Editor's Note: This article was
presented before the Ethics, Investment Banking and Professional
Compensation Committees' joint meeting at ABI's Annual Spring Meeting,

held April 20-23, 2006, in Washington, D.C. Part I appeared in
the June 2006 ABI Journal.Protection of Carve-Outs under
§364(e) While §364(e) was not considered in U.S.
Flow, some courts have found that this Code section may also protect
carve-outs from disgorgement. In In re Cooper Commons, the
Ninth Circuit dismissed a challenge to the payment of the trustee and
his professionals under a post-petition financing agreement.

Weinstein, Eisen & Weiss v. Gill (In re Cooper
Commons), 430 F.3d 1215 (9th Cir. 2005). In this case, a law
firm that had served as general counsel to the debtor objected to
approval of the proposed post-petition financing agreement because,
while the agreement set aside funds for payment of the trustee and his

professionals, it failed to set aside funds for the law firm. The
court rejected the law firm's argument that the proposed agreement
granted the trustee a superpriority treatment over the law firm
contrary to 11 U.S.C. §507(a)(1), which places the professionals
on equal priority. The court ruled that because the agreement was a
post-bankruptcy extension of credit, 11 U.S.C. §364(e) broadly
protects the agreement and funds advanced in "good faith"
thereunder. Thus, if the retention agreement is deemed to constitute
a post-petition extension of credit under §364, not only will the

agreement to advance funds to pay the carve-out be protected, but the
funds paid to professionals will similarly not be subject to
disgorgement and redistribution. Security Retainers Some
jurisdictions have found that pre-petition security retainers do not
have to be returned or are not subject to disgorgement when an estate
is rendered administratively insolvent. This line of authority is
based on a determination that the professional has a security interest

in the retainer for future services based on its possession of the
funds. See Bowles, supra; see also In re
Printcrafters Inc., 233 B.R. 113, 120 (D. Colo. 1999) (finding
that, pursuant to Colorado law, law firm had a possessory lien in
retainer that had been paid pre-petition and was entitled to immediate

payment from retainer without having to wait to see if sufficient
funds existed to pay other administrative claims); In re Pannebaker

Custom Cabinet Corp., 198 B.R. 453 (Bankr. M.D. Pa. 1996) (holding

that pre-petition security retainer debtor paid to its attorneys prior

to filing for chapter 11 relief was not subject to disgorgement simply

for purpose of obtaining parity among administrative claimants where
funds on hand were not sufficient to permit full payment of
administrative claims, absent any evidence as to excessive or
unreasonable nature of retainer); In re North Bay Tractor Inc.,

191 B.R. 186 (Bankr. N.D. Cal. 1996) (stating that a rule requiring
attorneys to disgorge their retainers so that other claimants of equal

priority receive equal dividends would undermine the purpose of
retainers and chill the willingness of many professionals to undertake

representation of chapter 11 debtors); In re Cottrell
International, 2000 WL 1180282 at *4 (Bankr. D. Col.) (ruling that

the Printcrafters decision equally applies to pre- and
post-petition retainers); In re Printing Dimensions Inc., 153
B.R. 715 (Bankr. D. Md. 1993) (finding that debtor's counsel was not
required to share pre-petition retainer pro rata with other
administrative claimants if either retainer is treated as security or
retainer is held in trust). A "security retainer" secures
payment for future services of the attorney and the attorney is said
to have a security interest in the payment. In re Renfrew Center of

Florida Inc., 195 B.R. 335, 338 (Bankr. E.D. Pa. 1996). Some
courts have even gone further and distinguished between pre-petition
retainers and administrative expense claims, stating that a
pre-petition retainer is entitled to superpriority treatment.

See, e.g., In re Hohenberg, 191 B.R. 694, 701
(Bankr. W.D. Tenn. 1996) (distinguishing pre-petition retainer from
administrative expense claim). Unlike these cases, however, most courts

have not distinguished between administrative versus superpriority
treatment. See, e.g., Bowles, supra, and
cases cited therein. At the same time, courts have, depending on the
nature of the retainer, required disgorgement of the unused portion of

pre-petition retainers. See, e.g., In re Prudoff,

196 B.R. 64, 66-67 (Bankr. E.D. Va. 1995) (requiring disgorgement of
unused portion of retainer based on state law that gave debtor equitable

interest in any unused portion of a retainer). It is unclear
whether, or how, the Specker decision affects this area of law.

First, that decision did not discuss whether the attorney acquired a
security interest in the retainer as the Ninth Circuit Bankruptcy
Appellate Panel (BAP) acknowledged in In re Cepek in
distinguishing Specker. Rus, Miliband & Smith v. Yoo (In

re Cepek), 2006 WL 851188 (9th Cir. BAP) (holding that a
professional with a valid pre-petition security retainer that has been

properly documented, disclosed and approved by the bankruptcy court
cannot be required to surrender it in the interest of equal treatment
under §726(b)). Presumably, having found that the retainer was
granted post-petition and without authority for the granting of a
security interest post-petition, the Sixth Circuit would have ruled
that no such security interest was granted or arose. On the other
hand, it is not clear how the Sixth Circuit would have ruled if it
found, like Judge Gregg, that the retainer had been given
pre-petition. As previously noted, the Sixth Circuit did not address the

significance, if any, between receipt of a pre-petition and a
post-petition retainer. Therefore, while Specker appears to
apply only to cases in which post-petition retainers are at issue, it
is unclear whether the Sixth Circuit would apply the same reasoning in

the case of a pre-petition retainer. Ultimately, how a court deals
with the issue of whether a security interest is created by virtue of
the payment of a pre-petition retainer will largely depend on the
particular state law involved. Law in this area differs significantly
from state to state. Moreover, the language of the specific retainer
agreement at issue may also influence how the retainer is treated and
how it is applied. Therefore, at the onset of a matter, practitioners
must ensure that their jurisdiction recognizes a security interest in
a pre-petition retainer before relying upon it for payment and a
security interest. Attorney Liens An attorney-charging lien

is an equitable interest in money or property awarded or recovered
through the attorney's services. Property interests are determined by
state law, and therefore, the nature and extent of attorney liens vary
from state to state. Whether the retainer constitutes property of the
estate, and under what circumstances the retainer can be
"protected" from the claims of other creditors and/or a
trustee, will depend on state law. For example, under Georgia law, the

automatic stay did not allow a post-petition attorney lien for
post-petition services. In re Chewning & Frey Security Inc.,

328 B.R. 899 (Bankr. N.D. Ga. 2005). However, another state's law may
allow a lien perfected post-petition to relate back to a pre-petition
date and cause the property subject to the lien to be considered
separate from property of the estate. Id. Furthermore, it is
unclear whether an attorney lien attaches merely to the file or also
to the funds held by the attorney. Thus, the result may likewise vary
from state to state. Therefore, practitioners must be cognizant of the

law of their jurisdiction and the possibility and/or implications of
obtaining a charging lien prior to undertaking the representation or
taking a retainer. Are Fees Awarded in a Confirmed Chapter 11
Case Subject to Attack in Subsequently Filed Case? Generally,
once the final order granting allowance and payment of professional
fees is entered and funds are distributed in payment of such fees under
a confirmed chapter 11 plan that has become effective and
substantially consummated, most professionals believe that the fees
they received are inviolate and beyond attack. However, a motion
recently filed in a Massachusetts bankruptcy case may now give rise to

second thoughts before professionals breathe a sigh of relief. In

In re High Voltage Engineering Corp., Case No. 05-10787 (Bankr.
D. Mass. 2005), the chapter 11 trustee appointed in a subsequent case
filed by the debtor filed a motion asking the court to reconsider the
administrative expense claims of professionals that had been paid in
the debtor's prior chapter 11 bankruptcy case as part of a confirmed
plan. A short time after the plan was confirmed and professionals had
been paid, the debtor found that it was in need of additional
bankruptcy relief. In lieu of seeking to reopen the prior chapter 11
or to modify the plan post-confirmation,2 the debtor filed a
new chapter 11 case and a trustee was appointed. Rather than
seeking to reopen the prior chapter 11 case in order to set aside and
challenge the fee awards, the trustee filed a motion in the debtor's
second chapter 11 case. The trustee alleged that the professionals may

have been aware that the debtor's plan was not feasible at the time of

confirmation and, therefore, they may not be entitled to their fees.
The trustee thus sought reconsideration of the order(s) allowing the
professionals' claim(s) for payment in the prior bankruptcy pursuant
to 11 U.S.C.§502(j) and Federal Rule of Civil Procedure 60(b),
made applicable in bankruptcy proceedings by Rule 3008 of the Federal
Rules of Bankruptcy Procedure. The motion is currently stayed, as the
trustee has twice assented to a motion to stay proceedings while he
further investigates the claims. The filing of such a motion
presents significant issues for professionals. First, should
professional fees be subject to attack after confirmation of a plan of

a solvent estate? If the High Voltage court believes that they
should, professionals can never be assured that payment of their fees is

final. Second, once fees are approved pursuant to a confirmed plan
that has been substantially consummated, should a trustee or other
interested party be able to challenge those professional fees in the
subsequent bankruptcy case (assuming they are not subject to avoidance

under another applicable provision of the Bankruptcy Code or otherwise

procured by fraud)? While from a procedural perspective it may be
appropriate for such fees to be challenged by reopening the prior
bankruptcy case, it remains to be seen how the court will deal with
this issue in High Voltage. On the other hand, to allow such a
process to go forth in the absence of fraud or an avoidance action
essentially makes the professional a guarantor of the success of a
confirmed plan, or risk potential disgorgement of its fees and
expenses incurred and approved in the case. Conclusion The

book is certainly not closed on the sanctity of previously awarded
attorneys' (and other professionals') fees. When a case becomes
administratively insolvent, unpaid post-petition creditors—be
they trade creditors, landlords or other professionals—may very
well look to a previously paid professional to share some of the
wealth, as well as the pain. Only time, and the specific facts of the
case, may tell how successful their efforts will be.
<hr><h3>Footnotes</h3> 1 The authors wish to give special thanks to
Richard M. Meth, Pitney Hardin, LLP, for his review and editorial
comments of this article. 2 It is unclear whether the plan had
been substantially consummated by the time the new case was filed or
whether the debtor would have had the right to seek to modify the plan

post-confirmation under §1127 of the Bankruptcy Code.

Journal Authors

Judith Greenstone Miller

Journal Date

Saturday, July 1, 2006 - 12:00

Bankruptcy Rule

2006

3008