United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT December 7, 2005
_______________________ Charles R. Fulbruge III
Clerk
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
disgorge fees taken both pre- and postpetition from clients who
utilized his services 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.
Accordingly, we AFFIRM in part, REVERSE in part, and REMAND to the
bankruptcy court to reassess sanctions.
I. BACKGROUND
This 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 high-
volume practice in the Eastern District of Texas. Under Rule
2016(e)(1) of the Local Rules of the United States Bankruptcy Court
for the 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 without 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, before 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 performed for his clients. These
prepetition payments were referred to as “deposits” in the retainer
agreement. A form retainer agreement between Barron and the debtor
1
The relevant facts were developed in a trial to the bankruptcy court
and are largely undisputed.
2
set forth, inter alia, the type of bankruptcy sought, the total
fees due, the amount of “initial deposit” owed, and the conse-
quences of not filing. Under the retainer agreement, the client
would forfeit the prepetition deposit to Barron if no bankruptcy
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-four 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 his efforts in contested
proceedings in the clients’ bankruptcy cases. Barron neither
requested nor received bankruptcy 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
consolidated motions, the bankruptcy court found that Barron
3
willfully and knowingly violated the Bankruptcy Code, the Texas
Disciplinary Rules of Professional Conduct (“Texas Rules”), 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.2
2
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. Ginther v. Ginther Trusts (In re Ginther Trusts),
238 F.3d 686, 689 (5th Cir. 2001) (citing Gilchrist 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
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 Chapter 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 officers, 11 U.S.C. §§ 329, 330, and to avoid certain
fraudulent or postpetition transactions, 11 U.S.C. §§ 548, 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 creditors
5
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 prop-
erty, 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 re-
jected 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
prepetition “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 the
3
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
debtor’s estate of all prepetition retainers,4 nor do the uniform
national 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 estate 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); In 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 the 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 from 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 nondisclosure
4
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). See also 11 U.S.C. § 1306(a)(1) and (2) (defining
debtor’s estate in Chapter 13 cases).
7
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. See Local Rule 2016(e)
(“If a chapter 13 debtor’s attorney requests $2000 or less for pre-
petition 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.
Section 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. Butner v. U.S., 440 U.S. 48, 54, 99 S. Ct. 914, 917-
18 (1979). Butner applies to the interpretation of the property
rights 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 retainers; and (3) advance
payment retainers. In re McDonald Bros., 114 B.R. at 996-98; see
also 1 NORTON BANKR. L. & PRAC. 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. Id. A classic retainer, paid
prepetition, is outside the estate and the purview of § 330, though
8
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. Id. 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. Id. Because the debtor retains
an interest in these funds, they become property of the estate at
filing subject to §§ 329 and 330. Id. 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 the debtor
relinquishes all interest. Id. at 1000, 1002. Funds collected as
advance payment retainers do not become property of the bankruptcy
estate at filing, and, as such, are subject to § 329 only. See
Wootton v. Ravkind (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 initial 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 security retainers for services to be rendered
9
postpetition. However, the record compels the conclusion that the
prepetition payments in this case should be characterized as
advance payment retainers for prepetition services. Barron
testified without contradiction that his clients 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 Chapter 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 is
10
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. See 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, that 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 payment 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 place “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 be
5
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 payment 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
held in trust . . . . Such retainer taken prior to the
filing of bankruptcy becomes the property of the
bankruptcy estate upon commencement of the bankruptcy
case.
Dixon, 143 B.R. at 677 (citations omitted) (emphasis added).
However, contrary to the bankruptcy court’s conclusion 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 Dixon court also
noted:
Though Texas ethical opinions 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 retainer, 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 subject to Local Bankruptcy Rule 2016. See 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 bankruptcy
12
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 fee 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 disclosing 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 estate.”
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].” Id. 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 court an opportunity to review the transfers.
Accordingly, the bankruptcy court had a sound basis to order Barron
to disgorge his undisclosed postpetition fees.
13
CONCLUSION
The bankruptcy court properly ordered Barron to disgorge
his undisclosed postpetition fees but erred in ordering
disgorgement of his prepetition retainers. We therefore AFFIRM the
portion of the judgment concerning postpetition fees, REVERSE as to
prepetition fees, and REMAND for further proceedings.
14