The 4th U.S. Circuit Court of Appeals, in a case of first impression in In re Equipment Services Inc., 290 F.3d 739 (4th Cir., May 31, 2002) held that the provisions of the Bankruptcy Code governing compensation of professionals do not allow a Chapter 7 debtor’s attorney to be compensated from the estate. It also held that the unearned portion of a Chapter 11 retainer held in debtor’s counsel’s trust account as security for payment of his fees became the property of the debtor’s estate on the petition date, so that fees earned during the Chapter 11 case could be paid from the retainer, whereas fees “earned” for services during the Chapter 7 case could not.

Debtor’s counsel received a $6,000 retainer pre-petition, of which $1,000 was used to pay the costs of filing the Chapter 11 petition. Counsel deposited the remaining $5,000 in his client escrow account. While there was no written agreement, the bankruptcy court elicited from counsel the understanding that any unused fees would be refunded to the debtor, therefore demonstrating that the retainer was not a “flat fee,” already-earned payment, but rather served as security for fees to be earned later. Debtor’s counsel earned $1,325 in fees during the Chapter 11 proceeding and “earned” an additional $1,000 in fees during the Chapter 7 proceeding, and applied for both.

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