Although a so-called evergreen retainer is permissible even in Subchapter V cases, the particular case before Bankruptcy Judge Laurel M. Isicoff didn’t justify one because it was “not a Subchapter V case of a size or exceptional nature.”

The Subchapter V debtor operated a pair of fitness centers. Given limited cash and the prospect of active litigation after filing, Judge Isicoff said in her April 25 opinion that the debtor was only able to pay bankruptcy counsel a “small” pre-petition retainer of $8,000.

To alleviate the possibility that the reorganization would fail, leaving the chapter 11 estate administratively insolvent, the retention agreement called for the debtor to pay a $6,000 evergreen retainer every month after filing to be held in counsel’s trust account. The evergreen retainer would earmark $5,000 a month for the debtor’s counsel and $1,000 a month for the Subchapter V trustee. Naturally, counsel could not draw down the retainer until the court granted allowances of compensation.

The U.S. Trustee objected to the post-petition retainer for the debtor’s counsel. The U.S. Trustee wanted the evergreen retainer to remain estate property for eventual pro rata distribution to administrative claimants.

The U.S. Trustee did not object to earmarking for the Subchapter V trustee.

Judge Isicoff approved retention of debtor’s counsel but reserved decision on earmarking the post-petition retainer for the debtor’s counsel.

Regarding the permissibility of a post-petition retainer, Judge Isicoff said:

The law is clear that the Court has discretion to authorize a post-petition retainer under 11 U.S.C. § 328(a). Section 328 provides that a debtor in possession may employ a professional “on any reasonable terms and conditions of employment, including on a retainer.” 11 U.S.C. § 328(a). The “retainer” in section 328 is not qualified by any pre-petition payment requirement.

Judge Isicoff went on to say that she had “authorized payment of post-petition retainers from estate funds many times over the past nineteen years.” Having decided that post-petition retainers are permissible, she turned to the question of “what the Court should consider in determining whether to approve such a request.”

Surveying decisions by other bankruptcy courts approving evergreen retainers, she decided that “the Court must consider the arrangement both from the perspective of the professional and of the debtor.”

Judge Isicoff found there had been adequate disclosure and that counsel’s familiarity with the debtor’s operations “surely played a role in Counsel’s decision to take the representation on such a small retainer.” Nonetheless, she said that counsel “knew of the Debtor’s financial constraints at the inception of the case and chose to take the engagement, nonetheless.”

The debtor’s lawyer contended “that the amount of legal fees and costs required to take the Debtor to confirmation is ‘exceptionally large’ for this particular Debtor” given anticipated litigation with the landlord. However, disputes with the landlord had been resolved, leaving Judge Isicoff to find “nothing about the size and circumstances of this case that warrants a post-petition retainer.”

Similarly, Judge Isicoff was “unconvinced that the failure to have the escrowed funds treated as a retainer creates an undue hardship on Counsel [by] shifting the burden of administrative insolvency to Counsel.” She said that counsel could mitigate the insolvency concern “somewhat” by filing “an interim fee application if appropriate.”

“Although interim fee applications are not common in Subchapter V cases,” Judge Isicoff said, “they are not prohibited.”

In sum, Judge Isicoff held that “this case is not a Subchapter V case of a size or exceptional nature to warrant authorizing the Post-petition Retainer.” While she denied the post-petition retainer, she allowed the monthly deposits into counsel’s trust account with the proviso that the funds would “remain property of the estate.”