“Security retainer” for anticipated adversary proceeding turned over to Trustee as property of the chapter 7 bankruptcy estate

In re Blackburn
Case No. 10-01532-TLM
Decision Date: 1/26/2011
Chapter 7

Debtors filed for chapter 7 relief paying their attorney a retainer of $5,701 to be used for an anticipated adversary proceeding. The attorney obtained a “security interest” in these trust account funds. The attorney did not mention this retainer on the 2016(b) statement. Chapter 7 Trustee moved for an order directing Debtor’s bankruptcy counsel to turn over the cash retainer claiming it was property of the estate pursuant to 542.
The Court found that the retainer in this case was a “security retainer” because remained the property of the Debtor and was titled under the Debtor’s name in the trust account.
A chapter 7 debtor’s attorney may not recover compensation earned post-petition from a prepetition security retainer that is property of the estate because the “retainer exception” from Lamie v. United States Trustee does not apply to security retainers. 540 U.S. 526,538-39 (2004). Further chapter 7 debtor’s attorney may not be compensated for post-petition services from a prepetition security retainer even if the attorney holds a valid security interest in the retainer under an applicable state lien law. Trustee’s motion was granted and the attorney was ordered to turn over the $5,701 retainer to Trustee.
The Court found that it could also issue sanctions against the attorney for failing to meet 329(a) and Rule 2016(b) disclosure requirements but did not sanction the attorney above the turnover amount.

Full decision found HERE

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