Bankruptcy courts have not always favored post-petition retainers to debtor’s counsel. [1] But does the Bankruptcy Code prohibit them? That is exactly the question Judge David D. Cleary answered in In re Golden Fleece Beverages Inc., in which he held that the Code indeed supports post-petition retainers. [2]
In the case, a chapter 11 debtor decided to go in another direction and hired new counsel during the case. In the engagement letter, the debtor agreed to pay a $75,000 retainer to its new counsel. Under the letter’s terms, the retainer would be escrowed, with any payments from the retainer to be paid after bankruptcy court approval. The debtor filed an application to retain that firm, and the U.S. Trustee objected.
Specifically, the U.S. Trustee objected that the retainer would be paid post-petition, contending both that (a) the Bankruptcy Code doesn’t authorize post-petition retainers, and (b) “to provide [debtor’s counsel] with a postpetition retainer would ‘better the position of counsel over every other administrative claimant in the case … which is both unfair, inappropriate, and provided for nowhere in the statute.’” [3]
To answer the question, the court looked to § 328(a), which provides that a chapter 11 debtor, “with the court’s approval, may employ or authorize the employment of a professional person … on any reasonable terms and conditions of employment, including on a retainer….” [4] Based on that language, the court overruled the objection for three key reasons.
First, the court emphasized that § 328(a) expressly contemplates the payment of “retainers” generally. Further, the Code does not modify that word as being “pre-petition” or “post-petition”; it simply authorizes “retainers.” Based on that language, then, Judge Clearly held that § 328(a) in fact supports post-petition retainers. What is more (although not expressly addressed by the court), the Code allows for retainers “on any reasonable terms and conditions of employment….” [5] So it would seem that, as long as the terms and conditions of a particular retainer are reasonable, payment of a retainer post-petition would fall in line with § 328(a)’s language.
Second, the court noted that § 329 requires debtor’s counsel to “file with the court a statement of the compensation paid or agreed to be paid … for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.” [6] The debtor’s application to employ fully complied with provision. Both the application to employ and its attached engagement letter disclosed the full terms of employment and disclosed the retainer. Those terms also provided that the retainer would be escrowed and accessed only after court approval.
Third, the court acknowledged the U.S. Trustee’s concern that post-petition retainers are estate property paid outside the ordinary course of the debtor’s business. But that concern was unfounded, as a debtor may use estate property outside the ordinary course with bankruptcy court approval under § 363(b). And that is exactly what the debtor planned to do: keep the retainer escrowed and accessible only after court approval. Thus, the escrowed retainer remained property of the estate, with distributions from the retainer to be paid only after court review and approval.
So while post-petition retainers are admittedly not the norm, Judge Clearly found that they are not prohibited and are instead supported by the Code. In addition, the court provided some helpful factors for approving post-petition retainers in the future:
- The case is an unusually large one in which an exceptionally large amount of fees accrues each month;
- The court is convinced that waiting an extended period of time for payment would place an undue hardship on counsel;
- The court is satisfied that counsel can respond to any reassessment in one or more of the ways listed above; and
- The fee retainer procedure is, itself, the subject of a noticed hearing prior to any payment thereunder.
In closing, the court cautioned that prohibiting post-petition retainers may chill a debtor’s ability to find counsel if a change must be made during a case. According to Judge Clearly, “[c]ounsel to prospective debtors would hold a new kind of leverage over their clients, knowing that only firms willing to undertake representation without a retainer could be chosen as substitute counsel.” [7] With that caution in mind, Judge Cleary’s opinion provides a pathway for debtors and their counsel to seek approval of post-petition retainers in the future.