Court Opinion

ID: 4192727
Source: CourtListenerOpinion
Date Created: 2017-08-03 17:02:24.204894+00
Date Added: 2024-06-11T14:40:20.648997
License: Public Domain

FILED
 1                         ORDERED PUBLISHED                 JUN 09 2016

 2                                                     SUSAN M. SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
                                                          OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    AZ-15-1279-KuJaJu
                                   )
 6   CRAIGHTON THOMAS BOATES,      )      Bk. No.    2:14-bk-17115-GBN
                                   )
 7                  Debtor.        )      Adv. No.   2:15-ap-00269-GBN
     ______________________________)
 8                                 )
     DALE D. ULRICH, Chapter 7     )
 9   Trustee,                      )
                                   )
10                  Appellant,     )
                                   )
11   v.                            )      O P I N I O N
                                   )
12   SCHIAN WALKER, P.L.C.,        )
                                   )
13                  Appellee.      )
     ______________________________)
14
                      Argued and submitted on May 20, 2016
15                             at Phoenix, Arizona
16                            Filed – June 9, 2016
17             Appeal from the United States Bankruptcy Court
                         for the District of Arizona
18
       Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding
19
20   Appearances:     Terry A. Dake argued for appellant Dale D. Ulrich,
                      chapter 7 trustee; Mark C. Hudson of Schian
21                    Walker, P.L.C. argued for appellee Schian Walker,
                      P.L.C.
22
23
24   Before:   KURTZ, JAIME* and JURY, Bankruptcy Judges.
25
26
27
          *
           Hon. Christopher D. Jaime, United States Bankruptcy Judge
28   for the Eastern District of California, sitting by designation.
 1   KURTZ, Bankruptcy Judge:
 2
 3                               INTRODUCTION
 4        The judgment on appeal disposed of the parties’ cross-
 5   motions for summary judgment and dismissed the chapter 71 trustee
 6   Dale D. Ulrich’s adversary proceeding against the debtor’s
 7   counsel Schian Walker, P.L.C.    In the adversary proceeding,
 8   Ulrich unsuccessfully sought to recover for the benefit of the
 9   bankruptcy estate $60,000 the debtor paid prepetition to Schian
10   Walker pursuant to a retainer agreement.    Under the express terms
11   of the retainer agreement, the $60,000 was a flat fee the debtor
12   was fully prepaying in exchange for Schian Walker’s promise to
13   defend the debtor in an anticipated nondischargeability
14   proceeding.    The retainer agreement further specified that the
15   $60,000 flat fee was earned on receipt and that it would be
16   deposited in Schian Walker’s business bank account.
17        Notwithstanding the debtor’s prepetition payment in full of
18   the $60,000, both parties to the retainer agreement still had
19   significant and material contractual duties to perform at the
20   time of the bankruptcy filing, so the retainer agreement
21   qualified as an executory contract for purposes of § 365, and the
22   retainer agreement was rejected by operation of law under
23   § 365(d)(1).   Because the bankruptcy court, in granting summary
24   judgment, erroneously determined that the retainer agreement was
25
          1
26         Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27   all "Rule" references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037. All “Civil Rule” references are to
28   the Federal Rules of Civil Procedure.

                                       2
 1   not an executory contract, we must VACATE AND REMAND for further
 2   proceedings consistent with our holding regarding the effect of
 3   that rejection on the parties’ respective rights and liabilities
 4   under the retainer agreement and under Arizona law.
 5        On remand, the bankruptcy court will need to address one
 6   lingering factual issue.   Absent from the summary judgment record
 7   was any undisputed fact demonstrating when Ulrich first exercised
 8   his power to liquidate the estate’s rights under the retainer
 9   agreement by notifying Schian Walker that the agreement was
10   terminated.   Under binding Ninth Circuit precedent, rejection of
11   the retainer agreement did not terminate the agreement, nor did
12   it divest the estate of the rights and defenses the debtor
13   enjoyed under the agreement at the time of his bankruptcy filing.
14        Accordingly, we VACATE AND REMAND.
15                                   FACTS
16        At the time of the debtor Craighton Thomas Boates’
17   bankruptcy filing, he was a defendant in a state court lawsuit
18   brought against him by Metro Phoenix Bank for negligent
19   misrepresentation and fraud.    In the state court lawsuit, the
20   bank sought damages in excess of $3.6 million.    When Boates
21   disclosed to the bank his intent to commence a bankruptcy case,
22   the Bank, in turn, expressed its intent to file a
23   nondischargeability adversary proceeding against Boates under
24   § 523.
25        In anticipation of this adversary proceeding, before filing
26   bankruptcy, Boates entered into an adversary proceeding retainer
27   agreement with Schian Walker.    Pursuant to the retainer
28   agreement, Schian Walker promised to defend Boates in the

                                       3
 1   anticipated nondischargeability action in exchange for a flat fee
 2   of $60,000.   More specifically, the retention agreement provided
 3   as follows:
 4        The Flat Fee will cover the value of all work we will
          perform through the conclusion of the Adversary
 5        Proceeding. The Flat Fee will be paid by you directly
          to us, and will be deposited in our business account.
 6        The Flat Fee is not an advance against any hourly rate,
          and the Flat Fee will not be billed against an hourly
 7        rate. You agree that the Flat Fee becomes the property
          of our firm upon receipt, and will be deposited into
 8        our business account.
 9   Nondischargeability Retention Letter (Nov. 5, 2014) at p. 2.
10        Several days before he filed his bankruptcy petition, Boates
11   signed the retainer agreement and paid the $60,000 to Schian
12   Walker, and Schian Walker immediately deposited the $60,000 into
13   its general business account.2
14        Boates filed his bankruptcy petition on November 17, 2014,
15   and the bank commenced its nondischargeability adversary
16   proceeding four days later on November 21, 2014.   Roughly one
17   month later, in December 2014, Ulrich was appointed as successor
18   chapter 7 trustee.
19        Several months later, in May 2015, Ulrich filed a complaint
20   against Schian Walker for declaratory relief and for a monetary
21   judgment of $60,000.   Ulrich’s complaint in large part was
22   founded on Gordon v. Hines(In re Hines), 147 F.3d 1185 (9th Cir.
23   1998).   Ulrich asserted that, based on In re Hines, the adversary
24
          2
           There was a separate retainer agreement covering general
25   bankruptcy legal services Schian Walker promised to provide in
26   exchange for a flat fee of $5,000. The bankruptcy retainer
     agreement was structured similarly to the adversary proceeding
27   retainer agreement. The bankruptcy retainer agreement is not
     critical to our analysis or resolution of this appeal, but we
28   mention it for background purposes.

                                      4
 1   proceeding retainer agreement was an executory contract, which
 2   had been rejected by operation of law under § 365(d)(1).     Ulrich
 3   further asserted that he was entitled under In re Hines to claim
 4   from Schian Walker the full contract value of Schian Walker’s
 5   legal services – $60,000 – based on the rejection of the retainer
 6   agreement and based on his pre-litigation demand that Schian
 7   Walker pay him the $60,000.     In support of this claim, Ulrich
 8   also alleged that Boates’ prepaid right to legal services was
 9   property of the estate under § 541.
10        As an alternate basis for recovering the $60,000, Ulrich
11   alleged that the retainer agreement was unenforceable because it
12   violated E.R. 1.5(d)(3) of the Arizona Rules of Professional
13   Conduct.3     Based on this Ethics Rule, Ulrich claimed that Schian
14   Walker should have but failed to disclose in writing Boates’
15   right to terminate Schian Walker’s representation and to seek a
16   refund depending on the actual value of the services Schian
17
          3
              This Ethics Rule states:
18
19        (d) A lawyer shall not enter into an arrangement for,
          charge, or collect:
20
          *       *    *
21
          (3) a fee denominated as “earned upon receipt,”
22
          “nonrefundable” or in similar terms unless the client
23        is simultaneously advised in writing that the client
          may nevertheless discharge the lawyer at any time and
24        in that event may be entitled to a refund of all or
          part of the fee based upon the value of the
25        representation pursuant to paragraph (a).
26
     (Emphasis added.) In turn, Comment [7] accompanying this Ethics
27   Rule also plays a critical role in our resolution of this appeal,
     so we quote Comment [7] in full, as Appendix A at the end of this
28   decision.

                                         5
 1   Walker provided.
 2        According to Ulrich, under either theory of recovery, any
 3   services Schian Walker actually provided postpetition to Boates
 4   effectively were irrelevant in calculating the estate’s
 5   entitlement to a refund of the $60,000 because, from and after
 6   the filing of the petition, the right to prepaid legal services
 7   belonged to the estate and not to Boates.
 8        Schian Walker filed a motion for summary judgment, and
 9   Ulrich filed a cross-motion for summary judgment.   In its summary
10   judgment motion, Schian Walker pointed out that, under the terms
11   of the retainer agreement and Arizona law, the $60,000 was not
12   property of the debtor at the time of Boates’ bankruptcy filing,
13   so the $60,000 was not estate property under § 541.   In addition,
14   Schian Walker asserted that the Boates had substantially
15   completed his required performance under the retainer agreement,
16   so the agreement was not an executory contract covered by § 365.
17   As for the alleged violation of E.R. 1.5(d)(3) of the Arizona
18   Rules of Professional Conduct, Schian Walker admitted the
19   violation but posited that the statute violation did not justify
20   rendering the retainer agreement unenforceable, especially given
21   the undisputed facts demonstrating that Schian Walker gave Boates
22   verbal notice of the rights referenced in Ethics Rule 1.5(d)(3)
23   and that Boates – himself a practicing attorney – already knew
24   and understood these rights.
25        Ulrich’s arguments in his cross-motion for summary judgment
26   mirrored those he made in his complaint.
27        At the hearing on the cross-motions for summary judgment,
28   the bankruptcy court ruled in favor of Schian Walker and against

                                     6
 1   Ulrich.   In so ruling, the bankruptcy court adopted most of the
 2   positions Schian Walker had advocated.    For instance, the
 3   bankruptcy court held that the retainer agreement was not an
 4   executory contract because Boates’ payment of the $60,000
 5   constituted substantial performance of his obligations under the
 6   retainer agreement.   The bankruptcy court additionally held that
 7   Schian Walker’s violation of Ethics Rule 1.5(d)(3) was
 8   insufficient, by itself, to render the retainer agreement
 9   unenforceable.   But the bankruptcy court went beyond Schian
10   Walker’s advocated positions.   The bankruptcy court ruled that
11   In re Hines was distinguishable because the retainer at issue in
12   In re Hines was not a flat fee advance payment retainer fully
13   prepaid before the bankruptcy was filed.    The bankruptcy court
14   acknowledged In re Hines’s statements regarding the appropriate
15   treatment in bankruptcy of flat-fee, advance-payment retainers,
16   fully prepaid before the bankruptcy is filed.    However, according
17   to the bankruptcy court, these statements were dicta.
18         On August 14, 2015, the bankruptcy court entered judgment
19   dismissing the adversary proceeding, and Ulrich timely filed a
20   notice of appeal.
21                              JURISDICTION
22         The bankruptcy court had jurisdiction under 28 U.S.C.
23   §§ 1334 and 157(b)(2)(A) and (O).     We have jurisdiction under 28
24   U.S.C. § 158.
25                                   ISSUE
26         Did the bankruptcy court err when it granted summary
27   judgment in favor of Schian Walker and against Ulrich?
28   ///

                                       7
 1                           STANDARDS OF REVIEW
 2        We review de novo the bankruptcy court’s summary judgment
 3   rulings.   Ilko v. Cal. St. Bd. of Equalization (In re Ilko), 651
 4   F.3d 1049, 1052 (9th Cir. 2011).       When we review a ruling de
 5   novo, we give no deference to the bankruptcy court’s decision.
 6   Univ. of Washington Med. Ctr. v. Sebelius, 634 F.3d 1029, 1033
 7   (9th Cir. 2011).
 8        In determining whether to uphold the bankruptcy court’s
 9   summary judgment rulings, we apply the same summary judgment
10   standards as do all other federal courts.       Marciano v. Fahs (In
11   re Marciano), 459 B.R. 27, 35 (9th Cir. BAP 2011), aff’d, 708
12   F.3d 1123 (9th Cir. 2013).    Summary judgment is properly granted
13   when no genuine issues of disputed material fact remain, and,
14   when viewing the evidence most favorably to the non-moving party,
15   the movant is entitled to prevail as a matter of law.       Civil Rule
16   56 (made applicable in adversary proceedings by Rule 7056);
17   Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986).       For
18   purposes of ruling on summary judgment motions, a factual issue
19   is considered material if it could affect the outcome of the
20   case.   Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
21   The substantive law controls which facts are material.       Id.    A
22   factual dispute is considered genuine if there is sufficient
23   evidence to permit a reasonable trier of fact to make a finding
24   in favor of either party.    Far Out Prods., Inc. v. Oskar, 247
25   F.3d 986, 992 (9th Cir. 2001) (citing Anderson, 477 U.S. at
26   248–49).
27                                DISCUSSION
28        Ulrich’s arguments on appeal are premised on two distinct

                                        8
 1   contentions: (1) that the adversary proceeding retainer agreement
 2   constituted an executory contract; and (2) that, even if the
 3   retainer agreement was not an executory contract, the retainer
 4   agreement was invalid because Schian Walker violated E.R.
 5   1.5(d)(3) of the Arizona Rules of Professional Conduct.     We will
 6   address each of these contentions in turn, but we note at the
 7   outset that Ulrich has forfeited all other issues on appeal that
 8   he might have raised because he did not specifically and
 9   distinctly argue them in his opening appeal brief.     Christian
10   Legal Soc’y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010);
11   Brownfield v. City of Yakima, 612 F.3d 1140, 1149 n.4 (9th Cir.
12   2010).
13   1.   Executory Contract Rejected by Operation of Law
14        Ulrich contends on appeal that the retainer agreement was an
15   executory contract.    According to Ulrich, because the retainer
16   agreement was an executory contract, he can recover the value of
17   the contract rights prepaid by Boates based on the rejection of
18   the contract under § 365(d)(1).    To support this argument, Ulrich
19   relies on In re Hines, which stated: “the trustee can liquidate
20   the debtor’s [prepaid] right to legal services by rejecting the
21   contract with the attorney and demanding a refund of the unearned
22   fees.”    In re Hines, 147 F.3d at 1189.
23        We do not read this statement quite as broadly as Ulrich
24   does.    In re Hines’ reference to “rejecting the contract”
25   doubtlessly is meant to invoke § 365(a) and the trustee’s power
26   thereunder to assume or reject executory contracts and unexpired
27   leases.    As the Supreme Court and the Ninth Circuit Court of
28   Appeals both have recognized, the trustee’s power of assumption

                                       9
 1   and rejection under § 365(a) only applies to executory contracts
 2   and unexpired leases.   See NLRB v. Bildisco & Bildisco, 465 U.S.
 3   513, 521-22 & n.6 (1984); Unsecured Creditors’ Comm. v. Southmark
 4   Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702,
 5   705-06 (9th Cir. 1998) (en banc).    We consider ourselves bound,
 6   if possible, to read the statement in In re Hines in a manner
 7   consistent with the above-referenced Supreme Court and Ninth
 8   Circuit authority, and with the limitation on the scope of
 9   § 365(a) set forth on the face of the statute itself.
10        Thus, the above-referenced statement from In re Hines only
11   should apply here if it has been established that the subject
12   retainer agreement was executory at the time of Boates’
13   bankruptcy filing.   We note that this reading of In re Hines does
14   no violence to In re Hines’ holding because the fee agreement at
15   issue in In re Hines clearly was executory: at the time of the
16   commencement of Hines’ chapter 7 case, Hines and her bankruptcy
17   counsel both owed each other substantial performance of their
18   respective material duties under their fee agreement.    In re
19   Hines, 147 F.3d at 1187.
20        In deciding whether a contract is executory, we apply the
21   following test, commonly known as the Countryman test:
22        An executory contract is one on which performance
          remains due to some extent on both sides. More
23        precisely, a contract is executory if the obligations
          of both parties are so unperformed that the failure of
24        either party to complete performance would constitute a
          material breach and thus excuse the performance of the
25        other.
26   In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d at 705
27   (citations and internal quotation marks omitted) (citing Vern
28   Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L.

                                     10
 1   REV. 439, 460 (1973)).
 2        In turn, to determine whether a failure to perform by one
 3   party would constitute a material breach excusing performance by
 4   the other party, we must look to state contract law – in this
 5   case Arizona contract law.   See Dunkley v. Rega Props., Ltd. (In
 6   re Rega Props., Ltd.), 894 F.2d 1136, 1139 (9th Cir. 1990); Hall
 7   v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1348
 8   n.4 (9th Cir. 1983).
 9        There is no dispute, here, that all of Schian Walker’s
10   contractual duties under the retainer agreement were unperformed
11   at the time of Boates’ bankruptcy filing.   Consequently, the
12   resolution of the executory contract issue hinges on whether, at
13   the time of the bankruptcy filing, Boates still owed Schian
14   Walker any further contractual duties – unfulfilled duties that
15   would satisfy the applicable executory contract definition.
16        According to Ulrich, Boates still had promises to perform
17   under the contract.    However, most of these so-called promises to
18   perform do not hold up as contractual duties under close
19   scrutiny.   For instance, Ulrich claims that Boates had a
20   contractual duty to cooperate in his own defense.    We disagree.
21   This was not part of the parties written agreement.    More
22   importantly, even if Boates was obliged to cooperate in his own
23   defense, this was not a bargained-for part of Schian Walker’s
24   consideration.   Quite obviously, Schian Walker was not entering
25   into the retainer agreement in order to obtain Boates’
26   cooperation.   Schian Walker was entering into the retainer
27   agreement to obtain money from Boates in exchange for Schian
28   Walker’s promise to provide future legal services.    In the

                                      11
 1   parlance of Arizona contract law, Boates’ cooperation was not
 2   part of Schian Walker’s bargained-for consideration; rather, the
 3   payment of $60,000 was Schian Walkers’ bargained-for
 4   consideration, which bound Schian Walker to provide legal
 5   services.    See generally Turken v. Gordon, 224 P.3d 158, 165
 6   (Ariz. 2010) (defining “consideration” for contract law
 7   purposes).
 8        To the extent Boates was obliged to cooperate in his own
 9   defense, we do not consider this a contractual duty under the
10   retainer agreement; instead, Boates’ cooperation was a mere
11   condition to Schian Walker’s performance.   Whereas failure of a
12   contractual duty constitutes a breach of contract, failure of a
13   condition does not result in the breach of the contract.    See
14   Restatement (Second) of Contracts, § 235 (indicating that only
15   non-performance of contractual duties constitutes a breach);
16   Restatement (Second) of Contracts, Intro. Note accompanying
17   Topic 5 of Chapter 9 (distinguishing between contractual duties
18   and conditions).4
19        On the other hand, Ulrich also has pointed to Boates’
20   obligation to pay out-of-pocket costs Schian Walker incurs in the
21   process of defending Boates, including but not limited to
22   “service of process fees, filing fees, witness fees, travel,
23   expenses of deposition, investigative costs, computer research,
24   copying . . . and other incidental expenses.”    This obligation
25
26        4
           Absent contrary precedent, Arizona courts generally follow
27   the Restatement (Second) of Contracts. See Arizona v. Tohono
     O’odham Nation, 944 F. Supp. 2d 748, 766 (D. Ariz. 2013), aff’d,
28   818 F.3d 549 (9th Cir. 2016).

                                      12
 1   was included in Schian Walker’s Billing Policies and Procedures,
 2   which were specifically incorporated into the retainer agreement.
 3   Schian Walker never attempted to controvert the existence of this
 4   obligation, nor did it object to the Billing Policies and
 5   Procedures as a summary judgment exhibit.
 6        We hold that Boates’ obligation to pay Schian Walker’s costs
 7   was a material contractual duty that could result in breach and
 8   could excuse Schian Walker from further performance.    See
 9   generally QC Constr. Prods., LLC v. Cohill’s Bldg. Specialties,
10   Inc., 423 F. Supp. 2d 1008, 1013-14 (D. Ariz. 2006) (applying
11   Restatement (Second) of Contracts § 237, which provides that a
12   material failure of performance by one contracting party will
13   excuse the other contracting party from further performance of
14   his or her contractual duties); O’Day v. McDonnell Douglas
15   Helicopter Co., 959 P.2d 792, 795 (Ariz. 1998) (same).
16        We are aware that the Arizona Rules of Professional
17   Responsibility restricted Schian Walker’s ability to withdraw as
18   counsel of record.    Even so, the Ethics Rules state that the
19   client’s substantial nonperformance of an obligation can be
20   grounds for withdrawal.    See Ariz. S. Ct. R. 42, E.R. 1.16(b)(5).
21   Indeed, the legislative comments accompanying Ethics Rule 1.16
22   provide in relevant part that “[a] lawyer may withdraw if the
23   client refuses to abide by the terms of an agreement relating to
24   the representation, such as an agreement concerning fees or court
25   costs or an agreement limiting the objectives of the
26   representation.”    See Ariz. S. Ct. R. 42, E.R. 1.16, Cmt. [8]
27   (emphasis added).
28        Under these circumstances, we conclude that, at the time of

                                      13
 1   Boates’ bankruptcy filing, both parties to the retainer agreement
 2   had contractual duties that were both material and as-yet
 3   unperformed.   Based on their respective unperformed duties, the
 4   retainer agreement qualified as an executory contract.
 5   2.   Effect of Rejection
 6        Having determined that the retainer agreement was an
 7   executory contract that could be rejected, we next must address
 8   the effect of that rejection.   In re Hines opined: (1) that,
 9   notwithstanding rejection, the debtor’s contractual right to
10   legal services continued to be estate property; and (2) the
11   trustee post-rejection could liquidate the value of that right
12   for the benefit of the estate by demanding a refund of fees paid.
13   147 F.3d at 1189.   The bankruptcy court, here, did not address
14   this aspect of In re Hines other than to note that it was dictum.
15        We agree with the bankruptcy court to a point.     This aspect
16   of In re Hines was dictum.   In re Hines spoke of two types of
17   attorney services contracts: those that are fully prepaid and
18   those that are not fully prepaid.    Id. at 1189.5   The attorney
19   services contract at issue in In re Hines was not fully prepaid,
20   whereas In re Hines’ dictum related to a hypothetical, fully-
21   prepaid attorney services contract.    Id.
22        Regardless, we must approach the Court of Appeals’ dicta
23   with both deference and caution.     The Court of Appeals has held
24   that its dicta, under certain circumstances, can bind the Court
25
          5
26         Cf. Rus, Miliband & Smith, APC v. Yoo (In re Dick Cepek,
     Inc.), 339 B.R. 730, 736 & n.5 (9th Cir. BAP 2006) (generally
27   identifying three different types of retainers: (1) classic
     retainers, (2) security retainers, and (3) advance payment
28   retainers).

                                     14
 1   of Appeals.    Miranda B. v. Kitzhaber, 328 F.3d 1181, 1186 (9th
 2   Cir. 2003); see also United States v. Johnson, 256 F.3d 895, 914
 3   (9th Cir. 2001) (en banc) (in 2d majority opinion) (“[W]here a
 4   panel confronts an issue germane to the eventual resolution of
 5   the case, and resolves it after reasoned consideration in a
 6   published opinion, that ruling becomes the law of the circuit,
 7   regardless of whether doing so is necessary in some strict
 8   logical sense.”).    This panel, as an intermediate appellate court
 9   subordinate to the Court of Appeals, certainly is no less bound
10   by Ninth Circuit dicta than the Court of Appeals itself is.
11        That being said, we do not need to decide here the extent to
12   which In re Hines’ dictum binds us.     Essentially the same
13   relevant principles are articulated in another Court of Appeals
14   decision, in that instance as part of the Court of Appeals’
15   holding.    See First Ave. W. Bldg., LLC v. James (In re Onecast
16   Media, Inc.), 439 F.3d 558, 563 (9th Cir. 2006).
17        In In re Onecast Media, Inc., the Court of Appeals held that
18   the chapter 7 trustee’s rejection under § 365 of a lease did not
19   divest or deprive the bankruptcy estate of its property interest
20   in the claims and defenses available to the debtor under the
21   lease at the time of the bankruptcy filing.     Id.   This holding is
22   consistent with § 541(a), which automatically and broadly creates
23   a bankruptcy estate consisting of all of the debtor’s legal and
24   equitable interests in property.      Gladstone v. U.S. Bancorp, 811
25   F.3d 1133, 1139 (9th Cir. 2016).      The holding also is consistent
26   with § 365(g)(1), which specifies that rejection constitutes a
27   breach of the contract or lease as of the date of the bankruptcy
28   filing.    Importantly, Congress did not specify in § 365(g)(1)

                                      15
 1   that rejection constitutes a termination of the contract, a
 2   rescission of the contract or a relinquishment of rights under
 3   the contract.       See In re Onecast Media, Inc., 439 F.3d at 563.
 4   Other Code provisions amply demonstrate that Congress knows how
 5   to terminate contracts and leases (§§ 365(h)(1), (i)(1) and
 6   (n)(1)(A)) and also knows how to divest the estate of property
 7   rights (§ 522(b)(1)) when it wants to do so.       But § 365(g)(1)
 8   contains no such termination or divestiture.
 9          In light of In re Onecast Media, Inc., the real issue the
10   bankruptcy court, here, needed to resolve was the nature and
11   extent of the Boates’ contract rights on the date of the
12   bankruptcy filing if Boates were considered to have breached the
13   contract on that date.       In re Onecast Media, Inc., 439 F.3d at
14   563.       As stated there, “[w]hile rejection of a lease [or
15   contract] prevents the debtor from obtaining future benefits of
16   the lease (such as ongoing possession of leased premises), it
17   does not rescind the lease [or contract] or defeat any pending
18   claims or defenses that the debtor had in regard to that lease
19   [or contract].”       Id. (emphasis added).6
20
21          6
           We realize that some Ninth Circuit decisions have held,
     inconsistent with In re Onecast Media, Inc., that contract rights
22
     associated with executory contracts do not become property of the
23   estate unless and until the contract is assumed. See, e.g., Otto
     Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex
24   Entm’t, Inc.), 950 F.2d 1492, 1495 (9th Cir. 1991); Chbat v.
     Tleel (In re Tleel), 876 F.2d 769, 770 (9th Cir. 1989). When
25   faced with inconsistent Ninth Circuit decisions, we typically
26   follow the more-recent and better-reasoned Ninth Circuit
     authority. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373,
27   381 (9th Cir. BAP 2011). In this instance, the more-recent and
     better-reasoned Ninth Circuit authority is In re Onecast Media,
28                                                      (continued...)

                                         16
 1          As a matter of Arizona law, Ulrich’s retainer agreement
 2   rights on the date of the bankruptcy filing necessarily included
 3   a right to terminate Schian Walker and a right to a refund of the
 4   fees previously prepaid based on the value of services provided
 5   before termination.         See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3) &
 6   Cmt. [7].
 7          However, there is a critical undisputed fact missing from
 8   the summary judgment record.         Neither party presented evidence
 9   demonstrating when Ulrich first exercised his right to terminate
10   Schian Walker.       Ulrich effectively has taken the position that he
11   never retained Schian Walker as an estate professional, nor did
12   he obtain bankruptcy court approval under § 327 to retain Schian
13   Walker, so Schian Walker is not entitled to claim any value for
14   any postpetition attorney services it provided to Boates, in
15   light of §§ 327 and 330.
16          Ulrich’s position is based on a false premise.       Neither
17   § 327 nor § 330 are applicable.         Those statutes ordinarily do not
18   apply to chapter 7 debtor’s attorneys.         Lamie v. United States
19   Trustee, 540 U.S. 526, 537-39 (2004).         Moreover, they also do not
20   apply when the debtor’s attorney receives compensation from a
21   source other than estate funds.         See id.
22          The $60,000 Boates paid to Schian Walker before he filed
23   bankruptcy never became estate property.          In accordance with the
24   unambiguous terms of the retainer agreement, Schian Walker’s
25   $60,000 in fees were earned on receipt and immediately were
26
27
            6
                (...continued)
28   Inc.

                                           17
 1   deposited in Schian Walker’s general business account.     As a
 2   result, the $60,000 immediately became Schian Walker’s property.
 3   See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3), Cmt. [7].   Those funds
 4   never were deposited in Schian Walker’s client trust account, as
 5   would have been required for funds in which Boates still held an
 6   interest.    See Ariz. S. Ct. R. 42, E.R. 1.15(c) (“A lawyer shall
 7   deposit into a client trust account legal fees and expenses that
 8   have been paid in advance, to be withdrawn by the lawyer only as
 9   fees are earned or expenses incurred.”).
10        For purposes of determining what is property of the estate,
11   debtor’s rights in the subject property are determined under
12   applicable state law.   See Butner v. United States, 440 U.S. 48,
13   55 (1979).   Under the undisputed terms of the retainer agreement
14   and under the above-referenced Arizona law, the $60,000 was not
15   Boates’ property on the date of the bankruptcy filing, so the
16   $60,000 never became property of his bankruptcy estate.7
17
          7
           A recent law review article addressed the issue of the
18   bankruptcy treatment of earned on receipt retainers when the
19   applicable non-bankruptcy law is California law. Sarah C. Hays &
     D. Edward Hays, Good Help Is Hard to Fund: The Problem of Earned
20   Upon Receipt Retainers and Pre-Funded Litigation, 33 CAL. BANKR.
     J. 421 (2016). In that article, the authors posited that advance
21   payment retainers for legal services, even if designated as
     earned on receipt, actually are mere security retainers because
22
     of the refund right clients retain under California law. Id. at
23   426, 437-40. We express no opinion as to whether this article
     correctly interprets California law. Arizona law applies to the
24   appeal currently before this Panel, and Arizona law cannot be
     reconciled with the law review article’s assertion that there is
25   no such thing as a true advance payment, earned on receipt
26   retainer for future legal services. See Ariz. S. Ct. R. 42, E.R.
     1.5(d)(3), Cmt. [7]; see also Ariz. S. Ct. R. 42, E.R. 1.15(c).
27   The law review article’s assertions also are difficult to
     reconcile with the statements in In re Hines, 147 F.3d at 1189-
28                                                      (continued...)

                                      18
 1        Given that the summary judgment record did not demonstrate
 2   when Ulrich first gave notice of termination to Schian Walker,
 3   there was no way the bankruptcy court correctly could have
 4   determined on summary judgment whether Ulrich was entitled to any
 5   fee refund based on the value of services provided before
 6   termination.   See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3) & Cmt. [7].
 7   On remand, the bankruptcy court will need to address this
 8   lingering factual issue.8
 9   3.   Enforceability of Agreement Under Arizona Law
10        There only is one other issue we need to address.   Ulrich
11   alternately claimed that the retainer agreement was unenforceable
12   under Arizona law because it did not contain an express written
13   provision advising Boates of his right to terminate Schian Walker
14
15        7
           (...continued)
16   90, regarding the appropriate bankruptcy treatment of fully
     prepaid contracts for future attorney services. Nor can they
17   easily be reconciled with this Panel’s statements in In re Dick
     Cepek, Inc., 339 B.R. at 736 & n.5, explaining the difference
18
     between security retainers and advance payment retainers.
19        8
           When this Panel inquired at oral argument regarding
20   evidence of the termination of the retainer agreement, Ulrich
     only pointed to a single document in the record – an email from
21   his counsel to Schian Walker dated May 7, 2015, stating as
     follows:
22
23        So as to avoid any further confusion or argument, since
          the trustee’s settlement offer has been rejected, the
24        trustee demands hereby that Schian Walker, PLC turn
          over to the trustee the $60,000.00 that was paid to the
25        firm pre-petition to defend the post-petition 523
26        litigation by Metro Phoenix Bank.

27   For purposes of summary judgment, this email, by itself, did not
     dispositively answer the question of when Ulrich first notified
28   Schian Walker of the termination of the retainer agreement.

                                     19
 1   and his right to a refund of the fees previously paid based on
 2   the value of services provided before termination.     According to
 3   Ulrich, Schian Walker thereby violated E.R. 1.5(d)(3) of the
 4   Arizona Rules of Professional Conduct.   However, the Ethics Rules
 5   do not specify particular consequences for a failure to comply
 6   with the written notice requirement set forth in Ethics Rule
 7   1.5(d)(3).
 8        Ulrich claims that, as a consequence of the Ethics Rule
 9   violation, the bankruptcy court should have declared the retainer
10   agreement unenforceable.   As authority for this proposition,
11   Ulrich cites a single Arizona Court of Appeals Case.    Fearnow v.
12   Ridenour, Swenson, Cleere & Evans, P.C., 110 P.3d 357, 359-60
13   (Ariz. Ct. App. 2005), vacated & remanded on other grounds, 138
14   P.3d 723 (Ariz. 2006).   Fearnow is distinguishable.   Fearnow
15   involved a different Ethics Rule, Ariz. S. Ct. R. 42, E.R.
16   5.6(a), which per se prohibits provisions in law partnership
17   agreements, employment agreements and similar agreements
18   restricting lawyers’ practice of law upon the termination of the
19   agreement.
20        In construing Arizona statutes, we first and foremost must
21   give effect to the legislature’s intent, and we must give the
22   statutory language its ordinary meaning unless the statutory
23   context requires otherwise.   Mail Boxes, Etc., U.S.A. v.
24   Industrial Comm’n of Ariz., 888 P.2d 777, 779 (Ariz. 1995).
25   Here, based on our contextual reading of Ethics Rule 1.5(d)(3)
26   (including Comment [7] accompanying that Ethics Rule), we are
27   convinced that the purpose of this Ethics Rule is to protect
28   client rights by assuring adequate notice and not to per se

                                     20
 1   prohibit particular attorney conduct.    Indeed, per se
 2   invalidation of a violative retainer agreement just as easily
 3   might hurt the client as help the client.    Tellingly, here, it is
 4   not the client (Boates) who seeks to invalidate the retainer
 5   agreement.   Rather, it is an intervening third party (Ulrich) –
 6   whom the Ethics Rules were not designed to protect.
 7        Accordingly, we reject Ulrich’s claim that the retainer
 8   agreement was per se unenforceable under Arizona law.
 9                               CONCLUSION
10        For the reasons set forth above, we VACATE the bankruptcy
11   court’s judgment dismissing the adversary proceeding, and we
12   REMAND this matter for further proceedings consistent with this
13   decision.
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                     21
 1                              APPENDIX A
 2   Comment [7] to E.R. 1.5 of the Arizona Rules of Professional
 3   Conduct provides in full as follows:
 4        Disclosure of Refund Rights for Certain Prepaid Fees
 5        [7] Advance fee payments are of at least four types.
          The “true” or “classic” retainer is a fee paid in
 6        advance merely to insure the lawyer’s availability to
          represent the client and to preclude the lawyer from
 7        taking adverse representation. What is often called a
          retainer but is in fact merely an advance fee deposit
 8        involves a security deposit to insure the payment of
          fees when they are subsequently earned, either on a
 9        flat fee or hourly fee basis. A flat fee is a fee of a
          set amount for performance of agreed work, which may or
10        may not be paid in advance but is not deemed earned
          until the work is performed. A nonrefundable fee or an
11        earned upon receipt fee is a flat fee paid in advance
          that is deemed earned upon payment regardless of the
12        amount of future work performed. The agreement as to
          when a fee is earned affects whether it must be placed
13        in the attorney’s trust account, see ER 1.15, and may
          have significance under other laws such as tax and
14        bankruptcy. But the reasonableness requirement and
          application of the factors in paragraph (a) may mean
15        that a client is entitled to a refund of an advance fee
          payment even though it has been denominated
16        “nonrefundable,” “earned upon receipt” or in similar
          terms that imply the client would never become entitled
17        to a refund. So that a client is not misled by the use
          of such terms, paragraph (d)(3) requires certain
18        minimum disclosures that must be included in the
          written fee agreement. This does not mean the client
19        will always be entitled to a refund upon early
          termination of the representation (e.g., factor (a)(2)
20        might justify the entire fee), nor does it determine
          how any refund should be calculated (e.g., hours worked
21        times a reasonable hourly rate, quantum meruit,
          percentage of the work completed, etc.), but merely
22        requires that the client be advised of the possibility
          of the entitlement to a refund based upon application
23        of the factors set forth in paragraph (a). In order to
          be able to demonstrate the reasonableness of the fee in
24        the event of early termination of the representation,
          it would be advisable for lawyers to maintain
25        contemporaneous time records for all representations
          undertaken on any flat fee basis.
26
27   (Emphasis added.)
28

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