a security interest in, not

ownership of, the refunds, so the refunds are property of the bankruptcy estate that must be turned over to the Trustee. The second count alleges the Debtors received less than a reasonably equivalent value from the Firm in return for the assignment, and seeks to avoid the transfer under § 548 of the Bankruptcy Code as a fraudulent transfer. The third count alleges the Trustee can recover the refunds under § 550 of the Code. The fourth count alleges the refunds are property of the estate that the Trustee may use, sell, or lease under § 363 of the Code, so that the Firm must turn them over to the Trustee as required by § 542. The fifth count alleges the value of the refunds exceed the reasonable value of the legal services the Firm provided the Debtors before they filed for bankruptcy, so the refunds should be returned to the bankruptcy estate pursuant to § 329. The sixth count alleges any lien the Firm might have on the refunds is invalid, unperfected, and subordinate to the Trustee's rights in them, and therefore avoidable under § 544 of the Code.

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the refunds and the portion of the cash retainer applied to postpetition fees from the Firm

through the following theory: (1) under Kansas law, money that clients pay their attorneys

for future services remains the clients' money at least until the services are provided;11 (2)

when the Debtors filed for bankruptcy, all interests in the refunds therefore became

property of the bankruptcy estate because the Firm had not yet provided any services not

covered by the initial $5,000 retainer; (3) fees for services an attorney renders after a

bankruptcy petition is filed can be paid from property of a Chapter 7 estate only if the fees

have been allowed under § 330(a);12 (4) under the Supreme Court's ruling in Lamie,13 the

Firm's postpetition fees and expenses cannot be allowed under § 330(a) because the Firm

was not employed by the Trustee; and (5) since the Firm's postpetition fees cannot be paid

from the refunds, it should be required to turn the refunds over to the Debtors' bankruptcy

estate, pursuant to § 542. The Trustee's motion is based on the combined effect of his

interpretation of Kansas law and the application of the Lamie decision.

 Responding for itself and the Debtors, the Firm also moves for partial summary

judgment. It contends that the first two premises of the Trustee's theory are mistaken,

insisting that because the Debtors assigned the refunds to the Firm before they filed for

bankruptcy, the bankruptcy estate's interest in the refunds is limited to a contingent right to

11In re Scimeca, 265 Kan. 742, 759-60, 962 P.2d 1080, 1092 (1998).

12See 11 U.S.C.A. § 503(b)(2) (fees allowed under § 330(a) are administrative expenses);

§ 507(a)(1) (administrative expenses allowed under § 503(b) are first priority expenses); § 726(a)(1) (property of estate is to be distributed first to pay claims specified in § 507).

13540 U.S. at 526, 124 S.Ct. at 1023.

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receive any balance remaining after the Firm's fees and expenses for representing the

Debtors in their bankruptcy case are paid from the refunds. The Firm further contends that

§ 329, Debtor's transactions with attorneys, instead of § 330, Compensation of

officers, is the appropriate Code section to apply when determining the Firm's right to

compensation, and that under § 329, the Firm is entitled to be paid prepetition and

postpetition fees and expenses from the assigned property.

ANALYSIS.

1.      The Debtor-Attorney Relationship and the Importance of Retainers.

   In this case, the Trustee is challenging the postpetition validity of the retainer

agreement between the Firm and its clients, the Chapter 7 Debtors. The agreement here is

no different from that customarily used in this district. Taking cash and assignments of tax

refunds for the payment of both prepetition and postpetition services is an accepted

practice to assure payment for attorney services. Counsel for Chapter 7 debtors provide

valued and essential services postpetition, and this Court has a significant interest in

preserving the availability of that representation.

Several courts applying the laws of states other than Kansas, including the Fourth

Circuit when Lamie was before it, have reached conclusions supporting the Trustee's

position that a Chapter 7 debtor's attorney cannot collect postpetition fees from a retainer

the debtor paid prepetition.14 More recently, the Seventh Circuit ruled that a Chapter 7

14E.g., In re Equipment Servs., Inc., 290 F.3d 739, 746-47 (4th Cir. 2002), aff'd on different issue sub nom. Lamie v. United States Trustee, 540 U.S. 526 (2004) (Virginia law); In re Mondie Forge Co.,

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debtor's discharge covers his or her personal liability for any fees the debtor had arranged

under a prepetition agreement to pay his or her bankruptcy attorney, even if the fees were

for services provided postpetition.15 If combined, the Fourth Circuit's ruling that

postpetition fees can't be charged against a prepetition retainer and the Seventh Circuit's

ruling that postpetition fees incurred under a prepetition agreement are covered by a

debtor's Chapter 7 discharge would mean that there is no way for an attorney representing

a Chapter 7 debtor to be assured of getting paid for postpetition services. Chapter 7

trustees could recover from attorneys any property clients supplied prepetition that was

intended to pay postpetition fees, and collecting from clients personally postpetition would

be barred by their discharges. In effect, if the rules of both these cases control, an attorney

cannot be confident at the time of the client's filing for bankruptcy that money will be

available to pay for the legal services which will be required during the bankruptcy case.

Following the approaches of the Trustee and the Fourth and Seventh Circuits would

undermine the unique role occupied by a Chapter 7 debtor's attorney. Essentially all

Chapter 7 debtors need legal advice to help them get their bankruptcy cases properly filed.

154 B.R. 232, 236-39 (Bankr. N.D. Ohio 1993) (Ohio law); In re On-Line Servs., Ltd., LLC, 2004 WL 2671669, slip op. at 2-3 (Bankr. N.D. Iowa 2004) (not reported in B.R.) (Iowa law); see also Snyder v. Dewoskin (In re Mahendra), 131 F.3d 750, 754-56 (8th Cir. 1997) (Missouri law; holding prepetition mortgage on real property did not secure postpetition attorney fees; in dicta, said same would be true for cash security retainer).

15Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125, 1126-1129 (7th Cir. 2003) (2 to 1

decision; dissenting judge thought only question of prepetition fees should be reached); but see In re Hines, 147 F.3d 1185, 1190-91 (9th Cir. 1998) (concedes plain language of Bankruptcy Code leads to conclusion postpetition fees of Chapter 7 debtor's attorney are discharged, but holds doctrine of necessity precludes that result).

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Only a very few need the assistance of other professionals such as accountants before

filing, but they all need legal advice and therefore benefit from the assistance of an

attorney. Of all the debtor's creditors and potential creditors, usually only his or her

bankruptcy attorney deals with the debtor knowing that the debtor is going to file for

bankruptcy and is, in fact, hired to help the debtor do so.16 A Chapter 7 debtor's attorney

must also continue to help the debtor postpetition in order to insure the debtor receives as

much of a fresh start as he or she is entitled to, and to fulfill the debtor's probable and

reasonable expectations under their prepetition contract. Postpetition representation is

also required to satisfy the bankruptcy court's expectations of the attorney as an officer of

the court. It is common practice in this district, as well as others,17 for counsel to obtain a

prepetiton retainer to assure payment for postpetition services. The Trustee's approach

would render this practice futile.

To solve the problem of the discharge of personal liability for fees under a

prepetition contract, the Seventh Circuit suggested that an attorney could agree to

represent debtors in preparing to file for bankruptcy, terminate the representation as of the

filing of the petition, and require the debtors to rehire him or her under a separate

16See Bethea v. Robert J. Adams & Assocs. (In re Bethea), 275 B.R. 284, 292 (Bankr. N.D. Ill. 2002), aff'd 287 B.R. 906 (N.D. Ill.), rev'd 352 F.3d 1125 (7th Cir. 2003) (Chapter 7 is intended to afford relief to financially distressed debtors. A debt incurred to the debtor's bankruptcy counsel does not add to the debtor's distress; rather, it is the means by which the debtor may obtain relief from that distress.).

17Morgan D. King, Between the Charybdis of Biggar and the Scylla of Lamie: How Can a

Debtor's Lawyer Get Paid?, Norton Bankr. L. Adviser, June 2004 at 2, n.4 (response to survey indicated that 71% of consumer attorneys in 35 state collect prepetition retainer sufficient for both prepetition and postpetition services).

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postpetition agreement if they want postpetition representation.18 This suggestion

assumes bankruptcy courts universally allow attorneys to structure their representation of

Chapter 7 debtors this way. In fact, however, while bankruptcy courts have taken

differing views of the obligations attorneys undertake by representing clients in filing

Chapter 7 bankruptcy petitions, none appears to have allowed the exclusion of all

postpetition services. Attorneys are almost always required to accompany their clients to

the meeting of creditors that is scheduled and held only after the petition is filed.19 Some

bankruptcy courts also require attorneys who prepare Chapter 7 petitions to continue to

represent the debtors at a minimum in postpetition matters that arise in the main

bankruptcy case, such as stay relief motions.20 Indeed, some matters that may arise —

objections to the exemptions the debtors have claimed, objections to discharge based on

18Bethea, 352 F.3d at 1127-28. The court also mistakenly said that legal fees under such a postpetition agreement with the debtors would be entitled to administrative priority, id. at 1128, an assertion Lamie clearly refutes. See In re Griffin, 313 B.R. 757, 766 n. 7 (Bankr. N.D. Ill. 2004) (pointing out that Lamie's holding clearly contravenes Bethea's assertion of administrative priority). The Griffin court also discussed a number of problems with Bethea's suggestion attorneys can represent debtors to the date of a bankruptcy filing, and then require a new agreement for any postpetition legal assistance. Id. at 766-70.

19See, e.g., In re Johnson, 291 B.R. 462, 466-72 (Bankr. D. Minn. 2003) (under local court rule, attorney could not limit representation of Chapter 7 debtors to exclude attorney's attendance at meeting of creditors); see also King, Between the Charybdis of Biggar and the Scylla of Lamie, Norton Bankr. L. Adviser, June 2004 at 2 & n.14 (indicating U.S. Trustee advises Chapter 7 trustees to consider seeking disgorgement of fees of debtor's attorney who fails to appear at meeting of creditors).

20The local rules that apply to attorneys appearing before this Court would seem to require an

attorney who signs a Chapter 7 petition with the debtors to file a motion and obtain the Court's approval in order to withdraw from representing the debtors in the bankruptcy case. See D. Kan. Rule 83.5.5 (withdrawal by attorney who has appeared in a case is not effective until order authorizing withdrawal is filed, unless substitution of counsel is accomplished); D. Kan. LBR 2090.2 (Rule 83.5.5 and other District Court rules apply to attorneys).

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alleged errors or omissions in the Schedules or Statement of Financial Affairs, and

motions to dismiss under § 707(b) for substantial abuse — are so closely related to the

advice the attorney gave in the prepetition preparation for filing that the attorney would at

least be morally bound, and might be legally bound, to defend the debtors' position

against such attacks. Some courts go even further and require the attorney to represent

the debtors in any adversary proceedings that might be brought against them.21 To the

extent that the court before which an attorney files a petition takes the view that the

representation automatically extends to postpetition matters, the attorney could not

effectively limit the representation to prepetition matters as a way to improve the chances

of getting paid for the postpetition representation the debtor needs.

In addition, the Seventh Circuit's suggestion of separate prepetition and

postpetition contracts raises difficult questions under the Kansas Rules of Professional

Conduct. Rule 1.1 requires the lawyer to provide competent representation,22 Rule 1.2(c)

permits limiting the objectives of the representation if the client consents after

consultation,23 and Rule 1.4(b) requires the lawyer to explain a matter to the extent

reasonably necessary to permit the client to make informed decisions regarding the

21See, e.g., In re Egwim, 291 B.R. 559, 569-75 (Bankr. N.D. Ga. 2003) (unless attorney can make unlikely showing of informed consent to limitation on representation, attorney filing bankruptcy case must represent debtor in postpetition matters in main case and adversary proceedings that affect Chapter 7 debtor's primary objectives of eliminating debt and retaining property); In re Castorena, 270 B.R. 504, 525-31 (Bankr. D. Idaho 2001) (attorney's efforts to limit representation of debtors in Chapter 7 bankruptcy unlikely to succeed because informed consent to limitations can rarely, if ever, be shown).

222004 Kan. Ct. R. Ann. 342.

232004 Kan. Ct. R. Ann. 350.

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representation.24 Together, these rules indicate the lawyer would have to explain

everything that could happen in the client's Chapter 7 bankruptcy case that might require

a lawyer's postpetition help in order to obtain the client's valid consent to terminate the

representation with the filing of the petition.25 In addition, Rule 1.7(b) provides: A

lawyer shall not represent a client if the representation of that client may be materially

limited . . . by the lawyer's own interests, unless: (1) the lawyer reasonably believes the

representation will not be adversely affected; and (2) the client consents after

consultation.26 To avoid running afoul of this rule, the lawyer would have to be satisfied

the client either could hire an attorney postpetition to provide the necessary services or

would be capable of competently proceeding without legal assistance.

But even if the courts allowed attorneys to terminate the representation on filing

the petition, as a practical matter, how could attorneys properly advise clients prepetition

about matters that might arise after a petition is filed without raising expectations of

continuing the representation, or at least leaving their clients extremely confused about

the necessity of hiring the same or another attorney again after the petition is filed? How

could they overcome the likely suspicion of trustees, creditors, and courts that they really

made the agreement prepetition to have their clients rehire them postpetition? Even

242004 Kan. Ct. R. Ann. 367.

25See Castorena, 270 B.R. at 529-30 (suggesting valid consent could rarely, if ever, be obtained);

Egwim, 291 B.R. at 569-72 (declaring that attorney representing Chapter 7 debtor ordinarily may not limit scope of engagement).

262004 Kan. Ct. R. Annot. 391.

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their clients might, in hindsight, change their minds about what the original understanding

was.27

For these reasons, the Court is persuaded that resolution of the issues the Trustee

has raised here will have a profound impact on bankruptcy courts, debtors, and their

attorneys. As a result, in reaching its decision, the Court has given careful consideration

to various provisions of federal and state law that affect these issues.

2.     The Tax Refunds Are Not Property of the Estate.

   The Bankruptcy Code generally provides that when a debtor files for bankruptcy,

the debtor's legal and equitable interests in property become property of the estate.28 But

nonbankruptcy law, usually state law, defines the debtor's rights in the property.29 In the

absence of explicit federal preemption, a Chapter 7 trustee ordinarily receives the

property subject to any restrictions nonbankruptcy law imposed on the debtor's rights.30

An interest limited in the hands of the debtor is equally limited in the hands of the

27Cf. Bethea, 352 F.3d at 1126 (prepetition, debtors agreed to pay attorneys over time for Chapter 7 assistance, but after discharge, claimed attorneys violated discharge injunction of § 524 by trying to collect amounts that remained unpaid).

2811 U.S.C.A. § 541(a).

29Butner v. United States, 440 U.S. 48, 54-55, 99 S. Ct 914, 917-918, 59 L. Ed.2d 136 (1979).

30Integrated Solutions, Inc., v. Service Support Specialties, Inc., 124 F.3d 487, 492-93 (3d Cir.

1997); see also In re ANR Advance Transportation Company, Inc., 247 B.R. at 774 (finding escrow to be valid and holding none of escrow funds were property of estate); Dickerson v. Central Florida Radiation Oncology Group, 225 B.R. 241 (M.D. Fla. 1998) (holding funds debtor was required to deposit in segregated account were held in escrow and debtor's interest was limited to contingent remainder, which became property of estate on bankruptcy filing); Cedar Rapids Meats, Inc. v. Hagar (In re Cedar Rapids Meats, Inc.), 121 B.R. 562 (Bankr. N.D. Iowa 1990) (holding fund established to guarantee payment of worker's compensation claims was an escrow and not property of estate; debtor's interest was limited to contingency).

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estate.31 The issue before the Court therefore requires determining the Debtors' interest

in the tax refunds under Kansas law on the date of filing.

In support of his argument that the tax refunds all belong to the bankruptcy estate,

the Trustee cites the Tenth Circuit's decision in In re Barowsky,32 which held that a

Chapter 7 debtor's right to receive the portion of a federal income tax refund attributable

to the prepetition portion of the tax year in which the debtor filed for bankruptcy becomes

property of his or her bankruptcy estate. The Court agrees that, under Barowsky, all the

tax refunds attributable to money the Debtors had paid to the IRS for tax years ending

before their bankruptcy filing and for the tax year in which they filed would constitute

property of the estate if they had not assigned the refunds to the Firm.

But the question here is whether the prepetition assignment of the refunds affects

the extent to which the refunds became property of the Debtors' bankruptcy estate.

Barowsky did not consider that question. In a case that did consider a prepetition

assignment of a tax refund, In re Martin,33 the court held under Oregon law that although

the Chapter 13 debtors' tax refund arose prepetition and was received postpetition, a

prepetition assignment to a bank of the right to the refund prevented the refund from

becoming property of the estate.

31In re ANR Advance Transportation Co., Inc., 247 B.R. 771, 774 (Bankr. E. D. Wis. 2000) (quoting In re N.S. Garrott & Sons, 772 F.2d 462, 466 (8th Cir. 1985)).

32In re Barowsky, 946 F.2d 1516, 1517-19 (10th Cir. 1991).

33Sticka v. Mellon Bank (In re Martin), 167 B.R. 609, 612-18 (Bankr. D. Or. 1994).

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Under Kansas law, an assignment is an expression of intent by the assignor that

his right shall pass to the assignee.34 If, after the assignment, the property assigned

comes into the hands of the assignor, the property is regarded as trust funds belonging to

the assignee.35 No particular form is required; the assignment must simply establish the

intent to transfer the property to the assignee.36 The assignment by the Debtors clearly

expresses their intent to transfer all interest in the tax refunds to the Firm. It states:

We, Max R. and Georgia A. Wagers, hereby assign to Lentz & Clark, P.A., for services rendered or to be rendered any and all tax refunds, resulting from original or amended returns, received for 2003, and any and all prior years. Additionally, we, Max R. and Georgia A Wagers, hereby appoint Lentz & Clark, P.A., as attorney in fact to endorse and deposit tax refund checks received for 2003 and any and all prior years.

By this document, the Debtors passed all of their title or interest in the tax refunds to the

Firm for services rendered and to be rendered and divested themselves of all right of

control over the refunds.37 The assignment is absolute and unconditional.

The assignment in this case is nearly identical to the one at issue in Lagerstrom.38

One day before filing for bankruptcy, the debtor executed a document which stated:

In consideration of legal services rendered and to be rendered in connection with bankruptcy proceedings, the undersigned hereby assign and transfer to BERNARD G. STUTLER all their interest in

34Brewer v. Harris, 147 Kan. 197, 201, 75 P.2d 287, 290 (1938).

35Patrons State Bank & Trust Co. v. Shapiro, 215 Kan. 856, 861, 528 P. 2d 1198, 1203 (1974).

36Id.

37Army Nat. Bank v. Equity Developers, Inc., 245 Kan. 3, 32, 774 P.2d 919, 932 (1989) (quoting

Patrons State Bank v. Shapiro, 215 Kan. at 861, 528 P. 2d at 1203).

38In re Lagerstrom, 300 F. Supp. 538 (S.D. Ill. 1969).

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and to any claim for refund against the United States Government for refund of income taxes over-withheld during the calendar year 1968, to the extent of $245.00.

The trustee filed a petition asking the bankruptcy referee to declare the assignment invalid

under the Federal Assignment of Claims Act and not perfected under the Uniform

Commercial Code. It was stipulated that the federal act was not complied with and no

UCC financing statement was filed. The referee rejected those challenges. Concerning

the UCC, he found that the bankrupt was not attempting to create a security interest in the

tax refund. Rather, the debtor made an outright assignment and transfer of the refund to

his attorney as part payment on his fees.39 The referee's opinion was affirmed by the

district court.

Revised Article 9 of the UCC confirms the Lagerstrom analysis. For purposes of

Article 9, a tax refund is a payment intangible, defined as a general intangible under

which the account debtor's principal obligation is a monetary obligation.40 Article 9

generally applies to both security interests in and sales of payment intangibles.41 But with

respect to sales transactions,42 the security interest is perfected upon attachment,43 and the

39Id. at 541.

40K.S.A. 2004 Supp. 84-9-102(a)(61). Payment intangibles, first defined by Revised Article 9,

are by definition a subcategory of general intangibles. Tax refunds were held to be general intangibles under Article 9 prior to the revision. E.g., In re Martin, 167 B.R. at 619. Although there are no cases under Revised Article 9 discussing whether tax refunds are payment intangibles, tax refunds clearly satisfy the definition because the principal obligation of the taxing authorities is payment.

41K.S.A. 2004 Supp. 84-9-109(a)(1) and (3).

42Article 9 adopts the definition of sale from Article 2. K.S.A. 2004 Supp. 84-9-102(b). K.S.A.

84-2-106 defines a sale as the passage of title from the seller to the buyer for a price. For purposes of Article 2, the price may be paid in money or otherwise. K.S.A. 84-2-304. Here the Debtors transferred

17

seller of the payment intangible retains no legal or equitable interest in the payment

intangible sold.44 In this case, as in Lagerstrom, the assignment of the tax refunds by the

Debtors was a sale. The Debtors retained no legal or equitable interest in the refunds

based upon the transaction documents.

However, because of the purpose of the assignment, the Debtors retain a

reversionary interest in the portion, if any, of the tax refunds not needed for their

representation. The uncontroverted testimony establishes that the assignment was a

prepayment of attorneys fees and expenses due the Firm for postpetition services on

behalf of the Debtors. The Legal Representation Agreement between the Debtors and the

Firm establishes hourly rates for attorney and legal assistant time devoted to the

representation. It provides for the payment of expenses and fees from the retainer,

initially in the amount of $5,000. The Disclosure of Compensation of Attorneys for

Debtors filed by the Firm pursuant to Bankruptcy Rule 2017 identifies the assignment of

tax refunds as an additional retainer. Although there is no written assignment

accompanying the transfer of the cash other than the Legal Representation Agreement,

because the cash was transferred for the same purpose as the tax refunds were assigned

and counsel for the Debtors reported to the Court that both the cash and the tax refunds

their right, title, and interest in the tax refunds to the Firm for future legal services. Although Article 2 does not apply to this transaction for services (see K.S.A. 84-2-201), if this were an Article 2 transaction, it would be the transfer of title for a price.

43K.S.A. 2004 Supp. 84-9-309(a)(3).

44K.S.A. 2004 Supp. 84-9-318(a).

18

constitute the retainer in this case, the Court concludes that the cash was likewise an

assignment transferring all of the Debtors' right, title, and interest. Therefore, in this

opinion, no distinction will be made between the tax refunds and the cash deposit

remaining on the date of filing.

Unfortunately, the word retainer, even as used to describe transactions with

attorneys, does not have an uniformly recognized meaning. As used in this opinion,

retainer means property transferred to an attorney or law firm as advance payment against

which fees and expenses will be charged after they are incurred. This meaning is

distinguished from a flat fee, sometimes referred to as a retainer, under which the

lawyer agrees to do a specific task in exchange for payment to the attorney of a specified

fee.45 It is also distinguished from an engagement retainer, which is a sum paid to the

lawyer to assure the lawyer's availability to represent the client, not for legal services.46

Both flat fee and engagement retainers are fully earned when paid to the attorney and

need not be placed in a trust account. Finally, the word retainer has at times been

confused with a nonrefundable retainer or a minimum fee retainer, which is

prohibited under the Kansas Rules of Professional Conduct.47 Under such an

arrangement, the fee is deemed immediately earned by the attorney and not placed in a

trust account. The fee agreement provides that the fee will be retained upon termination

45Philip Ridenour, Attorney Fees: Where Are We in Kansas?, 73 J. Kan. B. Ass'n 6 (2004).

46In re Scimeca, 265 Kan. at 759, 962 P.2d at 1091.

47Id.

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of the representation, even if essentially no services are rendered, and additional fees will

be charged if the value of the services exceeds the amount of the prepaid fee.48

In this case, the defendants have agreed that any excess funds remaining after the

payment of fees and expenses from the retainer will be turned over to the Trustee, unless

he abandons them to the Debtors. This construction of the retainer is required by Kansas

law. Under Kansas law, a retainer held by an attorney for payment of fees may not be

disbursed from the attorney's trust account to the attorney until the services are rendered

and, upon termination of the representation, the attorney must refund to the client any

excess advance payment.49 The rules that govern attorneys' conduct, the Kansas Rules of

Professional Conduct, indicate that an attorney can require advance payment of his or her

fees.50 Those rules require the attorney to hold property of clients or third persons that

comes into the lawyer's possession in connection with a representation separate from the

lawyer's own property and require that cash be placed in a trust account.51 Even absent a

retainer agreement, [t]he lawyer is not required to remit to the client funds which the

48Philip Ridenour, Attorney Fees: Where Are We in Kansas?, 73 J. Kan. B. Ass'n 6 (2004).

49See In re Scimeca, 256 Kan. at 759, 962 P.2d at 1091; Kan .R. Prof. Conduct. 1.16(d), 2004

Kan. Ct. R. Annot. 427.

50See Kan. R. Prof. Conduct 1.5, Kansas Comment, 2004 Kan. Ct. R. Annot. 418 (stating lawyer not required to remit funds to client from which fee is to be paid); Kan. R. Prof. Conduct 1.16(d), 2004 Kan. Ct. R. Annot. 427 (on termination of representation, lawyer must refund any advance payment of fee that has not been earned).

51Kan. R. Prof. Conduct 1.5, Kansas Comment, 2004 Kan. Ct. R. Annot. 418.

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lawyer reasonably believes represent fees owed.52 An agreement, such as a retainer

agreement or an assignment, may alter an attorney's duty to promptly deliver to the

client . . . any funds or other property that the client . . . is entitled to receive.53 The

attorney's duty to return an unearned retainer to the client arises only when the

representation is terminated,54 although [i]f there is risk that the client may divert the

funds without paying the fee, the lawyer is not required to remit the portion from which

the fee is to be paid until any dispute regarding fees is resolved.55

As argued by the Firm, when construed as a retainer, the assignment is similar to

an escrow. There is an agreement between the Debtors and the Firm governing the

property; when received, the tax refunds are to be deposited in the Firm's trust account,

with transfer out of the account to the Firm conditioned on performing legal services or

advancing expenses; and legal services must be performed or expenses advanced before

the funds may be released. The Kansas Rules of Professional Conduct, examined above,

provide safeguards. When an escrow exists, most courts hold that the assets in escrow are

not property of the estate and the estate's interest is limited to the interest granted to the

52Model R. Prof. Conduct 1.15, Comment, Annot. R. of Prof. Conduct, 248 (Am. Bar Ass'n 5th Ed. 2003).

53Kan.R. Prof. Conduct 1.15(b), 2004 Kan. Ct. R. Annot. 414.

54Kan. R. Prof. Conduct 1.16(d), 2004 Kan. Ct. R. Annot. 427.

55Kan. R. Prof. Conduct 1.15, Kansas Comment, 2004 Kan. Ct. R. Annot. 418

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debtor by the escrow agreement.56 Under Kansas law, the Debtors' interest in the retainer

is limited to a contingent right to the return of any money remaining after the

representation terminates and the Firm has been paid for all legal services it provided and

any expenses it advanced. The interest of the estate is likewise a reversionary interest.

Section 329 supports the foregoing analysis. Lamie requires that § 329, not § 330,

be applied when Chapter 7 counsel seeks payment from property which is not property of

the estate.57 Section 32958 addresses compensation already paid and compensation agreed

to be paid. It imposes a reasonable value standard for the court to apply and permits the

court to require cancellation of the agreement and the return of any such payment to the

565 Collier, ¶541.09A[2]; see, e.g., In re ANR Advance Transportation Company, Inc., 247 B.R. at 774 (finding valid escrow and holding none of escrow funds were property of estate); Dickerson v. Central Florida Radiation Oncology Group, 225 B.R. 241 (M.D. Fla. 1998) (holding funds debtor was required to deposit in segregated account were held in escrow and debtor's interest was limited to contingent remainder, which became property of estate bankruptcy filing); Cedar Rapids Meats, Inc. v. Hagar (In re Cedar Rapids Meats, Inc.), 121 B.R. 562 (Bankr. N.D. Iowa 1990) (holding fund established to guarantee payment of worker's compensation claims was an escrow and not property of estate; debtor's interest was limited to contingency).

57See 540 U.S. at 537-38, 124 S.Ct. at 1032.

5811 U.S.C.A. § 329 provides:

(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agree to be paid, if such a payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such Attorney, and the source of such compensation.

(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to —

(1) the estate if the property transferred —

(A) would have been property of the estate; or

(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or

(2) the entity that made such payment.

22

extent the fees are excessive. If the property used for the payment of excessive fees

would otherwise have constituted estate property, § 329(b)(1)(A) requires that such

property be returned to the estate. This statute clearly recognizes that debtors may set

aside property that would otherwise be estate property to pay for postpetition services.

The Trustee interprets the Debtors' acknowledged reversionary interest in the

retainer to mean that the deposited funds remain the Debtors' property until the Firm

earns fees to be charged against it. The Trustee's Kansas authorities are In re Scimeca59

and In re Hodes,60 which relied on Scimeca. The Court finds these authorities do not

require it to hold that the cash retainer and the assigned tax refunds are property of the

estate; only the estate's limited reversionary interest, not all interests in the cash and the

refunds, became property of the estate.

Scimeca was a disciplinary case where the court considered whether an attorney

violated the Kansas Rules of Professional Conduct by taking nonrefundable retainers and

depositing them directly to his own account rather than to a trust account. The court held

that because the fees were to be earned by future services and were not fees to commit the

attorney to represent the client, the advance payment was subject to Rule 1.15, the trust

account rule, and was in fact refundable if not fully earned. In so holding, the court

59265 Kan. at 758-60, 962 P.2d at 1091.

60Rajala v. Hodes (In re Hodes), 239 B.R. 239, 243 (Bankr. D. Kan. 1999), aff'd in part, rev'd in

part, 289 B.R. 5 (D. Kan. 2003).

23

indicated that a retainer to be earned by future services remains the client's money.61

But this dicta overstates the client's interest. In other parts of the opinion, the court

recognized the fees in issue were refundable and that any funds which are the client's,

either in whole or in part, must be placed in a trust account. The requirement to hold the

money in the attorney's trust account until earned meant both the attorney and the client

had an interest in it, but the court did not address the extent of either party's interest.

Scimeca determined the applicability of ethical rules; it did not determine property

interests. Further, to adopt the Trustee's construction of the ethical trust account

requirement would turn the ethical rule requiring trust accounts, which protects clients,62

into an instrument that harms clients by depriving them of a means to obtain postpetition

representation in bankruptcy cases.

Hodes, on the other hand, which was a bankruptcy case, did address the estate's

interest in a cash retainer that was not fully earned on the date of the order for relief.63

61In re Scimeca, 265 Kan. at 759-60, 962 P.2d at 1091.

62In re Anonymous, 698 N.E.2d 808, 809 (Ind. 1998).

63In re Hodes, 239 B.R. at 243. The Hodes bankruptcy court held that the cash retainer was

subject to an attorney's retaining lien under K.S.A. 7-108, which secured the payment of both prepetiton and postpetition fees, subject to court review under § 329. It therefore reached a result which the Trustee is opposing in this case. On appeal, the district court declined to review the holding that the retainer was property of the estate because the debtors had not filed a cross appeal. However, it reversed the holding that § 329 was applicable, finding that because the retainer was property of the estate, even though subject to a lien, § 330 controlled court review of attorney fees to be paid to the debtors' counsel from the funds. The case was remanded to this Court for further proceedings, but the parties settled the case before the Court decided any of the remaining issues.

24

The bankruptcy court held the retainer to be property of the estate, but did so based on a

reading of Scimeca which this Court does not adopt.

At least three courts applying other states' laws have reached conclusions

supporting the Trustee's position that a retainer transferred prepetition by a Chapter 7

debtor to an attorney from which postpetition fees and expenses are to be paid constitutes

property of the estate.64 Two of these courts concluded that when the client retains any

interest in a prepetition retainer intended to pay for the attorney's future services, the

attorney holds the retainer in trust as security for the payment of fees, and the retainer

becomes property of the estate to the extent fees have not been earned prepetition.65 The

third court held the retainer became property of the estate except to the extent it paid for

prepetition services, because the attorney had failed to sustain his burden to prove he was

paid a classic, nonrefundable, flat fee retainer.66 All three courts said attorney fees

could be paid from property of the estate only to the extent they met the requirements of

§ 330,67 but after Lamie, a Chapter 7 debtor's attorney does not qualify for compensation

under that provision.

64E.g., In re Equipment Servs., Inc., 290 F.3d at 746-47 (Virginia law); In re Mondie Forge Co., 154 B.R. at 236-39 (Ohio law); In re McDonald Bros. Construction, Inc., 114 B.R. 989, 999-1000 (Bankr. N.D. Ill. 1990) (Illinois law).

65Equipment Servs., 290 F.3d at 746-47; McDonald Bros. Constr., 114 B.R. at 999-1000.

66Mondie Forge, 154 B.R. at 237-38.

67Equipment Servs., 290 F.3d at 746-47; Mondie Forge, 154 B.R. at 237; McDonald Bros.

Constr., 114 B.R. at 993-94.

25

This Court finds these cases distinguishable. In this case, there is an absolute

assignment of the tax refunds to the Firm. The assignment is not an agreement for the

Firm to hold the Debtors' money as their agent; it is a transfer of the Debtors' right, title,

and interest in the property. The Debtors' potential reversionary interest is not a partial

interest in the entire retainer; it is a full interest in an undetermined portion of the

property. Money held by the Firm is not collateral securing the Debtors' obligation in

case the Debtors default on their obligation to pay. The Firm need not foreclose on the

Debtors' interest in the trust account before transferring the money to its own account.

The money cannot be used for any purpose other than paying the Firm's fees and

expenses, unless the representation is terminated.68 Further, the Court notes that at least

some courts from other jurisdictions which have found retainers to be property of the

estate have also said that the attorneys could be paid for postpetition services from the

retainer under § 330.69 Now that Lamie has held that § 330 does not allow a Chapter 7

debtor's counsel to be paid for postpetition services from property of the estate (unless

hired by the Chapter 7 trustee and approved by the court), the courts so holding may wish

to more carefully consider the property interests which arise when debtors transfer

property prepetition for payment of postpetition services.

68The Kansas legislature's intent to assure that retainers be used to pay attorney fees is reflected in the statutory attorney lien provision, K.S.A. 7-108.

69E.g., Mondie Forge, 154 B.R. at 232; McDonald Bros. Constr., 114 B.R. at 1000.

26

As urged by the Trustee, the combined effect of Lamie and a conclusion that

assigned tax refunds (or other property given as a retainer) are property of the estate

would be to preclude Chapter 7 debtors from using property they own prepetition to pay

for postpetition attorney fees. However, in Lamie, the Supreme Court expressed the view

that the sound functioning of the bankruptcy system would not be impaired by its holding

that Chapter 7 debtors' counsel cannot be paid from estate property under § 330.70 The

Court suggested the Bankruptcy Code anticipates that Chapter 7 debtors will pay their

attorneys in advance, citing § 329,71 which addresses agreements between debtors and

their lawyers for services rendered both before and after the entry of an order for relief.

This Court's analysis that the tax refunds are not property of the estate is consistent with

the Supreme Court's stated intention not to impair the functioning of the bankruptcy

system, and with the plain language of § 329.

If § 541 (or other Code provisions on which a trustee might rely to recover a

retainer for the benefit of the estate) prevents debtors from making prepetition

arrangements to pay reasonable postpetition attorney fees in Chapter 7 cases, initial

representation would need to be limited to prepetition services and new representation

secured postpetition with payment to be made only from postpetition assets. As discussed

above, this would be problematic. There is the question whether attorneys can ethically

70540 U.S. at 537-38, 124 S. Ct. at 1032.

71Id.

27

limit representation to prepetition matters.72 In addition, few debtors have sufficient

resourcefulness and income in the first few weeks after filing for bankruptcy to retain and

assure payment of counsel at the critical initial stages of a Chapter 7 proceeding.

Postpetition representation should not be limited to those debtors fortunate enough to

have relatives who can provide money for a retainer or have sufficient postpetition

income to pay not only their living expenses and reaffirmed debts, but also ongoing

attorney fees. Debtors should not be prohibited from providing a retainer, creating an

escrow, or otherwise establishing a fund which cannot be recovered by the Trustee to

pay postpetition legal fees and expenses. Section 329 should be sufficient to remedy any

abuses of such arrangements.

In conclusion, under Kansas law, after the assignment of the tax refunds and cash,

the Debtors' interest in the retainer was limited to a right to the return of any portion that

remains after paying the reasonable value of the services and expenses the Firm provides.

As assignee, the Firm holds full ownership of the retainer, subject to the contingent right

72See Egwim, 291 B.R. at 569-574; Castorena, 279 B.R. at 504. Rule 1.1 of the Kansas Rules of Professional Conduct requires the lawyer to provide competent representation (2004 Kan. Ct. R. Ann. 
342), Rule 1.2(c) permits limiting the objectives of the representation if the client consents after consultation (2004 Kan. Ct. R. Ann. 350), and Rule 1.4(b) requires the lawyer to explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation, (2004 Kan. Ct. R. Ann. 367). Together, these rules indicate the lawyer would have to explain everything that could happen in the client's Chapter 7 bankruptcy case that might require the lawyer's postpetition help in order to obtain the client's valid consent to terminate the representation with the filing of the petition. In addition, Rule 1.7(b) provides: A lawyer shall not represent a client if the representation of that client may be materially limited . . . by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation (2004 Kan. Ct. R. Annot. 391), so to avoid running afoul of this rule, the lawyer would have to be satisfied the client either could hire an attorney postpetition to provide the necessary services or would be capable of competently proceeding without legal assistance.

28

of reversion required by the Kansas Rules of Professional Conduct. The entire interest in

the fund did not pass to the estate; the estate's interest was limited to the Debtors'

contingent reversionary interest, which may or may not mature into full ownership of a

portion of the funds. The bankruptcy estate received no greater right than the Debtors

had, under Kansas law, to possess and use the refunds.73

The Trustee is denied summary judgment on count I of his Complaint, and the

defendants are granted summary judgment on their contention that the retainer is not

property of the estate.

3.    In this Chapter 7 Case, Transactions Between Debtors and their Counsel Are Governed by § 329, not § 330.

   The Firm seeks summary judgment on its contention that § 329 applies to its

entitlement to fees and expenses for prepetition and postpetition services. Indeed, Lamie

recognizes § 329, not § 330, is applicable when Chapter 7 counsel seeks fees from

property which is not property of the estate.74 [T]he Lamie decision should not prevent

debtors from providing their attorneys reasonable compensation, subject to disclosure and

court review under section 329, for the capable prosecution of their cases.75

73See, e.g., Integrated Solutions v. Service Support Specialties, 124 F.3d at 492-93 (property interest that passes to bankruptcy estate is subject to same limitations imposed on debtor by applicable nonbankruptcy law).

74540 U.S. at 538, 124 S. Ct. at 1032.

753 Collier, ¶ 330.03[3][a] at 330-25.

29

Because, as discussed above, this Court holds that the assigned tax refunds do not

constitute property of the estate, § 329 is the appropriate provision of the Code for court

review of attorney fees to be paid to the Firm for work on behalf of the Debtors. The

Trustee's argument that § 330 applies and bars payment of the Firm's fees from the

retainer is based on Lamie and is premised on the contrary conclusion that the tax refunds

assigned to the Firm constitute property of the estate. The Firm is granted summary

judgment on its contention that § 329 applies to its entitlement to have its prepetition and

postpetition fees and expenses paid from the retainer.

In the Court's view, § 329 adequately protects creditors from any possible abuses

that might result from the often close relationship between debtors and their counsel. It

allows for cancellation of fee agreements (presumably including associated retainers) and

recovery of fees paid when the compensation exceeds the reasonable value of the services

provided. The property recovered is returned to the estate if but for its transfer to counsel,

it would have been estate property.

Further, the Court notes that in the context of enforcing a prepetition retainer

agreement, the reasonable fee limitation of § 329 addresses the same concerns as do

§ 365, the executory contract section, and § 548, the fraudulent transfer section. If the

latter provisions, which contain no exception for Chapter 7 retainer agreements, apply to

Chapter 7 debtors' prepetition contracts with their bankruptcy attorneys, they would give

trustees other legal arguments, in addition to the property of the estate contention, to set

aside retainer agreements. If the issue were presented, this Court would likely hold that

30

the reasonableness standard of § 329 controls the propriety of paying Chapter 7 debtors'

attorneys postpetition fees from a prepetition retainer, to the exclusion of §§ 365 and 548.

Section 365(a) provides, with certain exceptions not applicable here, that a Chapter

7 trustee may assume or reject any executory contract of the debtor. The Bankruptcy

Code contains no definition of executory contract, but the courts generally accept the

view that in this provision, it means a contract that remains materially unperformed on

both sides.76 As explained earlier, a Chapter 7 debtor's attorney taking a prepetition

retainer certainly must provide the debtor at least some postpetition performance under

the contract for legal representation. It may be less obvious, especially when the debtor

has paid prepetition for the postpetition representation, but the debtor also has the

obligation to make important decisions, to cooperate, and otherwise to help the attorney

provide the representation. So, if the issue were presented, many courts would probably

feel compelled to hold that the debtor's prepetition contract with the attorney would be

covered by the usual definition of executory contract and therefore subject to § 365.

Under § 365(d)(1), any executory contract a Chapter 7 trustee does not assume or reject

within 60 days after the order for relief (or within any extension of time granted by the

court) is deemed rejected. Of course, a Chapter 7 trustee would have no reason to

assume a debtor's contract with his or her bankruptcy attorney, because personal legal

representation of the debtor could almost never provide any benefit to the bankruptcy

76See 3 Collier, ¶ 365.02[1].

31

estate. Instead, by rejecting the contract immediately, the trustee could bring money into

the estate by recovering any prepetition retainer the attorney had not yet earned by

providing postpetition services.

Section 548(a) authorizes the trustee to avoid a debtor's prepetition transfer for

less than a reasonably equivalent value, if one of three circumstances existed at the time

of the transfer. Since one of the circumstances is that the debtor was insolvent when the

transfer was made or became insolvent as a result of the transfer, retainers paid

prepetition to attorneys for Chapter 7 bankruptcy representation will nearly always be

avoidable if the transfer is considered to be for less than reasonably equivalent value. For

purposes of § 548, value is defined in such a way that executory promises have

frequently been held not to qualify.77 The consideration a debtor receives for a

prepetition retainer given to pay for postpetition representation is arguably an executory

promise. If § 548(a) applies to attorneys' retainer agreements, then many (or perhaps all)

of them will be vulnerable to attack as constructively fraudulent transfers to the extent the

retainers were paid prepetition and were intended to be applied to postpetition fees.

The Court is convinced that Congress must have intended for § 329 to be the only

Code provision that allows courts to set aside or modify Chapter 7 debtors' retainer

agreements for prepetition and postpetition legal representation, and that the Code should

77See § 548(d)(2)(A) (defining value to mean property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor); 5 Collier, ¶548.05[1][b] at 548-39 to -40 (asserting definition excludes executory promise, but noting cases have sometimes held one to be sufficient).

32

be construed to reflect this intent.78 Unlike §§ 365 and 548, § 329 of the Bankruptcy

Code explicitly deals with debtors' transactions with attorneys. This statute is broad and

expressly applies to Chapter 7 debtors' contracts with their attorneys, and to the

postpetition payment of attorney fees from non-estate property. It provides authority to

the courts to cancel such a contract, which is similar to rejection of an executory contract.

It allows courts to find the compensation such a contract promises to the attorney to be

unreasonable and to return to the estate the property transferred to the attorney, which is

similar to the recovery of a fraudulent transfer.

The defendants' request for summary judgment on their claim that § 329 controls

the Firm's ability to charge its postpetition fees and expenses against the retainer is

granted.

4.    The Court's Construction of §§ 541 and 329 Promotes the Public Policy of Preserving the Integrity of the Bankruptcy System.

   Public policy is served by the Court's conclusion that the retainer is not property

of the estate under § 541 and that § 329 controls Chapter 7 debtors' retainer contracts

78If, on the other hand, the broad, general provisions of §§ 365 and 548 apply to Chapter 7

debtors' retainer agreements, these statutes could be used by the trustee to undermine the standard of § 329 that such contracts be enforced unless the fees are unreasonable. When statutes present such conflicts, a common rule of statutory construction is to declare that the specific statute controls over the general one. Shawnee Tribe v. United States, 423 F.3d 1204, 1213 (10th Cir. 2005). This appears to be one of those rare situations where the literal application of §§ 365 and 548 would be demonstrably at odds with Congress's intent or would produce an absurd result. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242 (1989) (The plain meaning of legislation should be conclusive, except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.' [Citation omitted.] In such cases, the intention of the drafters, rather than the strict language, controls. [Citation omitted.]). Congress must have intended Chapter 7 debtors' retainer agreements with their attorneys for bankruptcy representation to be governed by § 329, the one provision that expressly and specifically applies only to debtors' contracts with their attorneys.

33

with their bankruptcy attorneys to the exclusion of §§ 365 and 548. Debtor representation

in postpetition matters is essential to a fair and equitable application of Chapter 7 and

facilitates the bankruptcy process. Creditors as well as debtors benefit when bankruptcy

proceedings are orderly, and the debtors are represented by counsel with knowledge of

the Code and case law authority. As one commentator has remarked:

It is fair to say that preserving the integrity of the bankruptcy system includes encouraging, not discouraging, excellence in representation of consumer debtors. The efficient and honest functioning of the bankruptcy system requires a robust, confident and motivated debtors' bar.

The system cannot have it both ways. Finding and

inventing devices to prevent lawyers from being paid will not encourage excellence in the practice of law. All participants in the system should undertake to help craft legal and practical ways to compensate lawyers for their work on behalf of consumer

debtors.79

The Court agrees with these observations. The bankruptcy system needs a robust,

confident, and motivated debtors' bar. This Court enjoys such a bar, and it is worthy of

protection.

5.     The Trustee Is Not Entitled to Turnover of the Tax Refunds Pursuant to § 542(a).

   In count IV of the Complaint, the Trustee prays for turnover and accounting of the

tax refunds under § 542. As relevant here, it provides:

1.       . . . [A]n entity, other than a custodian, in possession,

custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title . . . , shall

79King, Between the Charybdis of Biggar and the Scylla of Lamie, Norton Bankr. L. Adv., June 2004 at 2.

34

deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

The operative subsection of § 363, subsection (b)(1), provides: The trustee, after notice

and a hearing, may use, sell, or lease, other than in the ordinary course of business,

property of the estate. So a prerequisite for recovery by the trustee under § 542(a) is that

the property be property of the estate. This Court has previously held that the tax refunds

are not property of the estate; the Trustee is not entitled to turnover pursuant to § 542(a).

The Trustee's motion for summary judgment on count IV is denied.

CONCLUSION.

For these reasons, the Court denies the Trustee's motion for summary judgment on

counts I and IV of his Complaint, and grants the defendants' motion for summary

judgment on their contentions that the retainer is not property of the estate and that § 329

governs the enforcement of the retainer agreement. The Court retains jurisdiction to

determine the remaining counts alleged in the complaint.

# # #

35