            United States Bankruptcy Appellate Panel
                           FOR THE EIGHTH CIRCUIT
                                  _____________
                                  No. 04-6067 NI
                                  _____________

In re: On-Line Services Ltd.             *
                                         *
      Debtor.                            *
                                         *
Fiegen Law Firm, P.C.                    *
                                         *
      Respondent - Appellant,            * Appeal from the United States
                                         * Bankruptcy Court for the
             v.                          * Northern District of Iowa
                                         *
Habbo G. Fokkena,                        *
United States Trustee,                   *
                                         *
      Movant - Appellee,                 *


                                  _____________

                           Submitted: February 11, 2005
                              Filed: March 16, 2005
                                 _____________

Before SCHERMER, FEDERMAN, and VENTERS, Bankruptcy Judges.
                        _____________

FEDERMAN, Bankruptcy Judge.

       The Fiegen Law Firm, Ltd. (Fiegen), as attorney for debtor On-Line Services,
Ltd. (On-Line), appeals an order that reduced its prepetition fees and expenses, held
that those fees could not be paid from estate assets, and denied its claim for
postpetition fees and expenses. We affirm in part, reverse in part, and remand.
                           FACTUAL BACKGROUND

       In September of 2003, On-Line consulted with Fiegen regarding a possible
bankruptcy filing. On December 8, 2003, the members of On-Line voted to retain
Fiegen, to pay it the sum of $9,000 to represent On-Line, and to have Fiegen file a
Chapter 7 bankruptcy petition on its behalf. On-Line made the final installment on the
retainer on December 22, 2003, and those funds were deposited in Fiegen’s trust
account. Fiegen filed the bankruptcy case the next day. Prior to filing, the law firm
drew down $547.50 from the trust account and applied that amount to prepetition
services. At filing Fiegen disclosed that it had accepted a retainer in the amount of
$8,791.00, plus the filing fee of $209.00.

       Wesley Huisinga was appointed Chapter 7 trustee and filed an application to
operate the business, which the bankruptcy court granted. Fiegen, however, continued
to perform legal services for On-Line and to draw down the retainer. On June 24,
2004, the United States Trustee (the UST) filed a motion requesting the court to
examine the compensation paid to Fiegen. Fiegen filed billing statements
demonstrating that the law firm had provided $6,977.77 of legal services to On-Line
through June 30, 2004, consisting of $3,693.27 in prepetition fees and expenses and
$2,284.50 in post-petition fees and expenses. On August 26, 2004, the bankruptcy
court held a hearing on the UST’s motion. On October 28, 2004, the court ruled that
the $8,452.50 remaining in Fiegen’s trust account on the date of filing was property
of the estate, and directed Fiegen to turn that amount over to the trustee. The Court
further held that the reasonable value of the prepetition services performed by Fiegen
was $2,380.00, but that only the $547.50, which had been paid prepetition, could be
paid from the retainer. The court therefore held that the balance of the allowed




                                          2
prepetition services, $1,946.77,1 could not be paid from estate assets. The Court also
denied Fiegen’s application for fees and expenses incurred postpetition.

      On November 8, 2004, Fiegen filed its notice of appeal and a motion to stay the
court’s order pending appeal, which the court granted.

                             STANDARD OF REVIEW

       A bankruptcy appellate panel shall not set aside findings of fact unless clearly
erroneous, giving due regard to the opportunity of the bankruptcy court to judge the
credibility of the witnesses.2 We review the legal conclusions of the bankruptcy court
de novo.3 Reversal is appropriate if the bankruptcy court misunderstood or misapplied
the law.4

                                   DISCUSSION

      There are four distinct issues before us. The first is whether the unapplied
portion of the retainer ($8,452.50) became an asset of the bankruptcy estate. The
second is whether Fiegen has a lien on the retainer to secure prepetition work for
which he had not been paid at the time the petition was filed. The third is whether


1
 The $2,380.00 in allowed fees, plus allowed expenses of $114.27, less the $547.50
previously drawn.
2
 Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal v.
Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th
Cir. 1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609
(8th Cir.1997)). Fed. R. Bankr. P. 8013.

First Nat’l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th
3

Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997).
4
 Gourley v. Usery, 123 F.3d at 1093.
                                          3
Fiegen has any claim against estate funds for postpetition services. And the fourth is
the reasonable value of the services provided.

A. WHETHER A RETAINER IS AN ASSET OF THE BANKRUPTCY ESTATE

      The filing of a bankruptcy petition creates an estate comprised of all property
in which the debtor holds either a legal or equitable interest:

      (a) The commencement of a case under section 301, 302, or 303 of this
      title creates an estate. Such estate is comprised of the following
      property, wherever located and by whomever held:

             1. Except as provided in subsections (b) and (c)(2) of this
             section, all equitable interests of the debtor in property as
             of the commencement of the case.5

The Eighth Circuit has articulated a three-part inquiry to determine whether a debtor’s
interest becomes part of the bankruptcy estate: (1) does the item at issue constitute
property under section 541(a)(1); (2) does state law define the interest as property;
and (3) did the debtor have the property interest at the time of filing.6 Based on
Fiegen’s Statement of Compensation7, he had been paid $8,791 for legal services
rendered or to be rendered, to be charged at “normal hourly rates.” The letter
agreement8 between Fiegen and On-Line provides that retainer fees are to be held in
Fiegen’s trust account, to be drawn upon at billing, and that if the trust funds are
insufficient, the client is responsible for payment of the bill. That agreement further

5
 11 U.S.C. § 541(a).
6
 See, e.g., Snyder v. DeWoskin (In re Mahendra), 131 F.3d 750, 755 (8th Cir. 1997),
cert. denied 523 U.S. 1107 , 118 S. Ct. 1678 , 140 L. Ed. 2d 815 (1998).
7
 Appellant’s Appendix, page 111.
8
 Appellant’s Appendix, page 183.
                                          4
provides that any funds remaining in the trust account at the end of the case will be
either turned over to the Chapter 7 trustee, or refunded to On-Line.

       Disregarding for the moment the effect of the statutory lien claimed by Fiegen,
we find that the bankruptcy court properly applied the three-part test in concluding
that the unearned portion of the retainer is an asset of the estate. Money is property
under both state and federal law. As of the petition date, On-Line had an interest in
the money remaining in Fiegen’s trust account because it had not yet been applied to
pay Fiegen for services that had been rendered.

      B. WHETHER A SECURITY RETAINER SECURES PAYMENT OF
          PREPETITION SERVICES PERFORMED BUT UNPAID

       The bankruptcy court determined that the unapplied portion of the retainer,
which came into the estate as of the petition date, was thereafter not subject to the
security retainer claimed by Fiegen for either prepetition or postpetition services.
Therefore, the court ordered the entire amount to be turned over to the estate.

       Iowa allows an attorney to obtain a security retainer, or retaining lien, such as
that claimed by Fiegen.9

      An attorney has a lien for a general balance of compensation upon:

             1. Any papers belonging to a client which have come into
             the attorney’s hands in the course of professional
             employment.


9
 Iowa Supreme Court Board of Professional Ethics and Conduct v. McKittrick, 683
N.W.2d 554, 561 (Iowa 2004). Compare, In re Brick Hearth Pizza, Inc., 302 B.R. 877
(Bankr. D. Minn. 2003) (holding that retaining liens had been abolished by the
Minnesota legislature).
                                           5
                   2. Money in the attorney’s hands belonging to a client.10

A security retainer, also referred to as a retaining lien, gives the attorney the right to
possess property or funds of the client until the fee is paid.11 A security retainer is
available only to secure attorney’s fees and charges which are due for services already
rendered.12 And in Iowa, the extent of a security retainer is fixed at the time a question
of priority arises.13 In this case, the question of priority arose on the petition date. A
security retainer, to the extent it is valid, is extinguished on the petition date with
respect to any future advances.14 As the Eighth Circuit has stated ,“[t]he debtor’s
equitable interest in the unearned portion of the retainer becomes property of the
estate upon the filing of the petition.”15 The bankruptcy court so interpreted Iowa law
and found that “[t]he retainer, to the extent attorneys had not drawn upon it prior to
filing, became property of the estate when the case was filed.”16

       The issue, however, is whether such retainer remained subject to Fiegen’s
retaining lien for services which had been rendered prepetition, but for which Fiegen
had not drawn down payment as of the bankruptcy filing. We believe that it is. A
security retainer involves the attorney holding the client’s money as a pledge – a


10
     Iowa Code § 602.10116(1) and (2) (1996).
11
     McKittrick, 683 N.W.2d at 561; Iowa Code §602.10116(1) and (2).
12
 Tri City Equipment Co. v. Modern Real Estate Investments, Ltd., 460 N.W.2d 464,
465 (Iowa 1990); 7A C.J.S. Attorney & Client § 445.
13
     Tri City, 460 N.W.2d at 465.
14
     In re Mahendra, 131 F.3d at 756.
15
     Id. at 756.
16
 Appellant’s Appendix, page 230 (quoting In re Cargo, Inc., Bankr. No. x90-00200S,
slip op. at 3 (Bankr. N.D. Iowa Jan. 24, 1992)).
                                               6
possessory security interest – and the Uniform Commercial Code expressly allows for
a possessory security interest in money.17 Once a bankruptcy case is filed, the amount
of fees to be paid for prepetition services is subject to review by the court.
Nevertheless, once determined, such fees are payable out of the funds in which
Fiegen held a security interest as of the petition date. “By taking a retainer – even
though it is considered a security retainer – a professional becomes a secured creditor,
and hence has a claim on the retained funds prior to any other administrative
claimant.”18 We hold, therefore, that the bankruptcy court erred in holding that the
allowed prepetition fees and expenses were not payable out of the retainer.

      C. WHETHER A CHAPTER 7 DEBTOR’S ATTORNEY HAS A CLAIM
     AGAINST THE BANKRUPTCY ESTATE FOR POSTPETITION SERVICES

      The Chapter 7 trustee is the representative of the bankruptcy estate.19 The
Code, therefore, authorizes the trustee to employ attorneys, who do not have a
conflict of interest, to assist him in that capacity, and to pay them for their services:

         (a) Except as otherwise provided in this section, the trustee, with the
         court’s approval, may employ one or more attorneys, accountants,
         appraisers, auctioneers, or other professional persons, that do not hold
         or represent an interest adverse to the estate, and that are disinterested




17
 Iowa Code § 554.9313; In re Viscount Furniture Corp., 133 B.R. 360 (Bankr. N.D.
Miss. 1991), citing In re McDonald Bros. Construction, Inc., 114 B.R. 989 (Bankr.
N.D. Ill. 1990).
18
 Norton Bankruptcy Law and Practice 2d § 25:9, citing In re Printing Dimensions,
Inc., 153 B.R. 715, 719 (Bankr. D. Md. 1993)
19
     11 U.S.C. § 323(a).
                                             7
 persons, to represent or assist the trustee in carrying out the trustee’s duties under
this title.20
                                           ...

         (a)(1) After notice to the parties in interest and the United States Trustee
         and a hearing, and subject to sections 326, 328, and 329, the court may
         award to a trustee, an examiner, a professional person employed under
         section 327 or 1103 –

                (A) reasonable compensation for actual, necessary services
                rendered by the trustee, examiner, professional person, or
                attorney and by any paraprofessional person employed by
                any such person; and

                (B) reimbursement for actual, necessary expenses.21

In Lamie v. United States Trustee,22 the United States Supreme Court held that section
330(a)(1) of the Code does not authorize compensation awards to debtors’ attorneys
from estate funds, unless such attorneys have been employed by the trustee with
approval of the court. Fiegen was not so employed by the trustee. The bankruptcy
court, thus, did not err when it found that Fiegen was not entitled to payment of its
postpetition fees and expenses from the unapplied portion of the security retainer, or
from other assets of the estate.

       Fiegen also claims that the court erred when it applied the holding in Lamie
retroactively, since the Supreme Court case was not decided until after On-Line’s
bankruptcy case had been filed. However, in Lamie, the Court was simply
articulating the law as it had existed since the Bankruptcy Reform Act of 1994. In any


20
     11 U.S.C. § 327(a).
21
     11 U.S.C. § 330(a)(1)(A) and (B).
22
     540 U.S. 526, 124 S. Ct. 1023 (2004).
                                              8
event, the Eighth Circuit had so held since 1997. In Snyder v. DeWoskin (In re
Mahendra),23 the court denied compensation from the estate to debtor’s attorney,
Snyder, for postpetition services when the attorney had not been employed by the
trustee.24 Snyder contended that he held a lien on real estate of the debtor as security
for the postpetition services. In rejecting that argument, the Eighth Circuit noted that
debtor’s interest in the real estate became an asset of the estate on the petition date.
“At that point, debtor lost the right to authorize Snyder’s legal services which could
potentially further encumber this asset of the bankruptcy estate. Only the bankruptcy
court could control the further encumbrance of the estate property.”25 Thus, the
Supreme Court’s holding in Lamie had been the law in this Circuit well before the
On-Line bankruptcy case was filed. The bankruptcy court correctly held that Fiegen
could not be compensated out of estate funds for postpetition services.

           D. WHETHER THE COURT CORRECTLY DETERMINED THE
                REASONABLENESS OF THE PREPETITION FEES

       As we have explained, Fiegen is entitled to be compensated out of the retainer
for allowed prepetition services but, as the bankruptcy court held, he is not entitled
to compensation from estate assets for post-petition services. The final issue, then, is
the value of the prepetition services. The bankruptcy court found that $3,032.50
worth of legal services and $114.27 of expenses had been earned or accrued
prepetition, but had not been invoiced or paid as of the petition date.26 In addition,
Fiegen had drawn $547.50 from the retainer. The court held that it would not
compensate Fiegen for prepetition work involving communicating with creditors or


23
     131 F.3d 750 (8th Cir. 1997).
24
     Id.
25
     131 F.3d at 755. See also, In re Zepecki, 277 F.3d 1041, 1046 (8th Cir. 2000) [same]
26
     Appellant’s Appendix, page 232.
                                             9
with its client, or for review of pleadings, motions, and communications, unless such
actions were shown to benefit the estate. As a result, the court allowed prepetition
fees in the amount of $2,380.00 and expenses of $114.27, less the $547.50 previously
paid.

       The court’s use of a benefit-to-the-estate analysis would be appropriate as to
fees paid to a professional for postpetition services, under Code Section 330. But, as
stated, Fiegen is not entitled to compensation for such services. As to prepetition
work, Section 329 allows the court to determine the reasonable value of such
services:

         (a) Any attorney representing a debtor in a case under this title, or in
         connection with such a case, whether or not such attorney applies for
         compensation under this title, shall file with the court a statement of the
         compensation paid or agreed to be paid, if such payment or agreement
         was made after one year before the date of the filing of the petition, for
         services rendered or to be rendered in contemplation of or in connection
         with the case by such attorney, and the source of such compensation.

                (b) If such compensation exceeds the reasonable value of
                any such services, the court may cancel any such
                agreement, or order the return of any such payment, to the
                extent excessive, to–

                      (1) the estate . . .27

      In reviewing the reasonableness of fees awarded to debtor’s counsel for
prepetition work, the issue is not benefit to the estate, but the reasonable value of the
services provided to the debtor. Therefore, we hold that the bankruptcy court applied
the wrong standard as to the prepetition services, and that, on remand, the court



27
     11 U.S.C. § 329(a).
                                               10
should determine the reasonableness of Fiegen’s fees under the standard of section
329 of the Code.

                                  E. CONCLUSION

       Fiegen contends that the bankruptcy court’s application of Lamie forces
Chapter 7 debtor’s attorneys to represent debtors without compensation. We disagree.
The Supreme Court stated in Lamie that it “appears to be routine for debtors to pay
reasonable fees for legal services before filing for bankruptcy to ensure compliance
with the statutory requirements.”28 Even before Lamie, and at the time Fiegen filed
the Chapter 7 case for On-Line, Section 330 of the Code provided that a debtor’s
attorney could not be paid out of estate funds for post-petition services unless that
attorney is employed by the trustee. An attorney who accepts a Chapter 7 case on a
flat fee basis may well be asked to later prove that the fee is a reasonable one, but
once paid prepetition such fee is not an asset of the estate.29 If, as here, debtor’s
counsel is instead paid a retainer to be applied against future services, such attorney
may not be paid by the estate for postpetition services, absent appointment as
trustee’s counsel.

       The Order of the bankruptcy court is affirmed in part, reversed in part, and
remanded with instructions to determine the reasonableness of prepetition fees, with
any allowed fees to be paid from the retainer held by Fiegen.

                           ____________________


28
 Id. 540 U.S. at 538-39, 124 S. Ct. at 1032. We note that Fiegen contends that
attorneys for corporate Chapter 7 debtors are not allowed to charge a flat fee in Iowa.
We found no such restriction in the Local Rules. In any event, that issue is not before
us here.
29
     McDonald, 114 B.R. at 997.
                                          11
