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Bank’s Security Interest Does Not Attach to Chapter 11 Bankruptcy Retainer

In In re Tuscan Energy LLC, 16-100398 (Bankr. S.D.Fla. Dec. 30, 2016), a bank objected to a fee application of Debtor's counsel on the grounds that the pre-petition retainer paid to counsel constituted the bank's cash collateral that should not be used to pay counsel's fees. The court overruled the objection, holding that the bank had no interest in the pre-petition retainer held by Debtor's counsel and, if the bank had an interest, that interest was trumped by counsel's first-priority perfected security interest in the retainer. In reaching its decision, the court cited U.C.C. Article 9, section 9-332 for the proposition that a transferee of money from a deposit account takes free of any security interest "unless the transferee acts in collusion with the debtor in violating the rights of the secured party." The bank did not assert collusion, and the court held that the bank had no interest in the pre-petition retainer held by counsel. Therefore, the bank had no cash collateral interest that was entitled to adequate protection. And, even if the bank could somehow claim a continuing security interest in the pre-petition retainer, that interest would be junior to the perfected security interest held by counsel, which was perfected by counsel's possession of the funds.

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