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direct benefit to the creditor under Code § 506(c), or at least proof of adequate protection.
The type of retainer may be dispositive; a security retainer held in trust for payment of
future fees, less fees charged against it, is property of the estate that may be subject to a general intangibles or other lien. Taking a retainer from a secured creditor's collateral may create a conflict of interest. A retainer from a third party is not property of the estate, but is still subject to court review under § 329 and may result in a disqualifying conflict of interest.
2. It is incumbent upon counsel to ask about the retainer source. The filing of an involuntary petition by creditors does not preclude the debtor from using its assets during the gap period before the order for relief to fund a retainer.
1. Several bankruptcy courts in various jurisdictions have indicated that retainers to represent DIPs may not be considered "earned on receipt," but must be deposited into client trust accounts. The trust account money cannot be taken into income until services are rendered and fees are awarded by the court pursuant to fee applications. One appellate decision authorizes EOR bankruptcy retainers in certain circumstances, however, and another notes that advance payment retainers, earned prepetition for prepetition services, need not be held in trust.
2. The Bankruptcy Code expressly contemplates payment of retainers to
attorneys. The Code provisions do not specifically require that retainer funds be held in
This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)
