Stetler Cross Ministries v. City of Knoxville, TN
MEMORANDUM OPINION by Chief Judge Thomas B. Russell on 4/14/2011. For the foregoing reasons, the decision of the Bankruptcy Court is AFFIRMED. cc: Counsel; USBC Clerk; Judge Lloyd, USBC (CDF)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
BOWLING GREEN DIVISION
IN RE: Stetler Cross Ministries, Inc.,
Stetler Cross Ministries, Inc.,
Daniel M. McDermott,
This case is on appeal from the United States Bankruptcy Court for the Western District of
Kentucky. The Bankruptcy Judge in the instant case ordered attorney’s fees disgorged pursuant to
11 U.S.C. § 330(a)(2). This matter has been fully briefed by both sides, and is ripe for adjudication.
The ruling of the Bankruptcy Court is AFFIRMED.
Frank Yates (“Appellent”) represented Stetler Cross Ministries, Inc., for their Chapter 11
bankruptcy. Frank Yates prepared and filed a Chapter 11 Bankruptcy Petition on August 3, 2009
for the debtor. On August 15, 2009 Frank Yates and Stetler Cross Ministries, Inc., entered into a
written agreement for legal services. On August 17, 2009, Frank Yates disclosed to the Bankruptcy
Court that he received a $2,000 retainer payment from the Debtor in connection with the bankruptcy
case. On May 4, 2010, the US Trustee filed a motion to disgorge Yates’s retainer for failure to
comply with bankruptcy procedure. On July 7, 2010, the Bankruptcy Judge granted the motion to
Appellant presents two primary issues on appeal. The first issue is whether the retainer was
ever property of the estate and therefore under the control of the Bankruptcy Court and subject to
disgorgement. The second issue is whether, if the Bankruptcy Court had control of the retainer,
disgorgement was a lawful and appropriate remedy.
I. Authority to Disgorge
Appellant argues that the Bankruptcy Court had no authority to disgorge the retainer because
the payment was a prepetition classic retainer1 and therefore never property of the estate. There are
issues, however, with both classifying the retainer as prepetition and classifying the retainer as a
1. Classifying the Retainer as Prepetition
To be a prepetition classic retainer, Appellant must naturally first show that the agreement
and payment were actually prepetition. Appellant and Debtor entered into a written services
contract, which provided for the retainer, on August 15, 2009 – 12 days after the August 3, 2009
petition filing date. While this would seem to be conclusive evidence that the agreement was
postpetition, Appellant argues that an oral contract was present between Appellant and Stetler Cross
Ministries, Inc., prior to the written agreement. There is some evidence that this may be accurate,
since the written agreement states that it is reducing a prior agreement to writing. However, no date
of such a prior agreement is mentioned. Appellant has produced no evidence of the date of such a
prior oral agreement, for example by either his or his client’s affidavit. Appellant has also produced
A classic retainer is one that is earned upon receipt in exchange for the attorney’s
availability to the client. It is understood that any actual work is subject to separate billing by
no evidence to indicate that the payment from the prior oral agreement was received prepetition.2
Even if the agreement were prepetition, the payment would also have to be made prepetition, or else
the payment would have involved estate property.3 Accordingly, there is insufficient evidence to
indicate that any agreement and payment were prepetition. The retainer was therefore property of
the estate at the time of transfer, and was within the control of the Bankruptcy Court.
2. Classifying the Retainer as a Classic Retainer
Even assuming that the agreement and retainer payment were prepetition, Appellant must
also demonstrate that the retainer was actually a classic retainer and not a security retainer.4
Appellant contends that because the agreement states on its face that the retainer is a ‘general
retainer,’ that statement is binding as to the interpretation of the contract retainer as a classic
retainer. However, since “merely stating that a retainer is fully earned upon receipt and nonrefundable does not satisfy the requirements of a classic retainer,” merely stating that something is
a ‘general retainer’ does not satisfy the requirements of a classic retainer. In Re National Magazine
Publishing Co., 172 B.R. 237, 240 (Bankr. N.D.Oh. 1994). Rather, the “court may look beyond any
label applied by the parties when construing or interpreting the contract.” Id. (citing Cimorelli v.
New York Cent. R.R. Co., 148 F.2d 575 (6th Cir. 1965). Determining whether the retainer is a
classic retainer or a security retainer is a question of state law. Butner v. United States, 440 U.S. 48,
If Appellant had received the $2,000 payment prior to the bankruptcy petition filing, this
Court assumes that Appellant would have been able to produce a check or bank statement to
demonstrate as much. No such evidence has been produced.
Once property of the estate, any payments would have to be approved by the Bankruptcy
Court, even if the agreement was entered into prior to the bankruptcy petition.
A security retainer is one that an attorney collects at the beginning of a representation
and then draws from as actual legal work is performed. In the Bankruptcy context, a draw from
a security retainer must be approved by the court.
54 (1979). Looking to the other circumstances surrounding this agreement, it is clear that the
retainer has the characteristics of a security retainer rather than a classic retainer.
First, Appellant states that the agreement was initially entered into orally, and later
memorialized in writing. However, under Kentucky law, a classic retainer must be accompanied
by a writing. Kentucky Bar Association Ethic Opinion E-380 (June 1995), referenced in, e.g.,
Kentucky Bar Ass’n v. Adair, 203 S.W.3d 144, 145 (Ky. 2006). Failure to meet the requirements
of E-380 can result in disgorgement. Clendenin v. Kentucky Bar Ass’n, 114 S.W.3d 858, 860 (Ky.
2003). Accordingly, while the Ethics Opinion itself is only advisory, the opinion has been adopted
and applied by the Kentucky Supreme Court such that a written agreement is a clear requirement
for a classic retainer. Kentucky Supreme Court authority is binding on this Court, even if E-380 is
not. Accordingly, the fact that the retainer was not originally in writing - and not in writing when
the fee was paid if, as Appellant contends, he was paid prepetition - cuts against finding the retainer
to be a classic retainer. Even if the retainer was determined to be a classic retainer, disgorgement
would still be an appropriate remedy for Appellant’s failure to follow his ethical obligations. Id.
In addition, the retainer was treated by the parties as a security retainer, and not a classic
retainer. A true classic retainer pays solely for a lawyer’s availability, and “is not paid for the
purpose of applying the same towards hourly work.” In Re Nat’l Magazine Publ’g, 172 B.R. at 241.
The legal services agreement includes a provision for the retainer, immediately followed by a
provision for hourly service. It is unclear, from the face of the contract, whether the hourly services
were a separate fee or were to initially be billed against the ‘general retainer.’ In Re Tundra Co.,
243 B.R. 575, 583 (Bankr. D. Mass. 2000) (using the language in the contract to interpret the
meaning of ‘general retainer.’). Accordingly, this Court must look to the surrounding circumstances.
Looking through the Bankruptcy Court docket sheet contained in the record, there is no
evidence that Mr. Yates ever requested payment on an hourly basis following the bankruptcy filing.
The issue of Mr. Yates’s retainer was not raised until April 29, 2010, which was almost 9 months
after the initial filing. It is also clear from the Docket that Mr. Yates had likely spent a significant
number of hours working on the case prior to April 29, 2010. Under the Bankruptcy Code, the court
can award reasonable compensation for services. However, no such attempt to attain compensation,
in 9 months of work, was made. Such a failure to collect reasonable compensation seems to indicate
that the $150 hourly fee was initially meant to come from the retainer. This setup results in a
security retainer that remains the property of the estate even if collected prepetition.
Accordingly, because there is insufficient evidence to indicate that the retainer was entered
into and paid prepetition and intended by the parties to be a classic retainer, the retainer payment
was a postpetition security retainer within the control of the Bankruptcy Court.
II. DISGORGEMENT AS A REMEDY
Appellant also contests whether the appropriate remedy for his actions was disgorgement
even if the retainer was a postpetition security retainer. Appellant claims that disgorgement is a
harsh and extraordinary remedy that was not warranted in this case. In support of this, Appellant
cites to the Bankruptcy Court’s finding that the Bankruptcy Code violation was negligent, and not
Bankruptcy Judges have wide latitude to enforce procedural rules in their courts.
Accordingly, an order of disgorgement is only reviewed for abuse of discretion. In Re Geraci, 138
F.3d 314, 319 (7th Cir. 1998). It is uncontested that if the retainer was property of the estate, the
disbursement from a trust account to Mr. Yates’s personal account was unauthorized. Disgorgement
has generally been recognized as an appropriate remedy for unauthorized payments. In Re Triple
S Rests., Inc., 130 Fed. Appx. 766 (6th Cir. 2005) (Order of disgorgement upheld for violations of
rules). “[B]ankruptcy courts have broad and inherent authority to deny any and all compensation
where an attorney fails to satisfy the requirements of the Code and Rules . . . Disgorgement may be
proper even though the failure to disclose resulted . . . from negligence or inadvertence.” In Re
Kisseberth, 273 F.3d 714 (6th Cir. 2001). See also In re McCrary & Dunlap Constr. Co., LLC, 79
Fed. Appx. 770, 779 (6th Cir. 2003) (“We do not suggest, however, that a finding of willfulness
must in all instances precede an order requiring complete disgorgement of fees.”). Since a rules
violation is uncontested, and disgorgement can be ordered for willful or negligent violations, nothing
more need be establish to demonstrate that disgorgement was an available remedy. Appellant has
done nothing to demonstrate that there was an abuse of discretion when the Bankruptcy Judge
ordered disgorgement.5 Appellant has offered many reasons as to why disgorgement may not be the
best remedy in the current situation. However, the order of disgorgement has already been entered,
and Appellant must show why such an order was an abuse of discretion. This heavy burden has not
been met. In addition, while it is true that the Bankruptcy Judge found that the violations were due
to negligence, a review of the transcripts from hearings in front of the Bankruptcy Judge makes it
clear that the Judge thinks this is an extraordinary case where disgorgement was appropriate
This applies equally to Appellant’s failure to demonstrate that declining to grant nunc
pro tunc relief was an abuse of discretion.
Judge Lloyd had the following to say in this case: “[Mr. Yates,] I think you were hired
by Ms. Stetler because she knew that you would file some documents for her and drag this case
out as long as possible, without care to the rules and obligations of counsel for Chapter 11
debtor, without the obligations owed by a Chapter 11 debtor to this Court, its creditors, and all of
For the foregoing reasons, the decision of the Bankruptcy Court is AFFIRMED.
April 14, 2011
the other parties in interest. I am offended by that. And you should be ashamed, if you have
drawn that money out of your escrow account and utilized those funds.” Transcript of hearing
held Thursday, April 29, 2010, pgs. 43- 47, Bankruptcy Court Docket Sheet No. 88, Petition No.
09-11332 (Bankr. W.D.Ky. September 15, 2010); “Mr. Yates, you’ve let this Court down . . . . I
follow the rules, [opposing counsel] follows the rules . . . but not you, Mr. Yates. And not your
client, Linda Stetler. Because what you all do is you take advantage of everybody else observing
decorum, filing pleadings that make sense, making legal arguments that have merit, filing
adversary proceedings that make sense, that have a basis in fact [or] law. Everybody else
follows the rules except Ms. Stetler and her counsel. . . . This Court has had enough of Ms.
Stetler and Mr. Yates.” Transcript of hearing held Thursday, August 19, 2010, pgs. 12 - 13,
Bankruptcy Court Docket Sheet No. 75, Petition No. 09-11332 (Bankr. W.D.Ky. September 15,