551 B.R. 428
9th Cir. BAP2016Background
- Debtor Boates prepaid a $60,000 flat retainer to law firm Schian Walker to defend an anticipated §523 nondischargeability adversary; the fee was labeled "earned on receipt" and deposited into the firm’s business account prepetition.
- Boates filed chapter 7. A trustee, Ulrich, was later appointed and sued Schian Walker seeking recovery of the $60,000 for the estate.
- Ulrich argued the retainer was an executory contract that was rejected by operation of §365(d)(1), so the trustee could liquidate the debtor’s prepaid right to legal services and demand a refund (relying on In re Hines); alternatively, Ulrich argued the agreement violated Ariz. E.R. 1.5(d)(3) and was unenforceable.
- Schian Walker argued (1) the fee was earned on receipt and therefore not estate property under Arizona law, (2) the debtor substantially performed so the agreement was not executory, and (3) the Ethics Rule violation (if any) did not per se render the agreement unenforceable.
- The bankruptcy court granted summary judgment for Schian Walker, finding the contract was not executory and the Ethics Rule violation insufficient to invalidate the agreement; the Panel vacated and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the retainer was an executory contract under the Countryman test | Ulrich: parties had mutual, material unperformed obligations so contract was executory | Schian Walker: debtor’s prepayment constituted substantial performance; no mutual material duties remained | The Panel: contract was executory because Schian Walker’s services were unperformed and debtor had material remaining duty to pay out-of-pocket costs incorporated by reference |
| Effect of rejection on the estate’s rights in prepaid legal services | Ulrich: rejection lets trustee liquidate debtor’s prepaid right and recover full contract value (per In re Hines) | Schian Walker: prepaid, earned-on-receipt fee was firm property, not estate property; rejection doesn’t create greater estate rights | The Panel: rejection does not terminate or divest estate of debtor’s prepetition contract rights; trustee may liquidate rights but factual issue (when trustee terminated retainer) remains and summary judgment was premature |
| Whether the $60,000 was property of the estate under state law | Ulrich: debtor’s prepaid right to services became estate property under §541 | Schian Walker: Arizona law + agreement terms made fees earned on receipt and firm property prepetition, so not estate property | The Panel: under Arizona law and the contract, the $60,000 was not estate property on filing because it was earned on receipt and deposited in firm account |
| Whether violation of Ariz. E.R. 1.5(d)(3) renders the retainer unenforceable | Ulrich: failure to include the written termination/refund notice makes agreement unenforceable | Schian Walker: any omission did not per se invalidate agreement; client knew rights; Ethics Rule lacks explicit sanction of invalidation | The Panel: Ethics Rule’s written-notice requirement protects clients but does not automatically void the agreement; Ulrich’s unenforceability claim rejected |
Key Cases Cited
- In re Hines, 147 F.3d 1185 (9th Cir.) (trustee may liquidate debtor’s prepaid right to legal services upon rejection)
- In re Onecast Media, Inc., 439 F.3d 558 (9th Cir.) (rejection of contract/lease constitutes breach but does not rescind or divest estate of prepetition claims and defenses)
- Butner v. United States, 440 U.S. 48 (1979) (property rights in bankruptcy are determined by applicable nonbankruptcy law)
- NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) (trustee’s assumption/rejection power under §365 applies only to executory contracts)
- Lamie v. United States Trustee, 540 U.S. 526 (2004) (§327/§330 ordinarily do not govern chapter 7 debtor’s counsel retained privately)