United States Court of Appeals

Fifth Circuit



## FILED

December 7, 2005

Charles R. Fulbruge III

Clerk UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________________

No. 04-40462

_______________________

ROBERT E. BARRON,

Plaintiff-Appellee,

versus

JANNA L. COUNTRYMAN,

Defendant-Appellant.

Appeal from the United States District Court

for the Eastern District of Texas

Before JONES, WIENER, and CLEMENT, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Robert Barron, a bankruptcy attorney, appeals the

judgment of the bankruptcy and district courts ordering him to

d isgorge fees taken both pre- and postpetition from clien ts who

utilized his ser vices in one hundred sixty-seven Chapter 13

bankruptcies. The courts erred in construing Barron’s retainer

agreements to require escrow of the prepetition “deposits” earned

for prepetition services. Neither Texas professional ethics

standards nor applicable Bankruptcy Code provisions and court rules

support the courts’ results. We do, however, affirm the order to

disgorge postpetition fees for which no court approval was sought.1 The relevant facts were developed in a trial to the bankruptcy court

and are largely undisputed.

2 Accordingly, we AFFIRM in part, REVERSE in part, and REMAND to the

bankruptcy court to reassess sanctions.

I. BACKGROUND

T his is a consolidated appeal arising from a series of

motions filed in one hundred sixty-seven bankruptcy cases commenced

between 2001 and 2003 in which Barron charged his clients pre- and

postpetition fees. Barron is a bankruptcy attorney with a highvolume practice in the Eastern District of Texas. Under Rule

2016(e)(1) of the Local Rules of the United States Bankruptcy Court

for t he Eastern District of Texas (“Local Bankruptcy Rules”), an

attorney has been permitted to charge a total fee of up to two

thousand dollars for a Chapter 13 bankruptcy wit hout filing a

detailed fee application. Barron’s standard practice in Chapter 13

was to charge clients a total fee of two thousand dollars or less,

but he did this in an unorthodox manner. 1

First, Barron would require payment from clients,

generally about four hundred dollars, befor e he filed bankruptcy

petitions on their behalf. Barron testified that such payments

were necessary to ensure that debtors remained active in their

cases, and that the amounts were reasonable, given the substantial

prepetition work Barron per formed for his clients. These

prepetition payments were referred to as “deposits” in the retainer

agreement. A form retainer agreement between Barron and the debtor3

set forth, inter alia, the type of bankruptcy sought, the total

fees due, the amount of “initial deposit” owed, and the consequences of not filing. Under the retainer agreement, the client

w ould forfeit the prepetition deposit to Barron if no bankrup tcy

petition was filed. Barron did not place the prepetition fees into

a trust account but, rather, made the funds immediately available

to himself and his firm for prepetition work related to and/or in

contemplation of bankruptcy. He maintained neither a trust nor an

IOLTA account because he considered the prepetition funds his

property upon remittance. Barron took prepetition payments in all

of the cases involved in this appeal.

Second, in sixty-fo ur of the cases, Barron took

additional payments from clients after their bankruptcy petitions

had been filed. These payments ranged from thirty to five hundred

dollars and reimbursed Barron for h is efforts in contested

proceedin gs in the clients’ bankruptcy cases. Barron neither

requested nor received bankrupt cy court approval to accept these

postpetition payments. He earned the remainder of his two thousand

dollar standard fee subject to court scrutiny as part of the

Chapter 13 confirmation process.

Appellee Janna Countryman, a Chapter 13 trustee,

complained that Barron failed both to place prepetition fees in

escrow pending court approval and to file a fee application for the

extra postpetition fees. After holding a hearing on Countryman’s

con solidated motions, the bankruptcy court found that Barron2 Barron raised a number of other issues on appeal, two of which are

waived because they were inadequately preserved: Barron did not seriously mount

a Fifth Amendment takings challenge in the bankruptcy court to the disgorgement

order, nor did he timely challenge the Local Bankruptcy Rules’ nonconformity with

national Bankruptcy Rule 9029. G inther v. Ginther Trusts ( In re Ginther Trusts ),

238 F.3d 686, 6 89 (5th Cir. 2001) (citing G ilchrist v. Wescott

, ( In re

Gilchrist ), 891 F.2d 559, 561 (5th Cir. 1990)). The other issues need not be

discussed in light of our conclusions above.

4 willfully and knowingly violated the Bankruptcy Code, the Texas

Disciplinary Rules of Professional Conduct (“Texas R ules”), the

Local Bankruptcy Rules, and the Local Rules for the United States

District Court for the Eastern District of Texas (“Local Rules”).

Barron was ordered to disgorge all pre- and postpetition fees he

received prior to plan confirmation in the one hundred sixty-seven

cases.

On appeal, the district court affirmed the bankruptcy

court’s decision. Barron again appeals pursuant to 28 U.S.C.

§ 158(d).

II. DISCUSSION

Barron principally asserts that the bankruptcy court

erred in holding that his failure to place the clients’ prepetition

payments in escrow pending later court approval violated both Texas

Disc. Rule 1.14(a) and Local Bankruptcy Rule 2016(b). He also

challenges the holding that he violated Local Bankruptcy Rule

2016(e)(5), as well as various provisions of the Bankruptcy Code,

in receiving postpetition payments from clients outside the Chapter

13 plans without proper notice and hearing. 25 When this court reviews the decision of a district court

based on a bankruptcy court decision under 28 U.S.C. § 158,

findings of fact are reviewed under the clearly erroneous standard

and conclusions of law are reviewed de novo. Crowell v. Theodore

Bender Accounting, Inc. ( In re Crowell ), 138 F.3d 1031, 1033 (5th

Cir. 1998).

A. Prepetition Payments

Barron initially contends that Countryman lacked

“standing” to challenge his fee arrangements with Cha pter 13

debtors. This issue was addressed by the district court and is

properly before the court here. Barron focuses his argument on 11

U.S.C. § 1302(b)(4), which prohibits the trustee in chapter 13 from

advising the debtor on legal matters. However, he ignores the fact

that “Congress has given the chapter 13 trustee a broad array of

powers and duties.” Matter of Maddox

, 15 F.3d 1347, 1355 (5th Cir.

1994) (allowing a chapter 13 trustee to avoid a lien under 11

U.S.C. § 522(f)). The trustee in Chapter 13 exists to preserve the

bankruptcy estate for creditors. To accomplish this goal, the

trustee is given the power to review the compensation of attorneys

and other off icers, 11 U.S.C. §§ 329, 330, and to avoid certain

fraudulent or postpetition transactions, 11 U.S.C. §§ 54 8, 549.

Legal fees that are excessive or are alleged to have been

improperly paid postpetition from the bankruptcy estate create an

appearance of professional abuse and potentially deprive creditors3 The Local Rule, as written at the time this action was commenced,

required that “[a] court authorized professional must deposit a retainer, whether

received from the debtor or any other person for the benefit of the debtor, in

a trust or IOLTA account . The retainer must remain in the account until the

Court enters an order allowing removal.”

6 of funds. The trustee may take action to challenge the propriety

of such fees. Although we ultimately reject some of the trustee’s

arguments, Countryman nevertheless had standing to challenge

Barron’s payment system.

In order to apply the various rules and statutes Barron

has been found liable of violating, we must examine the status of

the prepetition “deposits” received from his clients. Three

possibilities arise. Were the deposits Barron’s exclusive property, as he maintains, or did Barron’s clients maintain an interest

in the deposits, or does the Bankruptcy Code authorize the courts

to require trust accounts for all retainers irrespective of the

ownership of the funds? The bankruptcy and district courts rejected Barron’s ownership contention and adopted both of the other

alternatives.

The key to the bankruptcy court’s reasoning is its “plain

meaning” conclusion that all attorney retainers are alike for

purposes of Local Bankruptcy Rule 2016(b). 3 While Barron’s

prepetiti on “deposits” are properly construed as retainers, this

determination standing alone means little. The Local Bankruptcy

Rule does not define the retainers to which it refers. Moreover,

nothing in the Bankruptcy Code compels the incorporation into the4 The debtor’s estate includes “all legal or equitable interests of the

debtor in property as of the commencement of the case.” 11 U.S.C.

§ 541(a)(1)(emphasis added). S e e also 11 U.S.C. § 1306(a)(1) and (2) (defining

debtor’s estate in Chapter 13 cases).

7 debtor’s estate of all prepetition retainers, 4 nor do the uniform

n ational Bankruptcy Rules make any pronouncement regarding the

placement of retainers in attorney trust accounts.

Without doubt, the Bankruptcy Code seeks to protect both

debtors and their estates from excessive or unnecessary legal fees.

The Code requires court approval of all attorneys fees sought to be

paid from the e state of the debtor . 11 U.S.C. §§ 330(a)(4)(B),

§ 331; In re Mayeaux , 269 B.R. 614, 626 & n.20 (Bankr. E.D. Tex.

2001); I n re McDonald Bros. Const., Inc. 114 B.R. 989, 994 (Bankr.

N.D. Ill. 1990). Section 329 requires disclosure of the debtor’s

payments or agreements to pay bankruptcy attorneys within the year

preceding bankruptcy, and it authorizes t he court to review all

attorney compensation and agreements for reasonableness, and to

cancel excessive service agreements or order return of payments if

they are excessive. While these provisions are potent, they are

not limitless. Importantly, § 330 is not applicable to attorney

fees derived fr om a source other than the debtor’s estate.

Mayeaux

, 269 B.R. at 614, 626, n.20. Thus, the bankruptcy court

could require a fee application for Barron’s “deposits” under § 330

only if these prepetition payments remained within the debtor’s

estate. Additionally, for purposes of this case, § 329 is

inapplicable because the trustee raises no issue of nondisclosure8

or unreasonableness of Barron’s fees. Barron took no more than the

two thousand dollars allotted to him by local practice in the

Eastern District of Texas Bankruptcy Court. S ee Local Rule 2016(e)

(“If a chapter 13 debtor’s attorney requests $2000 or less for prepetition and post-petition services and expenses incurred prior to

confirmation, an application is not required.”); see also Mayeaux

,

269 B.R. at 626 n. 20.

Sec tion 330 alone may apply to Barron’s retainer, but

only if the debtor maintained some ownership right in it after the

filing of a bankruptcy case. As the Supreme Court has made clear,

state law ordinarily supplies the definition of property rights in

bankruptcy. B utner v. U.S.

, 440 U.S. 48, 54, 99 S. Ct. 914, 917-

18 (1979). B utner applies to the interpretation of the property

r ights attributable to attorney retainer agreements as to other

property governed by state law.

Retainer agreements fall into three general categories:

(1) classic retainers; (2) security retai ners; and (3) advance

payment retainers. In re McDonald Bros. , 114 B.R. at 996-98; see

also 1 NORTON BANKR. L. & P RAC. 2d § 25:9 (2005). A classic

retainer involves fees paid as consideration for employment of

counsel, as opposed to compensation for services rendered.

McDonald Bros.

, 114 B.R. at 998. The classic retainer is earned in

its entirety by counsel upon payment, and the debtor relinquishes

all interest at remittance. I d. A classic retainer, paid

prepetition, is outside the estate and the purview of § 330, though9

it remains subject to disclosure and reasonableness review under

§ 329 of the Bankruptcy Code. A security retainer involves fees

paid to counsel for prospective services. I d. at 999. The debtor

retains an interest in the funds until services are actually

rendered. Pending the rendition of services, the attorney merely

“holds” the funds for the debtor. I d. Because the debtor retains

an interest in these funds, they become property of the estate at

filing subject to §§ 329 and 330. I d. at 1000-01. Finally, an

advance payment or flat fee retainer involves fees paid as

compensation for services to be rendered, but the payment passes

entirely to counsel upon remittance, at which time t he debtor

relinquishes all interest. I d. at 1000, 1002. Funds collected as

advance payment retainers do not become property of the bankruptcy

e state at filing, and, as such, are subject to § 329 only. S ee

Wootton v. Ravk ind ( In re Dixon ), 143 B.R. 671, 677 (N.D. Tex.

1992) (internal citations omitted).

Barron’s Retainer Agreement clearly lays out the

prepetition services to be provided by his office and provides that

a client will forfeit initi al deposits to Barron if he does not

make scheduled payments (on the deposit) or opts not to file a

petition. Countryman contends that since Barron ultimately filed

petitions on behalf of all these clients, the clients never

forfeited the deposits and retained their interests in the

prepetition payments. Such an argument presumes that the retainer

agreements were secur ity retainers for services to be rendered10

postpetition. However, the record compels the conclusion that the

prepetition payments in t his case should be characterized as

advance payment retainers for prepetition services. Barron

testified without contradiction that his clie nts gave him

prepetition deposits to secure his legal representation and to pay

him for prepetition work. Barron also explained that his office

performs the bulk of its services in ordinary Chapter 13 cases

before the case is filed. These services include multiple

conferences with the debtor; preparing the schedules; identifying

and proposing solutions to typical problems involving mortgage

arrearages, auto and insurance debts and taxes; and proposing a

payment plan.

The trustee complains that Barron’s retainer is suspect

as compensation for prepetition work because he keeps no official

time records. On the contrary, the trustee’s argument is

meritless. First, Barron testified without contradiction to the

substantial prepetition services his office performs for clients in

order to smooth their transition into Cha pter 13 and develop

realistic payment plans. Second, the trustee did not challenge the

reasonableness of the overall fee, implying acquiescence in

Barron’s testimony. Third, the trustee is hoist by her own petard,

viz., by her reliance on the Local Bankruptcy Rule’s specific

approval of Chapter 13 attorney fees of two thousand dollars or

less without a formal fee application. Detailed record keeping is5 It is worth noting that the practice of taking advance payment

retainers is common in Chapter 11 bankruptcies. Countryman’s broad

interpretation of Local Bankruptcy Rule 2016(b) and of the trust requirement

could have implications beyond this case. Attorneys for Chapter 11 filers are

routinely paid “current” for prepetition work before the case is actually filed.

Requiring firms to escrow debtors’ advance paym ent retainers for work done in

advance of the filing would create an enormous disincentive to competent

Chapter 11 representation. Yet the protections of Section 329 remain an

effective policing device for such payments.

11 either required or, in the Local Rule’s commonsense approach to the

practicalities of Chapter 13 representation, it is not.

Barron’s characterization of the prepetition fees as

“earned” immediately upon receipt is not controlling. S ee In re

Chapel Gate Apartments, Ltd.

, 64 B.R. 569, 574 (Bankr. N.D. Tex.

1986). The language of the Retainer Agreement and the undisputed

operation of Barron’s practice demonstrate, however, th a t the

prepetition fees became Barron’s property upon receipt in exchange

for his prepetition work. 5

Having determined that Barron’s initial deposit bears the

characteristics of an advance payme nt retainer, we must consider

whether Barron’s assuming control of the funds violated the Local

Bankruptcy Rules. Pursuant to L.R. 2016(b), attorneys are required

to p lace “a retainer . . . in a trust or IOLTA account,” and

“[t]he retainer must remain in the account until the court enters

an order allowing removal.” L.R. 2016(b). Texas case law on trust

and IOLTA accounts is consistent with the plain statement of this

local rule. As the bankruptcy court in Dixon stated:

It has been the practice in Texas and elsewhere to

require pre-petition retainers taken for services to be

rendered during the pendency of a bankruptcy case

, to be12

held in trust

. . . . Such retain er taken prior to the

filing of bankruptcy becomes the property of the

bankruptcy estate upon commencement of the bankruptcy

case.

Dixo n , 143 B.R. at 677 (citations omitted) (emphasis added).

However, contrary to the bankruptcy court’s conclu sion that “the

evidence is unequivocal that Barron ignored Texas [trust rules and

case law],” R. at 90, the trust duty as pertains to earned

prepetition fees is not settled in Texas. As the D ixon court also

noted:

Though Texas ethical opinion s have not prohibited flat

fees [a.k.a. advance payment retainers] as unethical

per se, they have recommended that all client funds whose

nature of ownership is subject to question be placed into

a trust account and segregated from funds belonging

entirely to the attorney.

Id. at 678 n.6 (emphasis added); see also Tex. Ethics Opinion 391

(discussing treatment of an advance payment retainer).

While it might have been prudent for Barron to place in

escrow the prepetition payments he received, the Texas Rules do not

require an advance payment retaine r, earned by the attorney

prepetition, to be placed in trust. Further, because the retainers

at issue in this case were advance payments in nature, they became

Barron’s property upon remittance. As Barron’s property, they were

not sub ject to Local Bankruptcy Rule 2016. S ee In re Dixon

, 143

B.R. at 677-78. There is no issue as to their unreasonableness or

nondisclosure under 11 U.S.C. § 329, and the retainers are outside

the reach of § 330, since they were not property of the bankruptcy13

estate. The bankruptcy and district courts erred in ordering

Barron to disgorge his prepetition retainers.

B. Postpetition Fees

The bankruptcy court found that in accepting postpetition

fees directly from clients, Barron violated Local Bankruptcy Rule

2016(e)(5). This rule states that any fees sought beyond an

attorney’s initial fe e must be paid as an 11 U.S.C. § 503(b)(2)

administrative expense. Barron plainly violated this rule in

taking additional funds from debtors without disclosi ng such

payments. Moreover, even in the absence of Local Rule 2016(e)(5),

these postpetition payments would have been improper. As the court

in Mayeaux correctly noted, “money paid to Debtor’s counsel in the

post-petition period constitutes estate property. It is elementary

bankruptcy law that all post-petition earnings of a Chapter 13

debtor

. . . constitute[] property of the bankruptcy es tate.”

Mayeaux

, 269 B. R. at 626. A “chapter 13 debtor . . . has no

authority to transfer estate property to an attorney without proper

notice [to the court].” I d. Pursuant to 11 U.S.C. § 549(a), the

trustee may avoid a transfer of the estate’s property unless the

transfer is authorized by the bankruptcy court. Since Barron never

requested permission from the court to receive these funds, he

denied the cour t an opportunity to review the transfers.

Accordingly, the bankruptcy court had a sound basis to order Barron

to disgorge his undisclosed postpetition fees.14 CONCLUSION

The bankruptcy court properly ordered Barron to disgorge

his undisclosed postpetition fee s but erred in ordering

disgorgement of his prepetition retainers. We therefore A FFIRM the

portion of the judgment concerning postpetition fees, REVERSE as to

prepetition fees, and REMAND for further proceedings.