Memorandum of Decision Re: "True Retainer" as Fraudulent Transfer

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re RICHARD and KIM AZEVEDO,                                       No. 91-11820    Debtors. ________________________/ RICHARD and KIM AZEVEDO,    Plaintiffs,    v.                                                                              A.P. No. 91-1150 ROBERT BROWN and MATTHEW UNGER,    Defendants. ______________________________/
Memorandum of Decision
     In early 1991, plaintiff and Chapter 11 debtor in possession Richard Azevedo learned from the FBI that he was about to be indicted for criminal conduct arising out of his check cashing business. He immediately consulted with defendant Matthew Unger, a licensed attorney who does mainly criminal defense work.      After reviewing Azevedo's situation, Unger recommended that another attorney, defendant Robert Brown, be retained to handle civil law aspects of Azevedo's troubles. On March 22, 1991, Azevedo entered into a written agreement with Unger and Brown whereby the attorneys agreed to defend the criminal matter and pursue the civil matters through trial for the flat fee of $125,000.00, payable before April 5, 1991. The contract recited that "It is agreed said fee is earned on the signing of this agreement." Azevedo was told that this term was necessary to avoid having the funds seized by the government upon indictment. The contract was silent on any rights of the parties in the event of termination.      By refinancing his home, Azevedo raised and paid Unger and Brown $100,000.00 by April 16; he was insolvent at that time. Brown and Unger began working on his case, but pressed him for the remaining $25,000.00, which he was having difficulty raising. They also did not communicate very well what they were doing to Azevedo.      On May 31, Azevedo, upset with the pressure for payment he was getting from Brown and not sure either attorney was doing anything, wrote them a letter terminating the attorney-client relationship and demanding his money back. Brown and Unger refused to return anything, citing the contract. Azevedo and his wife filed their Chapter 11 petition on July 31, 1991, and remain debtors in posession. Azevedo has been indicted, and is being represented by the Federal Public Defender.      By this action, they seek recovery of the funds as fraudulent transfers and on other theories. Brown and Unger have counterclaimed for the $25,000.00 unpaid under the contract. Brown and Unger did not keep time records; interpreting the facts liberally in their favor, it appears that Brown put in about 220 hours on the case and Unger put in about 250 hours. Since Brown's hourly rate was $200 and Unger's $150, the reasonable value of the services they performed was $81,500.00.      It is clear from the testimony that the fees were recited in the contract as nonrefundable only so that they were not subject to forfeit. They cannot be considered a "true retainer," as urged by defendants, because the payment was for actual services, not just availability. A true retainer cannot include a provision for future services. In re Hathaway Ranch Partnership, 116 B.R. 208, 216 (Bkrtcy.C.D.Cal.1990). Rule 3-700(D)(2) of the California Rules of Professional Conduct provides that an attorney must return any part of an advance fee which has not been earned unless the retainer was solely for ensuring availability. That is not the case here.      The interpretation of the contract sought by Brown and Unger, that the funds were not refundable even if not earned, is unconscionable and accordingly barred by Rule 4-200 of the California Rules of Professional Conduct. Even if such an agreement were not unconscionable, no court would enforce the sort of forfeiture urged by Brown and Unger unless the contract clearly spelled out that in the event of termination they could keep everything. The contract, drafted by Brown, was silent as to the rights of the parties upon termination. As a matter of state contract law, modified by the Rules of Professional Conduct, the court finds that upon termination of the attorney-client relationship Azevedo was entitled to the return of any funds over and above the reasonable value of the services actually rendered.      Exactly the same result is reached under section 548(a)(2) of the Bankruptcy Code. The payment was made within a year of the filing, and while the debtors were insolvent. The only argument Brown and Unger have is that their promise to perform in the future was "reasonably equivalent value," but this is not supported by the law. Transfers of funds to attorneys for future services to be rendered to the debtor or the debtor's dependents are not made for value, and thus are recoverable as fraudulent transfers, except to the extent services were actually performed prepetition. In re Butcher, 72 B.R. 447, 449-50 (Bkrtcy.E.D.Tenn.1987).      The court does not find that Brown and Unger cheated Azevedo, or that the agreement itself, to represent Azedvedo through a major criminal trail for an advance payment of $125,000.00, was in and of itself unreasonable. It is because of these findings that the court has been fairly liberal in favor of Brown and Unger in fixing the reasonable value of services actually rendered, even though they kept no actual time records and the physical evidence of their work is not that strong. What the court does find is that it is patently unfair to allow Brown and Unger to keep more than they earned while other creditors go unpaid. The purpose of section 548 is to avoid anyone keeping a windfall at the expense of other creditors.      Accordingly, judgment shall be entered jointly and severally against Brown and Unger in the sum of $18,500.00, together with interest at the legal rate from and after May 31, 1991 and costs of suit. Brown and Unger shall take nothing by their counterclaim.      Because Azevedo is under criminal indictment, and the sums recovered here may not be used to defend him personally, all funds recovered shall be held by counsel for the debtors in his trust account and shall not be disbursed without order of the court.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for the debtors shall submit an appropriate form of judgment forthwith.
Dated: February 8, 1992                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy