Opinion ID: 196328
Heading Depth: 3
Heading Rank: 2

Heading: Chapter 11 Counsel

Text: 23 a) Perfection of MHFA Lien 24 In order to obtain any meaningful relief against the debtor or the transferees of the $65,000 in other venues, of course, MHFA would have to demonstrate that it held a perfected lien or security interest in the diverted rents; otherwise, as property of the chapter 11 estate, see Bankruptcy Code Sec. 541(a)(6), any unperfected lien on the rents would be subject to avoidance by the debtor in possession pursuant to its strong arm powers. See id. Secs. 544(a) (strong arm powers), 1107(a); see generally In re Ryan, 851 F.2d 502, 512 (1st Cir.1988) (trustee); In re Wabash Valley Power Ass'n, 114 B.R. 613, 617 (S.D.Ind.1990) (debtor in possession). And once its unperfected lien was voided under Bankruptcy Code Sec. 544(a), MHFA would have had no right to control the disposition of any portion of the $65,000 in cash collateral which remained property of the chapter 7 estate, cf. Bankruptcy Code Sec. 363(a), (c)(2), (e), 9 nor any right of recourse to lien foreclosure proceedings outside the bankruptcy court against third party transferees who acquired title to the rents prior to the debtor's chapter 11 petition, cf., e.g., In re McBee, 714 F.2d 1316, 1326 (5th Cir.1983) (perfected security interest in collateral continues after collateral is conveyed). Nevertheless, we agree with the district court that the MHFA security interest in these rents had been perfected before the chapter 11 petition was filed. See In re Indian Motocycle Assocs. III Ltd. Partnership, 174 B.R. at 356. 25 Although the prepetition perfection of a security interest in property of the estate normally is determined in reference to applicable state law, see Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979), it is now well settled that the requirements for perfecting a federal agency's security interest in property securing federally-insured loans--a subject not addressed by the NHA--is controlled by federal common law, see United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979); Butner, 440 U.S. at 55, 99 S.Ct. at 918 (noting that state law governing perfection of security interests applies unless some federal interest requires a different result); 10 United States v. Landmark Park & Assocs., 795 F.2d 683, 685-86 (8th Cir.1986) (rents); United States v. Floral Park Dev. Co., 619 F.Supp. 144, 147-48 (S.D.Ohio 1985) (rents); United States v. Borden Fin. Corp., 164 B.R. 260, 264 (E.D.La.1994) (rents); cf. Graham v. Security Sav. & Loan, 125 F.R.D. 687, 692 (N.D.Ind.1989) (federal law controls government's rights in litigation involving federally guaranteed student loans), aff'd sub nom. Veal v. First Am. Sav. Bank, 914 F.2d 909 (7th Cir.1990); cf. also Conille v. Secretary of Hous. and Urban Dev., 840 F.2d 105, 109 (1st Cir.1988) (applying federal common law to litigation involving scope of HUD's obligations as NHA landlord, after finding NHA left this issue for the courts). 11 Under established federal common law, HUD's security interest in post-default NHA rents normally is perfected simply by recording a HUD mortgage containing an assignment of rents, which places third parties on notice of the HUD lien. See Landmark Park & Assocs., 795 F.2d at 685-86 (noting need for uniform federal rule in face of discordant state rules relating to perfection of security interests in rents); In re Westwood Plaza Apartments, Ltd., 154 B.R. 916, 920 (Bankr.E.D.Tex.1993) (same); cf. In re Executive House Assocs., 99 B.R. 266, 275-76 (Bankr.E.D.Pa.1989) (adopting Landmark Park perfection rule, but noting that other required means of perfection may be prescribed in security agreement; e.g., an express declaration of default). Of course, in our case the debtor concedes that the HUD mortgage and Regulatory Agreement were duly recorded in the appropriate registry of deeds, and that it had received a notice of default under the note before disbursing the $65,000. 12 26 Moreover, even if it were to be assumed that federal common law does not govern the perfection of MHFA's security interest, see supra note 11, the same result would obtain under Massachusetts law. 13 In Prudential Ins. Co. of Am. v. Boston Harbor Marina Co., 159 B.R. 616 (D.Mass.1993), the district court held that a Massachusetts mortgagee which recorded its assignment of rents in the registry of deeds as an adjunct to its mortgage, perfected its lien in the rents so as to constitute the rents cash collateral under Bankruptcy Code Sec. 363(a), and that there was no need for the creditor to take possession of the real property (e.g., as by foreclosure) or the rents (e.g., as by appointment of a receiver) prior to the filing of the bankruptcy petition. Id. at 620-22 (recognizing distinction between perfection, which governs secured creditor's rights against third parties, and enforcement of liens, which controls creditor's rights against its debtor; rejecting theory that such inchoate or unenforced security interests are voidable under Bankruptcy Code Sec. 544(a)); see also H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 312 (1978), U.S.C.C.A.N. 1978, pp. 5787, 6269 ([T]he definition [of 'lien'] ... is new and is very broad ... [and] [i]t includes 'inchoate lien[s]' ). 14 The Prudential court noted also that the recordation rule was fast becoming the majority rule among the states, thus providing further support for the uniform federal rule of decision adopted in Landmark. 15 See Conille, 840 F.2d at 112-13 (in fashioning appropriate federal rule of decision, court should not adopt forum state's law if it would frustrate NHA's purposes, but may consult other states' law as a source for the more apt federal common law rule) (citing Kimbell Foods, Inc., 440 U.S. at 715, 99 S.Ct. at 1451 (1979)). 16 Accordingly, we conclude that the MHFA lien on rents was fully perfected prior to the chapter 11 petition, hence not voidable under Bankruptcy Code Sec. 544(a). 27 b) Law Firm 28 MHFA concedes that it can proceed against the debtor's counsel in the bankruptcy court only if the $35,000 in diverted cash collateral, intended as a prepetition retainer, remains property of the estate, presumably as a fund held in trust for the debtor. MHFA cites several so-called collateral reimbursement decisions, see supra Section II.A.2, in which debtor counsel have been directed to surrender to the bankruptcy estate monies diverted to fund prepetition retainers. See, e.g., In re Westwood Plaza Apartments, 154 B.R. at 923 n. 11. MHFA itself intimated at oral argument that it may request the chapter 7 trustee to recoup the putative trust monies from counsel, see Bankruptcy Code Sec. 542, 11 U.S.C. Sec. 542, see also In re Sinder, 102 B.R. 978, 982-83 (Bankr.S.D.Ohio 1989) (questioning whether parties other than trustee and debtor in possession have standing to bring Sec. 542 action), or may interpose objection to any fee application submitted by debtor counsel, see Bankruptcy Code Sec. 330, 11 U.S.C. Sec. 330. 17 29 The question whether the $35,000 retainer is subject to turnover cannot be resolved on the present record, since it may ultimately turn on the precise terms of any retainer agreement between the debtor and its counsel. See, e.g., In re McDonald Bros. Constr., Inc., 114 B.R. 989, 1002 (Bankr.N.D.Ill.1990) (type of retainer is question of fact); see also In re DLIC, Inc., 120 B.R. 348, 351 (Bankr.S.D.N.Y.1990) (type of retainer depends on intent of parties). 18 Certain retainers simply ensure counsel's availability to represent the client (whether or not any legal services are ever performed), or constitute prepayment for all future legal services to be performed (e.g., a flat fee). In these circumstances, counsel acquires full title to the retainer fee on the date of payment, regardless whether legal services are ever performed. See In re McDonald, 114 B.R. at 997-98, 999-1000; see also In re Mondie Forge Co., 154 B.R. 232, 235 (Bankr.N.D.Ohio 1993). Such a retainer is precisely the same as the retainer fee paid Coopers & Lybrand; it never became part of the property of the debtor estate, and is subject to turnover only if it exceeds the reasonable value of services rendered. See Bankruptcy Code Sec. 329(b); In re McDonald, 114 B.R. at 995-96, 1003 n. 18; cf. also Bankruptcy Code Sec. 548(a)(2), 11 U.S.C. Sec. 548(a)(2) (avoidance of prepetition fraudulent transfers where insolvent debtor received less than a reasonably equivalent value in exchange for transfer). 19 30 On the other hand, a security retainer is held by counsel to secure payment of anticipated legal services yet to be rendered. Under the ethical rules applicable in most jurisdictions, these monies remain property of the client until applied by counsel in payment of legal services actually performed. See In re McDonald, 114 B.R. at 999; see also In re Saturley, 131 B.R. 509, 515 (Bankr.D.Me.1991); In re Lilliston, 127 B.R. 119, 120 (Bankr.D.Md.1991) (portion of prepetition retainer not earned prior to petition is property of estate); In re Fitzsimmons Trucking, Inc., 124 B.R. 556, 558-59 (Bankr.D.Minn.1991) (same). In the instant case, the debtor's equitable interest in any unearned portion of the retainer, impressed with MHFA's perfected lien, would have become property of the estate on the date the chapter 11 petition was filed, see Bankruptcy Code Sec. 541(a)(6), and presumably would remain subject to a turnover order in a section 542 action brought by the debtor in possession. See In re McDonald, 114 B.R. at 1000 n. 13 (citing In re Gerwer, 898 F.2d 730, 734 (9th Cir.1990)). 31 Of course, if the $35,000 transfer constituted a security retainer, counsel would be required to file a section 330 fee application to withdraw the retainer. In re Burnside Steel Foundry Co., 90 B.R. 942, 945 n. 1 (Bankr.N.D.Ill.1988). MHFA could then object to debtor counsel's retention of any portion of the retainer not yet devoted to legal services which were actual [and] necessary, see Bankruptcy Code Sec. 330, and the bankruptcy court presumably could order debtor counsel to surrender the unearned portion as property of the estate. See id. Secs. 105(a); 363(e); see also In re Westwood Plaza Apartments, 154 B.R. at 923 n. 11. 32 We need not resolve the precise contours of the potential bankruptcy court remedies available to MHFA against the debtor's law firm. Rather, it was MHFA's burden to demonstrate the unavailability of any alternative remedy for recovering its collateral. See supra Section II.A.2. Even if the $35,000 retainer is not property of the chapter 7 estate, hence not subject to chapter 7 administration, MHFA has suggested no plausible basis for concluding that it cannot trace and recover the diverted collateral in a nonbankruptcy lawsuit directed against the debtor's chapter 11 counsel (which is not protected by the automatic stay, see Bankruptcy Code Sec. 362) to foreclose upon its prior lien on the rents. On the other hand, if the retainer remains property of the chapter 7 estate, MHFA may pursue its bankruptcy court remedies against the nondebtor chapter 11 counsel.