In re: Craighton Thomas Boates

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: June 9, 2016
• Docket: AZ-15-1279-KuJaJu
• Status: Published

Opinion

FILED 1 ORDERED PUBLISHED JUN 09 2016

2 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-15-1279-KuJaJu ) 6 CRAIGHTON THOMAS BOATES, ) Bk. No. 2:14-bk-17115-GBN ) 7 Debtor. ) Adv. No. 2:15-ap-00269-GBN ______________________________) 8 ) DALE D. ULRICH, Chapter 7 ) 9 Trustee, ) ) 10 Appellant, ) ) 11 v. ) O P I N I O N ) 12 SCHIAN WALKER, P.L.C., ) ) 13 Appellee. ) ______________________________) 14 Argued and submitted on May 20, 2016 15 at Phoenix, Arizona 16 Filed – June 9, 2016 17 Appeal from the United States Bankruptcy Court for the District of Arizona 18 Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding 19 20 Appearances: Terry A. Dake argued for appellant Dale D. Ulrich, chapter 7 trustee; Mark C. Hudson of Schian 21 Walker, P.L.C. argued for appellee Schian Walker, P.L.C. 22 23 24 Before: KURTZ, JAIME* and JURY, Bankruptcy Judges. 25 26 27 * Hon. Christopher D. Jaime, United States Bankruptcy Judge 28 for the Eastern District of California, sitting by designation. 1 KURTZ, Bankruptcy Judge: 2 3 INTRODUCTION 4 The judgment on appeal disposed of the parties’ cross- 5 motions for summary judgment and dismissed the chapter 71 trustee 6 Dale D. Ulrich’s adversary proceeding against the debtor’s 7 counsel Schian Walker, P.L.C. In the adversary proceeding, 8 Ulrich unsuccessfully sought to recover for the benefit of the 9 bankruptcy estate $60,000 the debtor paid prepetition to Schian 10 Walker pursuant to a retainer agreement. Under the express terms 11 of the retainer agreement, the $60,000 was a flat fee the debtor 12 was fully prepaying in exchange for Schian Walker’s promise to 13 defend the debtor in an anticipated nondischargeability 14 proceeding. The retainer agreement further specified that the 15 $60,000 flat fee was earned on receipt and that it would be 16 deposited in Schian Walker’s business bank account. 17 Notwithstanding the debtor’s prepetition payment in full of 18 the $60,000, both parties to the retainer agreement still had 19 significant and material contractual duties to perform at the 20 time of the bankruptcy filing, so the retainer agreement 21 qualified as an executory contract for purposes of § 365, and the 22 retainer agreement was rejected by operation of law under 23 § 365(d)(1). Because the bankruptcy court, in granting summary 24 judgment, erroneously determined that the retainer agreement was 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 27 all "Rule" references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All “Civil Rule” references are to 28 the Federal Rules of Civil Procedure.

2 1 not an executory contract, we must VACATE AND REMAND for further 2 proceedings consistent with our holding regarding the effect of 3 that rejection on the parties’ respective rights and liabilities 4 under the retainer agreement and under Arizona law. 5 On remand, the bankruptcy court will need to address one 6 lingering factual issue. Absent from the summary judgment record 7 was any undisputed fact demonstrating when Ulrich first exercised 8 his power to liquidate the estate’s rights under the retainer 9 agreement by notifying Schian Walker that the agreement was 10 terminated. Under binding Ninth Circuit precedent, rejection of 11 the retainer agreement did not terminate the agreement, nor did 12 it divest the estate of the rights and defenses the debtor 13 enjoyed under the agreement at the time of his bankruptcy filing. 14 Accordingly, we VACATE AND REMAND. 15 FACTS 16 At the time of the debtor Craighton Thomas Boates’ 17 bankruptcy filing, he was a defendant in a state court lawsuit 18 brought against him by Metro Phoenix Bank for negligent 19 misrepresentation and fraud. In the state court lawsuit, the 20 bank sought damages in excess of $3.6 million. When Boates 21 disclosed to the bank his intent to commence a bankruptcy case, 22 the Bank, in turn, expressed its intent to file a 23 nondischargeability adversary proceeding against Boates under 24 § 523. 25 In anticipation of this adversary proceeding, before filing 26 bankruptcy, Boates entered into an adversary proceeding retainer 27 agreement with Schian Walker. Pursuant to the retainer 28 agreement, Schian Walker promised to defend Boates in the

3 1 anticipated nondischargeability action in exchange for a flat fee 2 of $60,000. More specifically, the retention agreement provided 3 as follows: 4 The Flat Fee will cover the value of all work we will perform through the conclusion of the Adversary 5 Proceeding. The Flat Fee will be paid by you directly to us, and will be deposited in our business account. 6 The Flat Fee is not an advance against any hourly rate, and the Flat Fee will not be billed against an hourly 7 rate. You agree that the Flat Fee becomes the property of our firm upon receipt, and will be deposited into 8 our business account. 9 Nondischargeability Retention Letter (Nov. 5, 2014) at p. 2. 10 Several days before he filed his bankruptcy petition, Boates 11 signed the retainer agreement and paid the $60,000 to Schian 12 Walker, and Schian Walker immediately deposited the $60,000 into 13 its general business account.2 14 Boates filed his bankruptcy petition on November 17, 2014, 15 and the bank commenced its nondischargeability adversary 16 proceeding four days later on November 21, 2014. Roughly one 17 month later, in December 2014, Ulrich was appointed as successor 18 chapter 7 trustee. 19 Several months later, in May 2015, Ulrich filed a complaint 20 against Schian Walker for declaratory relief and for a monetary 21 judgment of $60,000. Ulrich’s complaint in large part was 22 founded on Gordon v. Hines(In re Hines), 147 F.3d 1185 (9th Cir. 23 1998). Ulrich asserted that, based on In re Hines, the adversary 24 2 There was a separate retainer agreement covering general 25 bankruptcy legal services Schian Walker promised to provide in 26 exchange for a flat fee of $5,000. The bankruptcy retainer agreement was structured similarly to the adversary proceeding 27 retainer agreement. The bankruptcy retainer agreement is not critical to our analysis or resolution of this appeal, but we 28 mention it for background purposes.

4 1 proceeding retainer agreement was an executory contract, which 2 had been rejected by operation of law under § 365(d)(1). Ulrich 3 further asserted that he was entitled under In re Hines to claim 4 from Schian Walker the full contract value of Schian Walker’s 5 legal services – $60,000 – based on the rejection of the retainer 6 agreement and based on his pre-litigation demand that Schian 7 Walker pay him the $60,000. In support of this claim, Ulrich 8 also alleged that Boates’ prepaid right to legal services was 9 property of the estate under § 541. 10 As an alternate basis for recovering the $60,000, Ulrich 11 alleged that the retainer agreement was unenforceable because it 12 violated E.R. 1.5(d)(3) of the Arizona Rules of Professional 13 Conduct.3 Based on this Ethics Rule, Ulrich claimed that Schian 14 Walker should have but failed to disclose in writing Boates’ 15 right to terminate Schian Walker’s representation and to seek a 16 refund depending on the actual value of the services Schian 17 3 This Ethics Rule states: 18 19 (d) A lawyer shall not enter into an arrangement for, charge, or collect: 20 * * * 21 (3) a fee denominated as “earned upon receipt,” 22 “nonrefundable” or in similar terms unless the client 23 is simultaneously advised in writing that the client may nevertheless discharge the lawyer at any time and 24 in that event may be entitled to a refund of all or part of the fee based upon the value of the 25 representation pursuant to paragraph (a). 26 (Emphasis added.) In turn, Comment [7] accompanying this Ethics 27 Rule also plays a critical role in our resolution of this appeal, so we quote Comment [7] in full, as Appendix A at the end of this 28 decision.

5 1 Walker provided. 2 According to Ulrich, under either theory of recovery, any 3 services Schian Walker actually provided postpetition to Boates 4 effectively were irrelevant in calculating the estate’s 5 entitlement to a refund of the $60,000 because, from and after 6 the filing of the petition, the right to prepaid legal services 7 belonged to the estate and not to Boates. 8 Schian Walker filed a motion for summary judgment, and 9 Ulrich filed a cross-motion for summary judgment. In its summary 10 judgment motion, Schian Walker pointed out that, under the terms 11 of the retainer agreement and Arizona law, the $60,000 was not 12 property of the debtor at the time of Boates’ bankruptcy filing, 13 so the $60,000 was not estate property under § 541. In addition, 14 Schian Walker asserted that the Boates had substantially 15 completed his required performance under the retainer agreement, 16 so the agreement was not an executory contract covered by § 365. 17 As for the alleged violation of E.R. 1.5(d)(3) of the Arizona 18 Rules of Professional Conduct, Schian Walker admitted the 19 violation but posited that the statute violation did not justify 20 rendering the retainer agreement unenforceable, especially given 21 the undisputed facts demonstrating that Schian Walker gave Boates 22 verbal notice of the rights referenced in Ethics Rule 1.5(d)(3) 23 and that Boates – himself a practicing attorney – already knew 24 and understood these rights. 25 Ulrich’s arguments in his cross-motion for summary judgment 26 mirrored those he made in his complaint. 27 At the hearing on the cross-motions for summary judgment, 28 the bankruptcy court ruled in favor of Schian Walker and against

6 1 Ulrich. In so ruling, the bankruptcy court adopted most of the 2 positions Schian Walker had advocated. For instance, the 3 bankruptcy court held that the retainer agreement was not an 4 executory contract because Boates’ payment of the $60,000 5 constituted substantial performance of his obligations under the 6 retainer agreement. The bankruptcy court additionally held that 7 Schian Walker’s violation of Ethics Rule 1.5(d)(3) was 8 insufficient, by itself, to render the retainer agreement 9 unenforceable. But the bankruptcy court went beyond Schian 10 Walker’s advocated positions. The bankruptcy court ruled that 11 In re Hines was distinguishable because the retainer at issue in 12 In re Hines was not a flat fee advance payment retainer fully 13 prepaid before the bankruptcy was filed. The bankruptcy court 14 acknowledged In re Hines’s statements regarding the appropriate 15 treatment in bankruptcy of flat-fee, advance-payment retainers, 16 fully prepaid before the bankruptcy is filed. However, according 17 to the bankruptcy court, these statements were dicta. 18 On August 14, 2015, the bankruptcy court entered judgment 19 dismissing the adversary proceeding, and Ulrich timely filed a 20 notice of appeal. 21 JURISDICTION 22 The bankruptcy court had jurisdiction under 28 U.S.C. 23 §§ 1334 and 157(b)(2)(A) and (O). We have jurisdiction under 28 24 U.S.C. § 158. 25 ISSUE 26 Did the bankruptcy court err when it granted summary 27 judgment in favor of Schian Walker and against Ulrich? 28 ///

7 1 STANDARDS OF REVIEW 2 We review de novo the bankruptcy court’s summary judgment 3 rulings. Ilko v. Cal. St. Bd. of Equalization (In re Ilko), 651 4 F.3d 1049, 1052 (9th Cir. 2011). When we review a ruling de 5 novo, we give no deference to the bankruptcy court’s decision. 6 Univ. of Washington Med. Ctr. v. Sebelius, 634 F.3d 1029, 1033 7 (9th Cir. 2011). 8 In determining whether to uphold the bankruptcy court’s 9 summary judgment rulings, we apply the same summary judgment 10 standards as do all other federal courts. Marciano v. Fahs (In 11 re Marciano), 459 B.R. 27, 35 (9th Cir. BAP 2011), aff’d, 708 12 F.3d 1123 (9th Cir. 2013). Summary judgment is properly granted 13 when no genuine issues of disputed material fact remain, and, 14 when viewing the evidence most favorably to the non-moving party, 15 the movant is entitled to prevail as a matter of law. Civil Rule 16 56 (made applicable in adversary proceedings by Rule 7056); 17 Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). For 18 purposes of ruling on summary judgment motions, a factual issue 19 is considered material if it could affect the outcome of the 20 case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 21 The substantive law controls which facts are material. Id. A 22 factual dispute is considered genuine if there is sufficient 23 evidence to permit a reasonable trier of fact to make a finding 24 in favor of either party. Far Out Prods., Inc. v. Oskar, 247 25 F.3d 986, 992 (9th Cir. 2001) (citing Anderson, 477 U.S. at 26 248–49). 27 DISCUSSION 28 Ulrich’s arguments on appeal are premised on two distinct

8 1 contentions: (1) that the adversary proceeding retainer agreement 2 constituted an executory contract; and (2) that, even if the 3 retainer agreement was not an executory contract, the retainer 4 agreement was invalid because Schian Walker violated E.R. 5 1.5(d)(3) of the Arizona Rules of Professional Conduct. We will 6 address each of these contentions in turn, but we note at the 7 outset that Ulrich has forfeited all other issues on appeal that 8 he might have raised because he did not specifically and 9 distinctly argue them in his opening appeal brief. Christian 10 Legal Soc’y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010); 11 Brownfield v. City of Yakima, 612 F.3d 1140, 1149 n.4 (9th Cir. 12 2010). 13 1. Executory Contract Rejected by Operation of Law 14 Ulrich contends on appeal that the retainer agreement was an 15 executory contract. According to Ulrich, because the retainer 16 agreement was an executory contract, he can recover the value of 17 the contract rights prepaid by Boates based on the rejection of 18 the contract under § 365(d)(1). To support this argument, Ulrich 19 relies on In re Hines, which stated: “the trustee can liquidate 20 the debtor’s [prepaid] right to legal services by rejecting the 21 contract with the attorney and demanding a refund of the unearned 22 fees.” In re Hines, 147 F.3d at 1189. 23 We do not read this statement quite as broadly as Ulrich 24 does. In re Hines’ reference to “rejecting the contract” 25 doubtlessly is meant to invoke § 365(a) and the trustee’s power 26 thereunder to assume or reject executory contracts and unexpired 27 leases. As the Supreme Court and the Ninth Circuit Court of 28 Appeals both have recognized, the trustee’s power of assumption

9 1 and rejection under § 365(a) only applies to executory contracts 2 and unexpired leases. See NLRB v. Bildisco & Bildisco, 465 U.S. 3 513, 521-22 & n.6 (1984); Unsecured Creditors’ Comm. v. Southmark 4 Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702, 5 705-06 (9th Cir. 1998) (en banc). We consider ourselves bound, 6 if possible, to read the statement in In re Hines in a manner 7 consistent with the above-referenced Supreme Court and Ninth 8 Circuit authority, and with the limitation on the scope of 9 § 365(a) set forth on the face of the statute itself. 10 Thus, the above-referenced statement from In re Hines only 11 should apply here if it has been established that the subject 12 retainer agreement was executory at the time of Boates’ 13 bankruptcy filing. We note that this reading of In re Hines does 14 no violence to In re Hines’ holding because the fee agreement at 15 issue in In re Hines clearly was executory: at the time of the 16 commencement of Hines’ chapter 7 case, Hines and her bankruptcy 17 counsel both owed each other substantial performance of their 18 respective material duties under their fee agreement. In re 19 Hines, 147 F.3d at 1187. 20 In deciding whether a contract is executory, we apply the 21 following test, commonly known as the Countryman test: 22 An executory contract is one on which performance remains due to some extent on both sides. More 23 precisely, a contract is executory if the obligations of both parties are so unperformed that the failure of 24 either party to complete performance would constitute a material breach and thus excuse the performance of the 25 other. 26 In re Robert L. Helms Constr. & Dev. Co., Inc., 139 F.3d at 705 27 (citations and internal quotation marks omitted) (citing Vern 28 Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L.

10 1 REV. 439, 460 (1973)). 2 In turn, to determine whether a failure to perform by one 3 party would constitute a material breach excusing performance by 4 the other party, we must look to state contract law – in this 5 case Arizona contract law. See Dunkley v. Rega Props., Ltd. (In 6 re Rega Props., Ltd.), 894 F.2d 1136, 1139 (9th Cir. 1990); Hall 7 v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1348 8 n.4 (9th Cir. 1983). 9 There is no dispute, here, that all of Schian Walker’s 10 contractual duties under the retainer agreement were unperformed 11 at the time of Boates’ bankruptcy filing. Consequently, the 12 resolution of the executory contract issue hinges on whether, at 13 the time of the bankruptcy filing, Boates still owed Schian 14 Walker any further contractual duties – unfulfilled duties that 15 would satisfy the applicable executory contract definition. 16 According to Ulrich, Boates still had promises to perform 17 under the contract. However, most of these so-called promises to 18 perform do not hold up as contractual duties under close 19 scrutiny. For instance, Ulrich claims that Boates had a 20 contractual duty to cooperate in his own defense. We disagree. 21 This was not part of the parties written agreement. More 22 importantly, even if Boates was obliged to cooperate in his own 23 defense, this was not a bargained-for part of Schian Walker’s 24 consideration. Quite obviously, Schian Walker was not entering 25 into the retainer agreement in order to obtain Boates’ 26 cooperation. Schian Walker was entering into the retainer 27 agreement to obtain money from Boates in exchange for Schian 28 Walker’s promise to provide future legal services. In the

11 1 parlance of Arizona contract law, Boates’ cooperation was not 2 part of Schian Walker’s bargained-for consideration; rather, the 3 payment of $60,000 was Schian Walkers’ bargained-for 4 consideration, which bound Schian Walker to provide legal 5 services. See generally Turken v. Gordon, 224 P.3d 158, 165 6 (Ariz. 2010) (defining “consideration” for contract law 7 purposes). 8 To the extent Boates was obliged to cooperate in his own 9 defense, we do not consider this a contractual duty under the 10 retainer agreement; instead, Boates’ cooperation was a mere 11 condition to Schian Walker’s performance. Whereas failure of a 12 contractual duty constitutes a breach of contract, failure of a 13 condition does not result in the breach of the contract. See 14 Restatement (Second) of Contracts, § 235 (indicating that only 15 non-performance of contractual duties constitutes a breach); 16 Restatement (Second) of Contracts, Intro. Note accompanying 17 Topic 5 of Chapter 9 (distinguishing between contractual duties 18 and conditions).4 19 On the other hand, Ulrich also has pointed to Boates’ 20 obligation to pay out-of-pocket costs Schian Walker incurs in the 21 process of defending Boates, including but not limited to 22 “service of process fees, filing fees, witness fees, travel, 23 expenses of deposition, investigative costs, computer research, 24 copying . . . and other incidental expenses.” This obligation 25 26 4 Absent contrary precedent, Arizona courts generally follow 27 the Restatement (Second) of Contracts. See Arizona v. Tohono O’odham Nation, 944 F. Supp. 2d 748, 766 (D. Ariz. 2013), aff’d, 28 818 F.3d 549 (9th Cir. 2016).

12 1 was included in Schian Walker’s Billing Policies and Procedures, 2 which were specifically incorporated into the retainer agreement. 3 Schian Walker never attempted to controvert the existence of this 4 obligation, nor did it object to the Billing Policies and 5 Procedures as a summary judgment exhibit. 6 We hold that Boates’ obligation to pay Schian Walker’s costs 7 was a material contractual duty that could result in breach and 8 could excuse Schian Walker from further performance. See 9 generally QC Constr. Prods., LLC v. Cohill’s Bldg. Specialties, 10 Inc., 423 F. Supp. 2d 1008, 1013-14 (D. Ariz. 2006) (applying 11 Restatement (Second) of Contracts § 237, which provides that a 12 material failure of performance by one contracting party will 13 excuse the other contracting party from further performance of 14 his or her contractual duties); O’Day v. McDonnell Douglas 15 Helicopter Co., 959 P.2d 792, 795 (Ariz. 1998) (same). 16 We are aware that the Arizona Rules of Professional 17 Responsibility restricted Schian Walker’s ability to withdraw as 18 counsel of record. Even so, the Ethics Rules state that the 19 client’s substantial nonperformance of an obligation can be 20 grounds for withdrawal. See Ariz. S. Ct. R. 42, E.R. 1.16(b)(5). 21 Indeed, the legislative comments accompanying Ethics Rule 1.16 22 provide in relevant part that “[a] lawyer may withdraw if the 23 client refuses to abide by the terms of an agreement relating to 24 the representation, such as an agreement concerning fees or court 25 costs or an agreement limiting the objectives of the 26 representation.” See Ariz. S. Ct. R. 42, E.R. 1.16, Cmt. [8] 27 (emphasis added). 28 Under these circumstances, we conclude that, at the time of

13 1 Boates’ bankruptcy filing, both parties to the retainer agreement 2 had contractual duties that were both material and as-yet 3 unperformed. Based on their respective unperformed duties, the 4 retainer agreement qualified as an executory contract. 5 2. Effect of Rejection 6 Having determined that the retainer agreement was an 7 executory contract that could be rejected, we next must address 8 the effect of that rejection. In re Hines opined: (1) that, 9 notwithstanding rejection, the debtor’s contractual right to 10 legal services continued to be estate property; and (2) the 11 trustee post-rejection could liquidate the value of that right 12 for the benefit of the estate by demanding a refund of fees paid. 13 147 F.3d at 1189. The bankruptcy court, here, did not address 14 this aspect of In re Hines other than to note that it was dictum. 15 We agree with the bankruptcy court to a point. This aspect 16 of In re Hines was dictum. In re Hines spoke of two types of 17 attorney services contracts: those that are fully prepaid and 18 those that are not fully prepaid. Id. at 1189.5 The attorney 19 services contract at issue in In re Hines was not fully prepaid, 20 whereas In re Hines’ dictum related to a hypothetical, fully- 21 prepaid attorney services contract. Id. 22 Regardless, we must approach the Court of Appeals’ dicta 23 with both deference and caution. The Court of Appeals has held 24 that its dicta, under certain circumstances, can bind the Court 25 5 26 Cf. Rus, Miliband & Smith, APC v. Yoo (In re Dick Cepek, Inc.), 339 B.R. 730, 736 & n.5 (9th Cir. BAP 2006) (generally 27 identifying three different types of retainers: (1) classic retainers, (2) security retainers, and (3) advance payment 28 retainers).

14 1 of Appeals. Miranda B. v. Kitzhaber, 328 F.3d 1181, 1186 (9th 2 Cir. 2003); see also United States v. Johnson, 256 F.3d 895, 914 3 (9th Cir. 2001) (en banc) (in 2d majority opinion) (“[W]here a 4 panel confronts an issue germane to the eventual resolution of 5 the case, and resolves it after reasoned consideration in a 6 published opinion, that ruling becomes the law of the circuit, 7 regardless of whether doing so is necessary in some strict 8 logical sense.”). This panel, as an intermediate appellate court 9 subordinate to the Court of Appeals, certainly is no less bound 10 by Ninth Circuit dicta than the Court of Appeals itself is. 11 That being said, we do not need to decide here the extent to 12 which In re Hines’ dictum binds us. Essentially the same 13 relevant principles are articulated in another Court of Appeals 14 decision, in that instance as part of the Court of Appeals’ 15 holding. See First Ave. W. Bldg., LLC v. James (In re Onecast 16 Media, Inc.), 439 F.3d 558, 563 (9th Cir. 2006). 17 In In re Onecast Media, Inc., the Court of Appeals held that 18 the chapter 7 trustee’s rejection under § 365 of a lease did not 19 divest or deprive the bankruptcy estate of its property interest 20 in the claims and defenses available to the debtor under the 21 lease at the time of the bankruptcy filing. Id. This holding is 22 consistent with § 541(a), which automatically and broadly creates 23 a bankruptcy estate consisting of all of the debtor’s legal and 24 equitable interests in property. Gladstone v. U.S. Bancorp, 811 25 F.3d 1133, 1139 (9th Cir. 2016). The holding also is consistent 26 with § 365(g)(1), which specifies that rejection constitutes a 27 breach of the contract or lease as of the date of the bankruptcy 28 filing. Importantly, Congress did not specify in § 365(g)(1)

15 1 that rejection constitutes a termination of the contract, a 2 rescission of the contract or a relinquishment of rights under 3 the contract. See In re Onecast Media, Inc., 439 F.3d at 563. 4 Other Code provisions amply demonstrate that Congress knows how 5 to terminate contracts and leases (§§ 365(h)(1), (i)(1) and 6 (n)(1)(A)) and also knows how to divest the estate of property 7 rights (§ 522(b)(1)) when it wants to do so. But § 365(g)(1) 8 contains no such termination or divestiture. 9 In light of In re Onecast Media, Inc., the real issue the 10 bankruptcy court, here, needed to resolve was the nature and 11 extent of the Boates’ contract rights on the date of the 12 bankruptcy filing if Boates were considered to have breached the 13 contract on that date. In re Onecast Media, Inc., 439 F.3d at 14 563. As stated there, “[w]hile rejection of a lease [or 15 contract] prevents the debtor from obtaining future benefits of 16 the lease (such as ongoing possession of leased premises), it 17 does not rescind the lease [or contract] or defeat any pending 18 claims or defenses that the debtor had in regard to that lease 19 [or contract].” Id. (emphasis added).6 20 21 6 We realize that some Ninth Circuit decisions have held, inconsistent with In re Onecast Media, Inc., that contract rights 22 associated with executory contracts do not become property of the 23 estate unless and until the contract is assumed. See, e.g., Otto Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex 24 Entm’t, Inc.), 950 F.2d 1492, 1495 (9th Cir. 1991); Chbat v. Tleel (In re Tleel), 876 F.2d 769, 770 (9th Cir. 1989). When 25 faced with inconsistent Ninth Circuit decisions, we typically 26 follow the more-recent and better-reasoned Ninth Circuit authority. Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 27 381 (9th Cir. BAP 2011). In this instance, the more-recent and better-reasoned Ninth Circuit authority is In re Onecast Media, 28 (continued...)

16 1 As a matter of Arizona law, Ulrich’s retainer agreement 2 rights on the date of the bankruptcy filing necessarily included 3 a right to terminate Schian Walker and a right to a refund of the 4 fees previously prepaid based on the value of services provided 5 before termination. See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3) & 6 Cmt. [7]. 7 However, there is a critical undisputed fact missing from 8 the summary judgment record. Neither party presented evidence 9 demonstrating when Ulrich first exercised his right to terminate 10 Schian Walker. Ulrich effectively has taken the position that he 11 never retained Schian Walker as an estate professional, nor did 12 he obtain bankruptcy court approval under § 327 to retain Schian 13 Walker, so Schian Walker is not entitled to claim any value for 14 any postpetition attorney services it provided to Boates, in 15 light of §§ 327 and 330. 16 Ulrich’s position is based on a false premise. Neither 17 § 327 nor § 330 are applicable. Those statutes ordinarily do not 18 apply to chapter 7 debtor’s attorneys. Lamie v. United States 19 Trustee, 540 U.S. 526, 537-39 (2004). Moreover, they also do not 20 apply when the debtor’s attorney receives compensation from a 21 source other than estate funds. See id. 22 The $60,000 Boates paid to Schian Walker before he filed 23 bankruptcy never became estate property. In accordance with the 24 unambiguous terms of the retainer agreement, Schian Walker’s 25 $60,000 in fees were earned on receipt and immediately were 26 27 6 (...continued) 28 Inc.

17 1 deposited in Schian Walker’s general business account. As a 2 result, the $60,000 immediately became Schian Walker’s property. 3 See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3), Cmt. [7]. Those funds 4 never were deposited in Schian Walker’s client trust account, as 5 would have been required for funds in which Boates still held an 6 interest. See Ariz. S. Ct. R. 42, E.R. 1.15(c) (“A lawyer shall 7 deposit into a client trust account legal fees and expenses that 8 have been paid in advance, to be withdrawn by the lawyer only as 9 fees are earned or expenses incurred.”). 10 For purposes of determining what is property of the estate, 11 debtor’s rights in the subject property are determined under 12 applicable state law. See Butner v. United States, 440 U.S. 48, 13 55 (1979). Under the undisputed terms of the retainer agreement 14 and under the above-referenced Arizona law, the $60,000 was not 15 Boates’ property on the date of the bankruptcy filing, so the 16 $60,000 never became property of his bankruptcy estate.7 17 7 A recent law review article addressed the issue of the 18 bankruptcy treatment of earned on receipt retainers when the 19 applicable non-bankruptcy law is California law. Sarah C. Hays & D. Edward Hays, Good Help Is Hard to Fund: The Problem of Earned 20 Upon Receipt Retainers and Pre-Funded Litigation, 33 CAL. BANKR. J. 421 (2016). In that article, the authors posited that advance 21 payment retainers for legal services, even if designated as earned on receipt, actually are mere security retainers because 22 of the refund right clients retain under California law. Id. at 23 426, 437-40. We express no opinion as to whether this article correctly interprets California law. Arizona law applies to the 24 appeal currently before this Panel, and Arizona law cannot be reconciled with the law review article’s assertion that there is 25 no such thing as a true advance payment, earned on receipt 26 retainer for future legal services. See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3), Cmt. [7]; see also Ariz. S. Ct. R. 42, E.R. 1.15(c). 27 The law review article’s assertions also are difficult to reconcile with the statements in In re Hines, 147 F.3d at 1189- 28 (continued...)

18 1 Given that the summary judgment record did not demonstrate 2 when Ulrich first gave notice of termination to Schian Walker, 3 there was no way the bankruptcy court correctly could have 4 determined on summary judgment whether Ulrich was entitled to any 5 fee refund based on the value of services provided before 6 termination. See Ariz. S. Ct. R. 42, E.R. 1.5(d)(3) & Cmt. [7]. 7 On remand, the bankruptcy court will need to address this 8 lingering factual issue.8 9 3. Enforceability of Agreement Under Arizona Law 10 There only is one other issue we need to address. Ulrich 11 alternately claimed that the retainer agreement was unenforceable 12 under Arizona law because it did not contain an express written 13 provision advising Boates of his right to terminate Schian Walker 14 15 7 (...continued) 16 90, regarding the appropriate bankruptcy treatment of fully prepaid contracts for future attorney services. Nor can they 17 easily be reconciled with this Panel’s statements in In re Dick Cepek, Inc., 339 B.R. at 736 & n.5, explaining the difference 18 between security retainers and advance payment retainers. 19 8 When this Panel inquired at oral argument regarding 20 evidence of the termination of the retainer agreement, Ulrich only pointed to a single document in the record – an email from 21 his counsel to Schian Walker dated May 7, 2015, stating as follows: 22 23 So as to avoid any further confusion or argument, since the trustee’s settlement offer has been rejected, the 24 trustee demands hereby that Schian Walker, PLC turn over to the trustee the $60,000.00 that was paid to the 25 firm pre-petition to defend the post-petition 523 26 litigation by Metro Phoenix Bank.

27 For purposes of summary judgment, this email, by itself, did not dispositively answer the question of when Ulrich first notified 28 Schian Walker of the termination of the retainer agreement.

19 1 and his right to a refund of the fees previously paid based on 2 the value of services provided before termination. According to 3 Ulrich, Schian Walker thereby violated E.R. 1.5(d)(3) of the 4 Arizona Rules of Professional Conduct. However, the Ethics Rules 5 do not specify particular consequences for a failure to comply 6 with the written notice requirement set forth in Ethics Rule 7 1.5(d)(3). 8 Ulrich claims that, as a consequence of the Ethics Rule 9 violation, the bankruptcy court should have declared the retainer 10 agreement unenforceable. As authority for this proposition, 11 Ulrich cites a single Arizona Court of Appeals Case. Fearnow v. 12 Ridenour, Swenson, Cleere & Evans, P.C., 110 P.3d 357, 359-60 13 (Ariz. Ct. App. 2005), vacated & remanded on other grounds, 138 14 P.3d 723 (Ariz. 2006). Fearnow is distinguishable. Fearnow 15 involved a different Ethics Rule, Ariz. S. Ct. R. 42, E.R. 16 5.6(a), which per se prohibits provisions in law partnership 17 agreements, employment agreements and similar agreements 18 restricting lawyers’ practice of law upon the termination of the 19 agreement. 20 In construing Arizona statutes, we first and foremost must 21 give effect to the legislature’s intent, and we must give the 22 statutory language its ordinary meaning unless the statutory 23 context requires otherwise. Mail Boxes, Etc., U.S.A. v. 24 Industrial Comm’n of Ariz., 888 P.2d 777, 779 (Ariz. 1995). 25 Here, based on our contextual reading of Ethics Rule 1.5(d)(3) 26 (including Comment [7] accompanying that Ethics Rule), we are 27 convinced that the purpose of this Ethics Rule is to protect 28 client rights by assuring adequate notice and not to per se

20 1 prohibit particular attorney conduct. Indeed, per se 2 invalidation of a violative retainer agreement just as easily 3 might hurt the client as help the client. Tellingly, here, it is 4 not the client (Boates) who seeks to invalidate the retainer 5 agreement. Rather, it is an intervening third party (Ulrich) – 6 whom the Ethics Rules were not designed to protect. 7 Accordingly, we reject Ulrich’s claim that the retainer 8 agreement was per se unenforceable under Arizona law. 9 CONCLUSION 10 For the reasons set forth above, we VACATE the bankruptcy 11 court’s judgment dismissing the adversary proceeding, and we 12 REMAND this matter for further proceedings consistent with this 13 decision. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

21 1 APPENDIX A 2 Comment [7] to E.R. 1.5 of the Arizona Rules of Professional 3 Conduct provides in full as follows: 4 Disclosure of Refund Rights for Certain Prepaid Fees 5 [7] Advance fee payments are of at least four types. The “true” or “classic” retainer is a fee paid in 6 advance merely to insure the lawyer’s availability to represent the client and to preclude the lawyer from 7 taking adverse representation. What is often called a retainer but is in fact merely an advance fee deposit 8 involves a security deposit to insure the payment of fees when they are subsequently earned, either on a 9 flat fee or hourly fee basis. A flat fee is a fee of a set amount for performance of agreed work, which may or 10 may not be paid in advance but is not deemed earned until the work is performed. A nonrefundable fee or an 11 earned upon receipt fee is a flat fee paid in advance that is deemed earned upon payment regardless of the 12 amount of future work performed. The agreement as to when a fee is earned affects whether it must be placed 13 in the attorney’s trust account, see ER 1.15, and may have significance under other laws such as tax and 14 bankruptcy. But the reasonableness requirement and application of the factors in paragraph (a) may mean 15 that a client is entitled to a refund of an advance fee payment even though it has been denominated 16 “nonrefundable,” “earned upon receipt” or in similar terms that imply the client would never become entitled 17 to a refund. So that a client is not misled by the use of such terms, paragraph (d)(3) requires certain 18 minimum disclosures that must be included in the written fee agreement. This does not mean the client 19 will always be entitled to a refund upon early termination of the representation (e.g., factor (a)(2) 20 might justify the entire fee), nor does it determine how any refund should be calculated (e.g., hours worked 21 times a reasonable hourly rate, quantum meruit, percentage of the work completed, etc.), but merely 22 requires that the client be advised of the possibility of the entitlement to a refund based upon application 23 of the factors set forth in paragraph (a). In order to be able to demonstrate the reasonableness of the fee in 24 the event of early termination of the representation, it would be advisable for lawyers to maintain 25 contemporaneous time records for all representations undertaken on any flat fee basis. 26 27 (Emphasis added.) 28