Robert Barron, a bankruptcy attorney, appeals the judgment of the bankruptcy and district courts ordering him to disgorge fees taken both pre- and postpetition from clients who utilized his services in one hundred sixty-seven Chapter 13 bankruptcies. The courts erred in construing Barron’s retainer agreements to require escrow of the prepetition “deposits” earned for prepetition serviсes. Neither Texas professional ethics standards nor applicable Bankruptcy Code provisions and court rules support the courts’ results. We do, however, affirm the order to disgorge postpetition fees for which no court approval was sought. Accordingly, we AFFIRM in part, REVERSE in part, and REMAND to the bankruptcy court to reassess sanctions.
I. BACKGROUND
This is a consolidated appeal arising from a series of motions filed in one hundred sixty-seven bankruptcy cases commenced between 2001 and 2003 in which
First, Barron would require payment from clients, generally about four hundred dollars, before he filеd bankruptcy petitions on their behalf. Barron testified that such payments were necessary to ensure that debtors remained active in their cases, and that the amounts were reasonable, given the substantial prepetition work Barron performed for his clients. These pre-petition payments were referred to as “deposits” in the retainer agreement. A form retainer agreеment between Barron and the debtor set forth, inter alia, the type of bankruptcy sought, the total fees due, the amount of “initial deposit” owed, and the consequences of not filing. Under the retainer agreement, the client would forfeit the prepetition deposit to Barron if no bankruptcy petition was filed. Barron did not place the prepetition fees into a trust account but, rather, made the funds immediately available to himself and his firm for prepetition work related to and/or in contemplation of bankruptcy. He maintained neither a trust nor an IOLTA account because he considered the prepetition funds his property upon remittance. Barron took prepetition payments in all of the cases involved in this appeal.
Second, in sixty-four of the cases, Barron took additional payments from clients after their bankruptcy petitions had been filed. These payments ranged from thirty to five hundred dollars and reimbursed Barron for his efforts in contested proceedings in the clients’ bankruptcy cases. Barron neither requested nor received bankruptcy court approval to accept these postpetition payments. He еarned the remainder of his two thousand dollar standard fee subject to court scrutiny as part of the Chapter 13 confirmation process.
Appellee Janna Countryman, a Chapter 13 trustee, complained that Barron failed both to place prepetition fees in escrow pending court approval and to file a fee application for the extra postpetition fees. After holding a hearing on Countryman’s consolidated motions, the bankruptcy court found that Barron willfully and knowingly violated the Bankruptcy Code, the Texas Disciplinary Rules of Professional Conduct (“Texas Rules”), the Local Bankruptcy Rules, and the Local Rules for the United States District Court for the Eastern District of Texas (“Local Rules”). Barron was ordered to disgorge all pre- and post-petition fees he received prior to plan confirmation in the one hundred sixty-seven cases.
On appeal, the district court affirmed the bankruptcy court’s decision. Barron again appeals pursuant to 28 U.S.C. § 158(d).
II. DISCUSSION
Barron principally asserts that the bankruptcy court erred in holding that his failure to place the clients’ prepetition payments in escrow pending later court apрroval violated both Texas Disc. Rule
When this court reviews the decision of a district court based on a bankruptcy court decision under 28 U.S.C. § 158, findings of fact are reviewed under the clearly erroneous standard and conclusions of law are reviewed de novo.
Crowell v. Theodore Bender Accounting, Inc. (In re Crowell),
A. Prepetition Payments
Barron initially contends that Countryman lacked “standing” to challenge his fee arrangements with Chapter 13 debtors. This issue was addressed by the district court and is properly before the cоurt here. Barron focuses his argument on 11 U.S.C. § 1302(b)(4), which prohibits the trustee in chapter 13 from advising the debtor on legal matters. However, he ignores the fact that “Congress has given the chapter 13 trustee a broad array of powers and duties.”
Matter of Maddox,
In order to apply the various rules and statutes Barron has been found liable of violating, we must examine the status of the preрetition “deposits” received from his clients. Three possibilities arise. Were the deposits Barron’s exclusive property, as he maintains, or did Barron’s clients maintain an interest in the deposits, or does the Bankruptcy Code authorize the courts to require trust accounts for all retainers irrespective of the ownership of the funds? The bankruptcy and district courts rejected Barron’s ownеrship contention and adopted both of the other alternatives.
The key to the bankruptcy court’s reasoning is its “plain meaning” conclusion that all attorney retainers are alike for purposes of Local Bankruptcy Rule 2016(b).
3
While Barron’s prepetition “de
Without doubt, the Bankruptcy Code seeks to protect both debtors and their estates from еxcessive or unnecessary legal fees. The Code requires court approval of all attorneys fees sought to be paid
from the estate of the debtor.
11 U.S.C. §§ 330(a)(4)(B), § 331;
In re Mayeaux,
Section 330 alone may apply to Barron’s retainer, but only if the debtor maintained some ownership right in it after the filing of a bankruptcy case. As the Supreme Court has made clear, state law оrdinarily supplies the definition of property rights in bankruptcy.
Butner v. United States,
Retainer agreements fall into three general categories: (1) classic retainers; (2) security retainers; and (3) advance payment retainers.
In re McDonald Bros.,
Barron’s Retainer Agreement clearly lays out the prepetition services to be provided by his office and provides that a client will forfeit initial deposits to Barron if he does not make scheduled payments (on the deposit) or opts not to file a petition. Countryman contends that since Barron ultimately filed petitions on behalf of all these clients, thе clients never forfeited the deposits and retained their interests in the prepetition payments. Such an argument presumes that the retainer agreements were security retainers for services to be rendered postpetition. •However, the record compels the conclusion that the prepetition payments in this case should be characterized as advance payment retainers for prepetition services. Barron testified without contradiction that his clients gave him prepetition deposits to secure his legal representation and to pay him for prepetition work. Barron also explained that his office performs the bulk of its services in ordinary Chapter 13 cases before the case is filed. These services include multiple cоnferences with the debt- or; preparing the schedules; identifying and proposing solutions to typical problems involving mortgage arrearages, auto and insurance debts and taxes; and proposing a payment plan.
The trustee complains that Barron’s retainer is suspect as compensation for pre-petition work because he keeps no official time records. On the contrary, the trustee’s argument is meritless. First, Barron testified without contradiction to the substantial prepetition services his office performs for clients in order to smooth their transition into Chapter 13 and develop realistic payment plans. Second, the trustee did not challenge the reasonableness of the overall fee, implying acquiescence in Barron’s testimony. Third, the trustee is hоist by her own petard, viz., by her reliance on the Local Bankruptcy Rule’s specific approval of Chapter 13 attorney fees of two thousand dollars or less without a formal fee application. Detailed record keeping is either required or, in the Local Rule’s commonsense approach to the practicalities of Chapter 13 representation, it is not.
Bаrron’s characterization of the prepetition fees as “earned” immediately upon receipt is not controlling.
See In re Chapel Gate Apartments, Ltd.,
It has been the practice in Texas and elsewhere to require pre-petition retainers taken for services to be rendered during the pendency of a bankruptcy case, to be held in trust .... Such retainer taken prior to the filing of bankruptcy becomes the property of the bankruptcy estate upon commencement of the bankruptcy case.
Dixon,
Though Texas ethical opinions have not prohibited flat fees [a.k.a. advance payment retainers] as unethical per se, they have recommended that all client funds whose nature of ownership is subject to question be placed into a trust account and segregated from funds belonging entirely to the attorney.
Id. at 678 n. 6 (emphasis added); see also Tex. Ethics Opinion 391 (discussing treatment of an advance payment retainer).
While it might have been prudent for Barron to place in escrow the prepetition payments he received, the Texas Rules do not require an advance payment retainer, earned by the attorney prepetition, to be placed in trust. Further, because the retainers at issue in this case were advance payments in nature, they became Barron’s property upon remittance. As Barron’s property, they were not subject to Local Bankruptcy Rule 2016.
See In re Dixon,
B. Postpetition Fees
The bankruptcy court found that in accepting postpetition fees directly from clients, Barron violated Local Bankruрtcy Rule 2016(e)(5). This rule states that any fees sought beyond an attorney’s initial fee must be paid as an 11 U.S.C. § 503(b)(2) administrative expense. Barron plainly violated this rule in taking additional funds from debtors without disclosing such payments. Moreover, even in the absence of Local Rule 2016(e)(5), these postpetition payments would have been improper. As the court in
Mayeaux
correctly noted, “money paid to Debtor’s сounsel in the post-petition period constitutes estate property. It is elementary bankruptcy law that all post-petition earnings of a Chapter 13 debtor ... constitute[ ] property of the bankruptcy estate.”
Mayeaux,
CONCLUSION
The bankruptcy court properly ordеred Barron to disgorge his undisclosed postpe-tition fees but erred in ordering disgorgement of his prepetition retainers. We therefore AFFIRM the portion of the judgment concerning postpetition fees, REVERSE as to prepetition fees, and REMAND for further proceedings.
Notes
. The relevant facts were developed in a trial to the bankruptcy court and are largely undisputed.
. Barron raised a numbеr of other issues on appeal, two of which are waived because they were inadequately preserved: Barron did not seriously mount a Fifth Amendment takings challenge in the bankruptcy court to the disgorgement order, nor did he timely challenge the Local Bankruptcy Rules’ nonconformity with national Bankruptcy Rule 9029.
Ginther
v.
Ginther Trusts (In re Ginther Trusts),
. The Loсal Rule, as written at the time this action was commenced, required that ''[a] court authorized professional must deposit a retainer, whether received from the debtor or any other person for the benefit of the debtor, in a trust or IOLTA account. The retainer must remain in the account until the Court enters an order allowing removal."
. The debtor’s estate includes "all legal or equitable intеrests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(l)(emphasis added). See also 11 U.S.C. § 1306(a)(1) and (2) (defining debt- or’s estate in Chapter 13 cases).
. It is worth noting that the practice of taking advance payment retainers is common in Chapter 11 bankruptcies. Countryman's broad interpretation of Local Bankruptcy Rule 2016(b) and of the trust requirement could have implications beyond this case. Attоrneys for Chapter 11 filers are routinely paid "current” for prepetition work before the case is actually filed. Requiring firms to escrow debtors’ advance payment retainers for work done in advance of the filing would create an enormous disincentive to competent Chapter 11 representation. Yet the protec