THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

trust accounts.²⁸⁶ The trust account money cannot be taken into income until services are rendered and fees are awarded by the court pursuant to fee applications.²⁸⁷ One appellate decision authorizes EOR bankruptcy retainers in certain circumstances, however, ²⁸⁸ and anoth

er notes that advance payment retainers, earned prepetition for prepetition services, need not be held in trust.²⁸⁹

2. The Bankruptcy Code expressly contemplates payment of retainers to attorneys.²⁹⁰ The Code provisions do not specifically require that retainer funds be held in trust. And although equitable interests in trust funds are considered estate property,²⁹¹ prepaid

attorneys' fees required to be refunded under § 329(b) are not deemed property of the estate

statutorily, until actually recovered by the trustee.²⁹² Several courts have held this section does not prevent unearned retainer money being property of the estate pursuant to § 541(a)(1) as trust money, however.²⁹³ The Code also expressly provides for interim compensation to a debtor's attorney once every 120 days or more often if the court permits.²⁹⁴

3. The seminal discussion of the various types of retainers is found in In re McDonald Brothers Construction, Inc..²⁹⁵ The court distinguishes among the following:

(1)

A "classic retainer" is paid to bind the attorney and preclude him from representing another, and simply as payment for accepting the case.²⁹⁶ Precluding counsel from

representing other parties may be a significant consideration in a large Chapter 11 case, especially if counsel agrees to continue representing the debtor after the retainer is exhausted, even if withdrawal might otherwise be permitted.²⁹⁷ Such retainers are earned on receipt, and are not property of the debtor's estate.²⁹⁸

(2)

A "security retainer" is held by the attorney to secure payment of fees for future services. The funds are held in trust, perfected via a pledge, and authorized to be drawn upon to cover any accrued but unpaid fees when the representation terminates. The retainer is property of the estate.²⁹⁹ It may be reasonable and appropriate for the security retainer to be "evergreen," i.e. not used to pay approved fees until approval of the final fee application.³⁰⁰

(3)

An "advance payment retainer" represents advance payment for services the attorney is expected to perform for the client, up to the amount of the retainer. The court said that ownership of the funds is intended to pass to the attorney upon receipt, in exchange for the commitment to provide legal services, even though the balance would be refundable if representation ended before services valued at the full retainer amount were performed.³⁰¹ The McDonald Brothers court explained that court approval is necessary before retainers can be used if those retainers are property of the estate, held in trust by counsel. But the court may only require disclosure of attorney compensation from non-estate funds, and disgorgement if they are excessive.³⁰² Courts may disregard attorneys' categorization of their fees, and look to the retainer purpose to determine if it is an advance fee to be refunded if unearned, or can be considered earned on receipt.³⁰³

4. State rules of professional conduct require any retainer that is an advance against fees or costs, but still property of a client, to be deposited into a trust account.³⁰⁴ Several

state bar ethics committees have concluded, however, that a non-refundable retainer which operates as a minimum fee agreement may be taken into firm income immediately. That is, a client