In re Raocore Technology LLC, ___ BR___ (Bankr. D.D.C. Jan. 28, 2025) bky case 24-00065
In re Raocore Technology LLC, ___ BR___ (Bankr. D.D.C. Jan. 28, 2025) bky case 24-00065: denied so called ‘Evergreen’ Retainer that SubV Chapter 11 debtor had agreed to pay its bankruptcy attorneys, and explains that ‘evergreen’ retainers are Ok Only in ‘Exceptional’ Sub V Cases
Washington, D.C. Bankruptcy Judge Elizabeth Gunn describes the procedures to employ for approval and operation of an ‘evergreen’ retainer in chapter 11.
In Washington, D.C., it seems unlikely that Gunn will countenance a so-called evergreen retainer in a chapter 11 case where “approval would essentially authorize the [debtor’s counsel] to write themselves a blank check from the Debtor’s post-petition income without any Court oversight as to the amount.”
The procedural history was lengthy and complex, but here are some of the pertinent details:
Pro se, a corporation filed a petition under Subchapter V of chapter 11. Immediately after filing, the debtor decided to hire a law firm with which it had no prior relationship. The firm received a $15,000 retainer paid by the debtor’s owner.
According to Judge Gunn’s January 28 opinion, the debtor agreed to a retention agreement containing an evergreen retainer. In substance, the retainer required the debtor or its owner to replenish the retainer every month to cover the month’s charges. The retention agreement gave the firm “sole judgment” about how much to add to the retainer. The firm also had the right to require the retainer on different terms if there were a change in circumstances.
The debtor had filed the original petition in another district, but a venue motion brought the case to Washington, D.C. Before the venue transfer, the debtor filed an application to retain the firm under Section 327 and to approve the evergreen retainer under Section 328.
Section 328(a) allows a chapter 11 debtor to retain counsel “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.”
Judge Gunn had the first crack at the retention application. She found the firm to be disinterested but called for more information about the evergreen retainer. In the ensuing weeks, details about the retainer came to light. Somewhere along the way, the case converted to chapter 7.
Judge Gunn held a hearing on the evergreen retainer after conversion to chapter 7. Although she had not signed an order approving the firm’s retention or the evergreen retainer, the opinion indicates that the debtor had replenished the retainer by more than $100,000. The opinion does not say whether the law firm held the retainer in trust.
When it comes to the “appropriateness” of evergreen retainers, Judge Gunn it was “an issue of first impression in this jurisdiction.” In a typical chapter 11 case, she said that “an evergreen retainer agreement contemplates that a debtor’s professional’s interim compensation shall be paid from the debtor’s operating capital, holding the original retainer for application towards a final fee application.” A retainer of the sort, she said, “may result in one administrative creditor receiving a significantly higher payment of its claims than other administrative creditors.”
Judge Gunn said that “ordering the Debtor to pay to the Applicants each month the total amount of fees incurred [would be] amounts significant enough to cause the Debtor to choose between paying operating expenses or paying counsel.”
Even though an evergreen retainer may benefit debtor’s counsel at the expense of the estate and creditors, Judge Gunn said that they “are permissible in certain chapter 11 cases” if, among other things, there is appropriate notice, specific disclosure in the retention application and the retention agreement, the payments are held in trust pending fee allowances, and there was “approval of any employment application by the Court prior to any payments made by any entity thereunder.”
Regarding the retention application, Judge Gunn said that “[s]uch open-ended, unilateral authority by counsel with a potential retroactive review by the Court is anything but sufficient disclosure.” The firm’s ability to require a retainer on different terms, she said, “is nothing more than a request for the Court to approve a blank check for the Applicants to modify in their sole judgment with no prior disclosure or court approval whatsoever.”
Judge Gunn therefore held that the “Applicants have not met their burden of appropriate notice and disclosure as to the Evergreen Provisions.” She went on to say that “the negotiation [over the retention agreement] was clearly not arms-length between the Debtor and the Applicants and weighs against approval.”
Judge Gunn said that a $15,000 retainer in a Subchapter V case “is not an unreasonable amount.” Still, she said it “will be the truly rare subchapter V case that will be of a size and exceptional nature to warrant an evergreen retainer.” She said that the case before her was “neither of a size nor complexity on its face to, without more, support the necessity of an evergreen retainer.”
Not willing to give the debtor’s counsel “a blank check from the Debtor’s post-petition income without any Court oversight as to the amount,” Judge Gunn approved the firm’s retention under Section 327 but disapproved the evergreen retainer sought under Section 328. She ordered the firm to “turn over to the chapter 7 trustee the amount of $100,163.46 representing all post-petition ‘evergreen’ deposits after the initial ‘donative’ $15,000.00 retainer.”