“Postpetition retainers are not used routinely in bankruptcy cases, but this is not because the Code prohibits their use,” according to Bankruptcy Judge David D. Cleary of Chicago. They are not barred “[s]imply because [they] are not ordinarily part of the compensation arrangement,” he said.
The debtor filed a petition under Subchapter V of chapter 11 commencing a “contentious” case that portended to result in large legal fees, Judge Cleary said in his December 24 opinion. Prepetition, the debtor had paid a retainer to its bankruptcy counsel.
Two weeks into its chapter 11, the debtor decided to hire another firm in substitution for the firm that had filed the petition and first-day motions. Judge Clearly did not say why the debtor wanted new counsel.
Naturally, the debtor filed an application for retention of the new firm and approval to pay a postpetition retainer of $75,000, to be held in escrow pending allowances of compensation. With no objections, the court in the meantime had approved a so-called DIP financing arrangement where the $75,000 retainer was one of the budgeted expenses.
The U.S. Trustee objected to payment of a postpetition retainer. The government’s watchdog contended there was no statutory basis for a postpetition retainer and that it would give new counsel an unfair advantage over other administrative creditors.
Section 328(a) allows a trustee or DIP to retain professionals under Section 327 “on any reasonable terms and conditions of employment, including on a retainer . . . .” But the “twist here,” Judge Cleary said, is payment postpetition.
The U.S. Trustee’s first argument — the lack of statutory authority for a postpetition retainer — “ignore[s] the plain language of the Bankruptcy Code,” Judge Cleary said. “Section 328 clearly states that a debtor in possession may employ a professional on any reasonable terms and conditions of employment, including a retainer.” In fact, he said that the Bankruptcy Code “supports” approval of a postpetition retainer.
Judge Clearly said that Section 363(b) “can and should be the basis of a court’s authorization to use property of the estate to pay a postpetition retainer to a debtor in possession’s chosen professionals.”
Judge Clearly understood that counsel sought “to avoid being unreasonably exposed to risk, which would place an undue hardship on the attorneys.” If postpetition retainers were impermissible, he said, it “would chill a debtor’s ability to employ counsel of its choosing.”
Having found statutory authority for a postpetition retainer, Judge Cleary turned to the U.S. Trustee’s second argument: A postpetition retainer would unduly prefer counsel over other administrative creditors.
The argument “finds no traction here,” Judge Clearly said.
After being paid, the retainer would be held in escrow. Even after interim allowances, Judge Cleary said that “compensation is always subject to disgorgement until the case is concluded. It is a risk that bankruptcy counsel takes.”
Judge Cleary approved retention of new counsel and payment of a $75,000 postpetition retainer.
“Postpetition retainers are not used routinely in bankruptcy cases, but this is not because the Code prohibits their use,” according to Bankruptcy Judge David D. Cleary of Chicago. They are not barred “[s]imply because [they] are not ordinarily part of the compensation arrangement,” he said.
The debtor filed a petition under Subchapter V of chapter 11 commencing a “contentious” case that portended to result in large legal fees, Judge Cleary said in his December 24 opinion. Prepetition, the debtor had paid a retainer to its bankruptcy counsel.
Two weeks into its chapter 11, the debtor decided to hire another firm in substitution for the firm that had filed the petition and first-day motions. Judge Clearly did not say why the debtor wanted new counsel.