Chapter 7 Attorney Retainers - Fair Game?

Can the trustee get her hands on a pre-petition retainer paid to the debtor’s counsel? The subject is being revisited in the bankruptcy courts following the Supreme Court’s decision in Lamie v. U.S. Trustee, 124 S.Ct. 1023 (2004). I think of Lamie as the case which resolved a controversy over the “drafting error” in the 1994 amendment to §330(a), holding that a chapter 11 debtor’s lawyer can’t be compensated from the estate unless that lawyer is employed by the trustee with Court approval (and abrogating In re Century Cleaning Services, Inc., 195 F.3d 1053 (9th Cir. 1999), which allowed such compensation where the services were necessary to estate administration).
Now the other shoe has dropped, in an Oregon bankruptcy case In re Hill, 355 B.R. 260 (Bankr. D. Ore. 2006). In Hill the debtor’s counsel received a $5,000 advance retainer in a chapter 7 case, which was deposited into his client trust account. Counsel paid himself $2,115.15 for prepetition bankruptcy services. The Rule 2016 Statement reflected that “[t]he unpaid balance due and payable” to the lawyer was zero, and that “the source of payments to be made by debtor(s) to the undersigned for the unpaid balance remaining, if any, will be from earnings, wages and compensation for services performed, and gifts, loans, tax refunds, and cash retainer of $2,675.85” Bankruptcy Judge Trish Brown granted the Trustee’s motion to compel turnover of the trust account balance as of the petition date. An appeal is now pending in the District Court.
What happened to the notion that a debtor’s attorney obtains a security interest in the retainer, perfected by possession of the funds? Hill holds that the lien is irrelevant because the debtor’s counsel can’t be compensated.
It was important to the reasoning of Hill that the retainer paid to counsel was a “true retainer” not completely earned upon receipt by the lawyer. However, debtor attorneys trying to structure their retainers as flat fees are forced to describe in their fee agreements, as precisely as they can, what they are committed to do, post-petition, for the flat fee. Post-BAPCPA, where post-petition litigation issues not involving an adversary proceeding are more likely to arise, these promises may prove awkward.