Commentary: Law Life: Bankruptcy attorney must cough up fee

By Pat Murphy

The Daily Record Newswire

Attorneys are ordinarily very careful creatures when it comes to protecting their all-important fee in a client's bankruptcy case.

One Kentucky lawyer, however, has learned the hard way the dire consequences of failing to follow the rather simple rules governing retainers in bankruptcy.

Frank Yates represented Stetler Cross Ministries when it filed for Chapter 11 bankruptcy in the Western District of Kentucky. But he got it all wrong from the start.

Yates filed the bankruptcy petition on August 3, 2009, without having a written retainer agreement in hand.

Nope, although Yates claimed that he and the debtor had an oral agreement for legal services, it wasn't until August 15 that a written retainer was actually executed.

This post-petition retainer agreement became a real problem when the bankruptcy trustee came after the $2,000 that Yates received for his services from Stetler Cross Ministries.

The trustee filed a motion to disgorge Yates' retainer for failure to comply with bankruptcy procedures.

The bankruptcy judge -- who we'll later find out had his own issues with the lawyer -- entered an order for disgorgement of attorney fees pursuant to 11 U.S.C. §330(a)(2).

Last week, U.S. District Judge Thomas B. Russell affirmed this rather extraordinary remedy.

Yates tried to avoid the loss of his fee by arguing that there had been a prepetition oral contract with the client that was simply reduced to writing post-petition. Under this theory, the lawyer's $2,000 payment was supposedly a prepetition "classic retainer" and therefore never property of the estate.

But Russell didn't buy it.

"[Yates] has produced no evidence of the date of such a prior oral agreement, for example by either his or his client's affidavit," said the judge. "[Yates] has also produced no evidence to indicate that the payment from the prior oral agreement was received prepetition."

The judge observed that "[e]ven if the agreement were prepetition, the payment would also have to be made prepetition, or else the payment would have involved estate property. Accordingly, there is insufficient evidence to indicate that any agreement and payment were prepetition. The retainer was therefore property of the estate at the time of transfer, and was within the control of the Bankruptcy Court."

Russell wasn't done with this issue, explaining that, even if he were to give Yates the benefit of the doubt that the agreement and retainer payment were prepetition, the lawyer still had the burden of showing that the retainer was actually a classic retainer and not a security retainer.

This Yates could not do.

Scanning the bankruptcy court's docket sheet, Russell observed that there was no evidence that Yates ever sought payment on an hourly basis following the bankruptcy filing.

"Under the Bankruptcy Code, the court can award reasonable compensation for services," Russell explained. "However, no such attempt to attain compensation, in 9 months of work, was made. Such a failure to collect reasonable compensation seems to indicate that [his] $150 hourly fee was initially meant to come from the retainer. This setup results in a security retainer that remains the property of the estate even if collected prepetition." (Stetler Cross Ministries v. McDermott)

Yates' final gambit was to throw himself on the mercy of the court. After all, disgorgement is a "harsh and extraordinary" remedy.

Unfortunately for Yates, he had gotten himself on the wrong side of the bankruptcy judge, and U.S. District Judge Russell was not about to second-guess his colleague.

Russell had reviewed the hearing transcripts from the bankruptcy court and come to the conclusion that Yates had engaged in some shenanigans that didn't warrant mercy.

In a footnote, Russell recounted these comments from the bench made by an obviously frustrated bankruptcy judge: "[Mr. Yates,] I think you were hired by Ms. Stetler because she knew that you would file some documents for her and drag this case out as long as possible, without care to the rules and obligations of counsel for a Chapter 11 debtor, without the obligations owed by a Chapter 11 debtor to this Court, its creditors, and all of the other parties in interest. I am offended by that."

Which all goes to prove that it's never a good thing to anger the guys and gals in the black robes, particularly if you want to get paid.

Published: Thu, Apr 21, 2011