Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-06067/USCOURTS-ca8-04-06067-0/pdf.json

Parties Involved:
Fiegen Law Firm
Appellant
Habbo G. Fokkena
Appellee
On-Line Services Ltd.
Not Party

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

_____________

No. 04-6067 NI

_____________

In re: On-Line Services Ltd. *

*

Debtor. *

 * 

Fiegen Law Firm, P.C. *

*

Respondent - Appellant, * Appeal from the United States

 * Bankruptcy Court for the 

v. * Northern District of Iowa

*

Habbo G. Fokkena, *

United States Trustee, *

*

Movant - Appellee, *

_____________

Submitted: February 11, 2005

Filed: March 16, 2005

_____________

Before SCHERMER, FEDERMAN, and VENTERS, Bankruptcy Judges.

_____________

FEDERMAN, Bankruptcy Judge.

The Fiegen Law Firm, Ltd. (Fiegen), as attorney for debtor On-Line Services,

Ltd. (On-Line), appeals an order that reduced its prepetition fees and expenses, held

that those fees could not be paid from estate assets, and denied its claim for

postpetition fees and expenses. We affirm in part, reverse in part, and remand.

Appellate Case: 04-6067 Page: 1 Date Filed: 03/16/2005 Entry ID: 1879362 
2

FACTUAL BACKGROUND

In September of 2003, On-Line consulted with Fiegen regarding a possible

bankruptcy filing. On December 8, 2003, the members of On-Line voted to retain

Fiegen, to pay it the sum of $9,000 to represent On-Line, and to have Fiegen file a

Chapter 7 bankruptcy petition on its behalf. On-Line made the final installment on the

retainer on December 22, 2003, and those funds were deposited in Fiegen’s trust

account. Fiegen filed the bankruptcy case the next day. Prior to filing, the law firm

drew down $547.50 from the trust account and applied that amount to prepetition

services. At filing Fiegen disclosed that it had accepted a retainer in the amount of

$8,791.00, plus the filing fee of $209.00.

Wesley Huisinga was appointed Chapter 7 trustee and filed an application to

operate the business, which the bankruptcy court granted. Fiegen, however, continued

to perform legal services for On-Line and to draw down the retainer. On June 24,

2004, the United States Trustee (the UST) filed a motion requesting the court to

examine the compensation paid to Fiegen. Fiegen filed billing statements

demonstrating that the law firm had provided $6,977.77 of legal services to On-Line

through June 30, 2004, consisting of $3,693.27 in prepetition fees and expenses and

$2,284.50 in post-petition fees and expenses. On August 26, 2004, the bankruptcy

court held a hearing on the UST’s motion. On October 28, 2004, the court ruled that

the $8,452.50 remaining in Fiegen’s trust account on the date of filing was property

of the estate, and directed Fiegen to turn that amount over to the trustee. The Court

further held that the reasonable value of the prepetition services performed by Fiegen

was $2,380.00, but that only the $547.50, which had been paid prepetition, could be

paid from the retainer. The court therefore held that the balance of the allowed

Appellate Case: 04-6067 Page: 2 Date Filed: 03/16/2005 Entry ID: 1879362 
1

The $2,380.00 in allowed fees, plus allowed expenses of $114.27, less the $547.50

previously drawn.

2

Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v.

Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th

Cir. 1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609

(8th Cir.1997)). Fed. R. Bankr. P. 8013.

3

First Nat’l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th

Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997).

4

Gourley v. Usery, 123 F.3d at 1093.

3

prepetition services, $1,946.77,1 could not be paid from estate assets. The Court also

denied Fiegen’s application for fees and expenses incurred postpetition.

On November 8, 2004, Fiegen filed its notice of appeal and a motion to stay the

court’s order pending appeal, which the court granted.

STANDARD OF REVIEW

A bankruptcy appellate panel shall not set aside findings of fact unless clearly

erroneous, giving due regard to the opportunity of the bankruptcy court to judge the

credibility of the witnesses.2

 We review the legal conclusions of the bankruptcy court

de novo.3

 Reversal is appropriate if the bankruptcy court misunderstood or misapplied

the law.4

DISCUSSION

There are four distinct issues before us. The first is whether the unapplied

portion of the retainer ($8,452.50) became an asset of the bankruptcy estate. The

second is whether Fiegen has a lien on the retainer to secure prepetition work for

which he had not been paid at the time the petition was filed. The third is whether

Appellate Case: 04-6067 Page: 3 Date Filed: 03/16/2005 Entry ID: 1879362 
5

11 U.S.C. § 541(a).

6

See, e.g., Snyder v. DeWoskin (In re Mahendra), 131 F.3d 750, 755 (8th Cir. 1997),

cert. denied 523 U.S. 1107 , 118 S. Ct. 1678 , 140 L. Ed. 2d 815 (1998).

7

Appellant’s Appendix, page 111.

8

Appellant’s Appendix, page 183.

4

Fiegen has any claim against estate funds for postpetition services. And the fourth is

the reasonable value of the services provided.

A. WHETHER A RETAINER IS AN ASSET OF THE BANKRUPTCY ESTATE

The filing of a bankruptcy petition creates an estate comprised of all property

in which the debtor holds either a legal or equitable interest:

(a) The commencement of a case under section 301, 302, or 303 of this

title creates an estate. Such estate is comprised of the following

property, wherever located and by whomever held:

1. Except as provided in subsections (b) and (c)(2) of this

section, all equitable interests of the debtor in property as

of the commencement of the case.5

The Eighth Circuit has articulated a three-part inquiry to determine whether a debtor’s

interest becomes part of the bankruptcy estate: (1) does the item at issue constitute

property under section 541(a)(1); (2) does state law define the interest as property;

and (3) did the debtor have the property interest at the time of filing.6

 Based on

Fiegen’s Statement of Compensation7

, he had been paid $8,791 for legal services

rendered or to be rendered, to be charged at “normal hourly rates.” The letter

agreement8

 between Fiegen and On-Line provides that retainer fees are to be held in

Fiegen’s trust account, to be drawn upon at billing, and that if the trust funds are

insufficient, the client is responsible for payment of the bill. That agreement further

Appellate Case: 04-6067 Page: 4 Date Filed: 03/16/2005 Entry ID: 1879362 
9

Iowa Supreme Court Board of Professional Ethics and Conduct v. McKittrick, 683

N.W.2d 554, 561 (Iowa 2004). Compare, In re Brick Hearth Pizza, Inc., 302 B.R. 877

(Bankr. D. Minn. 2003) (holding that retaining liens had been abolished by the

Minnesota legislature).

5

provides that any funds remaining in the trust account at the end of the case will be

either turned over to the Chapter 7 trustee, or refunded to On-Line. 

Disregarding for the moment the effect of the statutory lien claimed by Fiegen,

we find that the bankruptcy court properly applied the three-part test in concluding

that the unearned portion of the retainer is an asset of the estate. Money is property

under both state and federal law. As of the petition date, On-Line had an interest in

the money remaining in Fiegen’s trust account because it had not yet been applied to

pay Fiegen for services that had been rendered. 

B. WHETHER A SECURITY RETAINER SECURES PAYMENT OF

PREPETITION SERVICES PERFORMED BUT UNPAID

The bankruptcy court determined that the unapplied portion of the retainer,

which came into the estate as of the petition date, was thereafter not subject to the

security retainer claimed by Fiegen for either prepetition or postpetition services.

Therefore, the court ordered the entire amount to be turned over to the estate.

Iowa allows an attorney to obtain a security retainer, or retaining lien, such as

that claimed by Fiegen.9

An attorney has a lien for a general balance of compensation upon:

1. Any papers belonging to a client which have come into

the attorney’s hands in the course of professional

employment.

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10Iowa Code § 602.10116(1) and (2) (1996).

11McKittrick, 683 N.W.2d at 561; Iowa Code §602.10116(1) and (2).

12Tri City Equipment Co. v. Modern Real Estate Investments, Ltd., 460 N.W.2d 464,

465 (Iowa 1990); 7A C.J.S. Attorney & Client § 445.

13Tri City, 460 N.W.2d at 465.

14In re Mahendra, 131 F.3d at 756.

15Id. at 756.

16Appellant’s Appendix, page 230 (quoting In re Cargo, Inc., Bankr. No. x90-00200S,

slip op. at 3 (Bankr. N.D. Iowa Jan. 24, 1992)).

6

2. Money in the attorney’s hands belonging to a client.10

A security retainer, also referred to as a retaining lien, gives the attorney the right to

possess property or funds of the client until the fee is paid.11 A security retainer is

available only to secure attorney’s fees and charges which are due for services already

rendered.12 And in Iowa, the extent of a security retainer is fixed at the time a question

of priority arises.13 In this case, the question of priority arose on the petition date. A

security retainer, to the extent it is valid, is extinguished on the petition date with

respect to any future advances.14 As the Eighth Circuit has stated ,“[t]he debtor’s

equitable interest in the unearned portion of the retainer becomes property of the

estate upon the filing of the petition.”15 The bankruptcy court so interpreted Iowa law

and found that “[t]he retainer, to the extent attorneys had not drawn upon it prior to

filing, became property of the estate when the case was filed.”16

The issue, however, is whether such retainer remained subject to Fiegen’s

retaining lien for services which had been rendered prepetition, but for which Fiegen

had not drawn down payment as of the bankruptcy filing. We believe that it is. A

security retainer involves the attorney holding the client’s money as a pledge – a

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17Iowa Code § 554.9313; In re Viscount Furniture Corp., 133 B.R. 360 (Bankr. N.D.

Miss. 1991), citing In re McDonald Bros. Construction, Inc., 114 B.R. 989 (Bankr.

N.D. Ill. 1990).

18Norton Bankruptcy Law and Practice 2d § 25:9, citing In re Printing Dimensions,

Inc., 153 B.R. 715, 719 (Bankr. D. Md. 1993)

1911 U.S.C. § 323(a).

7

possessory security interest – and the Uniform Commercial Code expressly allows for

a possessory security interest in money.17 Once a bankruptcy case is filed, the amount

of fees to be paid for prepetition services is subject to review by the court.

Nevertheless, once determined, such fees are payable out of the funds in which

Fiegen held a security interest as of the petition date. “By taking a retainer – even

though it is considered a security retainer – a professional becomes a secured creditor,

and hence has a claim on the retained funds prior to any other administrative

claimant.”18 We hold, therefore, that the bankruptcy court erred in holding that the

allowed prepetition fees and expenses were not payable out of the retainer.

C. WHETHER A CHAPTER 7 DEBTOR’S ATTORNEY HAS A CLAIM

AGAINST THE BANKRUPTCY ESTATE FOR POSTPETITION SERVICES

The Chapter 7 trustee is the representative of the bankruptcy estate.19 The

Code, therefore, authorizes the trustee to employ attorneys, who do not have a

conflict of interest, to assist him in that capacity, and to pay them for their services:

(a) Except as otherwise provided in this section, the trustee, with the

court’s approval, may employ one or more attorneys, accountants,

appraisers, auctioneers, or other professional persons, that do not hold

or represent an interest adverse to the estate, and that are disinterested

Appellate Case: 04-6067 Page: 7 Date Filed: 03/16/2005 Entry ID: 1879362 
2011 U.S.C. § 327(a).

2111 U.S.C. § 330(a)(1)(A) and (B).

22540 U.S. 526, 124 S. Ct. 1023 (2004).

8

 persons, to represent or assist the trustee in carrying out the trustee’s duties under

this title.20

. . .

(a)(1) After notice to the parties in interest and the United States Trustee

and a hearing, and subject to sections 326, 328, and 329, the court may

award to a trustee, an examiner, a professional person employed under

section 327 or 1103 –

(A) reasonable compensation for actual, necessary services

rendered by the trustee, examiner, professional person, or

attorney and by any paraprofessional person employed by

any such person; and

(B) reimbursement for actual, necessary expenses.21

In Lamie v. United States Trustee,

22 the United States Supreme Court held that section

330(a)(1) of the Code does not authorize compensation awards to debtors’ attorneys

from estate funds, unless such attorneys have been employed by the trustee with

approval of the court. Fiegen was not so employed by the trustee. The bankruptcy

court, thus, did not err when it found that Fiegen was not entitled to payment of its

postpetition fees and expenses from the unapplied portion of the security retainer, or

from other assets of the estate. 

Fiegen also claims that the court erred when it applied the holding in Lamie

retroactively, since the Supreme Court case was not decided until after On-Line’s

bankruptcy case had been filed. However, in Lamie, the Court was simply

articulating the law as it had existed since the Bankruptcy Reform Act of 1994. In any

Appellate Case: 04-6067 Page: 8 Date Filed: 03/16/2005 Entry ID: 1879362 
23131 F.3d 750 (8th Cir. 1997).

24Id.

25131 F.3d at 755. See also, In re Zepecki, 277 F.3d 1041, 1046 (8th Cir. 2000) [same]

26Appellant’s Appendix, page 232.

9

event, the Eighth Circuit had so held since 1997. In Snyder v. DeWoskin (In re

Mahendra),23 the court denied compensation from the estate to debtor’s attorney,

Snyder, for postpetition services when the attorney had not been employed by the

trustee.24 Snyder contended that he held a lien on real estate of the debtor as security

for the postpetition services. In rejecting that argument, the Eighth Circuit noted that

debtor’s interest in the real estate became an asset of the estate on the petition date.

“At that point, debtor lost the right to authorize Snyder’s legal services which could

potentially further encumber this asset of the bankruptcy estate. Only the bankruptcy

court could control the further encumbrance of the estate property.”25 Thus, the

Supreme Court’s holding in Lamie had been the law in this Circuit well before the

On-Line bankruptcy case was filed. The bankruptcy court correctly held that Fiegen

could not be compensated out of estate funds for postpetition services.

D. WHETHER THE COURT CORRECTLY DETERMINED THE

REASONABLENESS OF THE PREPETITION FEES

As we have explained, Fiegen is entitled to be compensated out of the retainer

for allowed prepetition services but, as the bankruptcy court held, he is not entitled

to compensation from estate assets for post-petition services. The final issue, then, is

the value of the prepetition services. The bankruptcy court found that $3,032.50

worth of legal services and $114.27 of expenses had been earned or accrued

prepetition, but had not been invoiced or paid as of the petition date.26 In addition,

Fiegen had drawn $547.50 from the retainer. The court held that it would not

compensate Fiegen for prepetition work involving communicating with creditors or

Appellate Case: 04-6067 Page: 9 Date Filed: 03/16/2005 Entry ID: 1879362 
2711 U.S.C. § 329(a).

10

with its client, or for review of pleadings, motions, and communications, unless such

actions were shown to benefit the estate. As a result, the court allowed prepetition

fees in the amount of $2,380.00 and expenses of $114.27, less the $547.50 previously

paid. 

The court’s use of a benefit-to-the-estate analysis would be appropriate as to

fees paid to a professional for postpetition services, under Code Section 330. But, as

stated, Fiegen is not entitled to compensation for such services. As to prepetition

work, Section 329 allows the court to determine the reasonable value of such

services:

(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 agreed to be paid, if such 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 . . .27

In reviewing the reasonableness of fees awarded to debtor’s counsel for

prepetition work, the issue is not benefit to the estate, but the reasonable value of the

services provided to the debtor. Therefore, we hold that the bankruptcy court applied

the wrong standard as to the prepetition services, and that, on remand, the court

Appellate Case: 04-6067 Page: 10 Date Filed: 03/16/2005 Entry ID: 1879362 
28Id. 540 U.S. at 538-39, 124 S. Ct. at 1032. We note that Fiegen contends that

attorneys for corporate Chapter 7 debtors are not allowed to charge a flat fee in Iowa.

We found no such restriction in the Local Rules. In any event, that issue is not before

us here.

29McDonald, 114 B.R. at 997.

11

should determine the reasonableness of Fiegen’s fees under the standard of section

329 of the Code.

E. CONCLUSION

Fiegen contends that the bankruptcy court’s application of Lamie forces

Chapter 7 debtor’s attorneys to represent debtors without compensation. We disagree.

The Supreme Court stated in Lamie that it “appears to be routine for debtors to pay

reasonable fees for legal services before filing for bankruptcy to ensure compliance

with the statutory requirements.”28 Even before Lamie, and at the time Fiegen filed

the Chapter 7 case for On-Line, Section 330 of the Code provided that a debtor’s

attorney could not be paid out of estate funds for post-petition services unless that

attorney is employed by the trustee. An attorney who accepts a Chapter 7 case on a

flat fee basis may well be asked to later prove that the fee is a reasonable one, but

once paid prepetition such fee is not an asset of the estate.29 If, as here, debtor’s

counsel is instead paid a retainer to be applied against future services, such attorney

may not be paid by the estate for postpetition services, absent appointment as

trustee’s counsel. 

The Order of the bankruptcy court is affirmed in part, reversed in part, and

remanded with instructions to determine the reasonableness of prepetition fees, with

any allowed fees to be paid from the retainer held by Fiegen.

____________________ 

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