TRUSTEE NOT ENTITLED TO ATTORNEY'S FEES HELD OVER FOR POSTPETITION SERVICES

In a well-drafted opinion that protects the debtor’s attorney’s use of the portion of a prepetition retainer fee that is reserved to cover postpetition services, the court denied the trustee’s attempt to recover the funds for the estate.The debtor paid his attorney a prepetition retainer fee for a chapter 7 case. The retainer fee consisted of cash plus an assignment of the debtor’s expected tax refund, due to be paid postpetition. At time of filing the petition, a portion of the retainer, including the tax refund, was unused, but clearly earmarked by the debtor and attorney to cover postpetition services.Trustee moved for disgorgement, on the theory that the unused portion of the cash, and the tax refund, were property of the estate, and the debtor’s attorney was prohibited from being paid out of the estate by the Supreme Court ruling in Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023 (2004), unless appointed by the court to represent the estate.In this case, the Court, acknowledging that the cases are split on the issue, held that the rights an individual has to property is a matter of state law, and that under Kansas state law an assignment of property transfers all right, title and interest in the property to the assignee (i.e., the debtor’s attorney). In such event, the only interest retained by the debtor (and hence the estate) is “limited to a right to the return of any portion that remains after paying the reasonable value of the services and expenses the Firm provides.”In so holding, the court observed that the integrity of the bankruptcy system depended on debtors being competently represented, and that without assurance of being paid for postpetition services, such representation would be impaired.The court quoted from an article by Morgan King** on the problem of adequate compensation for consumer bankruptcy attorneys: “The efficient and honest functioning of the bankruptcy system requires a robust, confident, and motivated debtors’ bar.” The Court said, “The Court agrees with these observations.”*The case is In re Wagers, BK case # 03-24484, Adv. # 04-6095, Feb. 23, 2006, District of Kansas, Dale L. Somers judge presiding