Tenderloin Housing Clinic just filed a restraining order against one of their own managers potentially affecting a lot of people. Do you think they need regulation?
Public Comment sought regarding Tenderloin Housing Clinic, at the State Bar of California
send public comments here:
Kate O’Connor kate.oconnor@calbar.ca.gov
The State Bar of California
Office of Legal Services, Access & Fairness Programs
180 Howard Street, 10th Floor
San Francisco, CA 94105
415-538-2316
415-538-2552 Fax
SUBJECT: Proposed Report Regarding Nonprofit Entity Legal Practice (Frye v. Tenderloin Housing Clinic, Inc. (2006) 38 Cal.4th 23.
PROPOSAL: In response to the California Supreme Court’s request in Frye v. Tenderloin Housing Clinic, Inc., (2006) 38 Cal.4th 23, 40 Cal.Rptr.3d 221, that the State Bar conduct a study and report back to the Court as to whether regulation of nonprofit legal service providers is warranted, the State Bar has developed a proposed report on this subject.
This report is not subject to public comment process, but it has been determined that public comment would enhance consideration of the report by the Board of Governors and the Supreme Court. The report will be before the Board for consideration at its November 2007, meeting. It is anticipated that the report will be filed with the Supreme Court by the end of December 2007.
In order to receive comments and finalize the report for consideration at the Board’s November meeting, the period for public comment has been reduced to 45 days.
SOURCE: Board Committee on Regulation, Admissions & Discipline
COMMENT DEADLINE: October 15, 2007
——————————————some excerpts of note————————————–
The Court directed the State Bar to determine whether there is evidence of actual client
endangerment resulting from law practice in a nonprofit setting and whether any
discovered harm to clients warrants regulation of the nonprofit entity itself, as opposed
to the regulation of the individual attorneys, who remain always subject to State Bar and
Supreme Court oversight as individual licensees. To this end, the Court instructed the
State Bar to:
Determine whether nonprofits actually imperil client interests [Id., at p.
51.]; Determine whether, absent the usual profit motive, a nonprofit
organization’s ideological motivation may, nevertheless, pose a risk to
client interests [Id., at p. 51]; Determine if existing Rules of Professional
Conduct applicable to individual attorneys already afford adequate
safeguards to clients in the nonprofit setting [Id., at pp. 51-52.]; Evaluate
the benefits and detriments of a regulatory structure for nonprofit entities,
balanced against their First Amendment expressive and associational
protections. [Id., at p. 54.]
————————————————————————————————————–
The least responsive sector to the study was the consumers of nonprofit legal services.
[Appendix 2-3]. Those served by nonprofits often are near the fringe of society, difficult
to reach and not likely to respond to official inquiries of this nature. The greatest value
of the comment received from this sector is that it generally paralleled the data received
elsewhere.
————————————————————————————————————-
A concern expressed throughout the survey responses is that nonattorneys in the
nonprofit legal service sector engage in the unauthorized practice of law. [Appendix 2-
3, Question 4; Appendix 2-4, Questions 5, 8].
Calls for more regulation of nonprofits from consumers were based on perceptions that
nonprofit entities were not regulated to the extent that many, particularly nonprofit
corporations, actually are, and on concerns that attorneys working for nonprofits not
escape their individual professional responsibilities and liabilities simply due to the form
through which they practice. [Appendix 2-3, Question 14].
—————————————————————————————————————
However, the best, most conscientious, professionally committed practitioners are not
those of concern to the State Bar’s attorney discipline system. It is, rather the
individuals and firms that operate on the margins of the profession that create the need
for regulation. Just as with the general population of attorneys and for-profit law
practices, the nonprofit world is not immune from marginal and misguided operators.
Nor can it be said that nonprofit law practices, while endeavoring to do the best, never
fall short.
————————————————————————————————————-
Survey responses from providers on internal risk management controls varied, although
nearly all respondents confirmed their use of case management policies and
procedures, staff supervision and training, conflict of interest compliance systems,
standardized forms and procedures, periodic case reviews and file audits, calendaring
and tickler systems. [Appendix 2-2, Questions 5, 6, 9, 10].
———————————————————————————————————–
A commenter at the public hearing cited as an example of potential harm to clients from
nonprofit law practice, the limited liability nonprofit entities have for noncompliance with
the professional standards governing the attorneys rendering services through the
nonprofit entity. It was suggested that a victimized client had no meaningful recourse
against a nonprofit entity for harm caused the client by noncompliance with professional
standards. [Appendix 2-6, 94:16-24 (only remedy for nonprofit client is to sue entity, no
State Bar process available)].
—————————————————————————————————————
The remaining ten percent of responders in this category expressed concerns that
competition for funding can affect decision-making and “twist” the nonprofit mission
away from service and toward funding preservation and maximization. [Appendix 2-2,
Question 18].
————————————————————————————————————–
Even when economic pressures may be limited or absent, pressures to enhance
visibility or political power, to address one constituency over another or advance the
standing of the nonprofit in pursuit of its ideological mission can push toward the
margins of professional standards. [See generally, Brustin, Legal Services Provision
Through Multidisciplinary Practice — Encouraging Holistic Advocacy While Protecting
Ethical Interests, supra, 73 U.Colo.L.Rev. at p. 824].
————————————————————————————————————-
The authorities that were at issue in Frye expressly limited nonprofit law corporations in
their generation of fee revenues. [See e.g., State Bar Law Corp. Rules, rule IV.A.10.c;
Corp. Code §16406(b); 75 Ops.Cal.Atty.Gen92, supra; see also, Frye v. Tenderloin
Housing Clinic, Inc., supra, 38 Cal.4th at pp. 34-36, 44-45]. Nevertheless, as noted in
Frye, actual practice in California regularly results in fees being awarded to nonprofit
entities despite these limitations, creating a judicial exception to the authorities that
otherwise ban or limit the practice. [Id. at p. 49, n. 10].
————————————————————————————————————-
As observed in Frye, nonprofit corporations currently receive more oversight than forprofit
corporations in order to obtain and maintain their nonprofit and favorable tax
status.
. . . [T]he Attorney General is vested with authority to bring actions to
challenge a nonprofit public benefit corporation’s failure to comply with its
charitable mission or corporate charter. ([Corp. Code,] §§ 5250, 6216;
see also §§ 5141, 5142). Nonprofit public benefit corporations are
required to register with the Secretary of State and register annually with
the Attorney General. ([Corp. Code,] § 6210; Gov. Code, §§ 12585-
12587.) Annual reports must include certain financial transactions,
nonprogram expenditures, use of professional fundraisers, receipt of
government funds, and certain IRS reporting requirements. (2 Advising
California Nonprofit Corporations (Cont.Ed.Bar 2d ed. 1998) § 1140, pp.
611-612). ‘Public benefit corporations are subject to examination by the
Attorney General at all times to ascertain the extent to which they may
have departed from the purposes for which they were formed or have
failed to comply with [the requirements of the] charitable trusts they have
assumed. The Attorney General may institute any proceedings necessary
to correct such a departure or noncompliance,’ including proceedings to
compel compliance with statutes governing nonprofit corporations.
(1 Advising California Nonprofit Corporations, supra, § 8.115, pp. 397-
398). In addition, public interest law firms seeking to maintain nonprofit
status for the purpose of compliance with 26 U.S.C. § 501(c) are subject
to oversight by the Internal Revenue Service, both with respect to their
public purpose and the circumstances under which they may accept fees
from clients or through judicial awards. (Rev.Proc. 92-95, 1992-2 C.B.
411.]”
———————————————————————————————
Complaints about nonprofit charities are reviewed by the Attorney General’s Charitable
Trusts audit staff. If improper actions result in a loss of charitable assets, the Attorney
General may sue the directors to recover from them the missing funds. The funds
recovered by the Attorney General are returned to the charity. The Attorney General
has limited staff and financial resources to carry out charitable investigations. Although
disclosure procedures prohibit the Attorney General from discussing pending
investigations or indicating whether or not any specific action has or will be taken with
respect to a particular organization, the Attorney General seeks to administer the
Charitable Trust laws equitably and efficiently. [See, http://ag.ca.gov/charities/faq.php].
————————————————————————————————-
The registration/certification requirement proposed here is directed at the “head of legal
practice” within the entity, keeping the focus upon attorney professional standards,
whether the entity be a nonprofit corporation or other nonprofit organization. The
designated “head of legal practice” in a nonprofit law practice will register with the State
Bar and certify that the law practice 1) maintains security for claims, if it is a corporation;
2) is bound by all professional standards; 3) has policies and procedures in place to
assure compliance with professional standards; and 4) dedicates legal fees obtained by
the entity to the legal practice.
Registration provides a “safe harbor” for the nonprofits. Failure to register alone is not a
disciplinary offense either for the “head of practice” or for the entity. Failure to register
merely eliminates the protections the corporate “shield” provides in the corporate setting
and removes from nonprofit corporations and other organizations the “safe harbor”
allowances on nonattorney governance, fee-sharing and mixing legal services with
other services.
————————————————————————————————————-
16. There are identifiable risks to the public interest that are unaddressed by existing
regulation and which can be addressed by an unburdensome
certification/registration program directed at the “head of the legal practice” within
any entity that provides legal services where there is the potential for nonattorney
governance, fee-splitting and mixed legal and nonlegal services.