THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

trust. And although equitable interests in trust funds are considered estate property, prepaid attorneys' fees required to be refunded under § 329(b) are not deemed property of the estate statutorily, until actually recovered by the trustee. Several courts have held this section does not prevent unearned retainer money being property of the estate pursuant to § 541(a)(1) as trust money, however. The Code also expressly provides for interim compensation to a debtor's attorney once every 120 days or more often if the court permits.

3. The seminal discussion of the various types of retainers is found in In re McDonald Brothers Construction, Inc.. The court distinguishes among the following:

(1)

A "classic retainer" is paid to bind the attorney and preclude him from representing another, and simply as payment for accepting the case. Precluding counsel from representing other parties may be a significant consideration in a large Chapter 11 case, especially if counsel agrees to continue representing the debtor after the retainer is exhausted, even if withdrawal might otherwise be permitted. Such retainers are earned on receipt, and are not property of the debtor's estate.

(2)

A "security retainer" is held by the attorney to secure payment of fees for future services. The funds are held in trust, perfected via a pledge, and authorized to be drawn upon to cover any accrued but unpaid fees when the representation terminates. The retainer is property of the estate. It may be reasonable and appropriate for the security retainer to be "evergreen," i.e. not used to pay approved fees until approval of the final fee application.

This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)