The Recorder - January 6, 2006
Nonprofit Law Firms Can't Ignore Rules
By Andrew Zacks

On Tuesday, the California Supreme Court will hear oral argument in a case that will decide whether nonprofit corporations engaging in the practice of law are subject to oversight by the State Bar of California.

For more than 20 years, San Francisco's Tenderloin Housing Clinic has operated a law office that is not registered with the State Bar. My law firm, Zacks & Utrecht, P.C., represents former THC clients Roy Frye, Douglas Blunt and Thomas Hannon, who allege in Frye v. Tenderloin Housing Clinic, 120 Cal.App.4th 1208, that THC is not allowed to collect attorneys' fees because it is not registered and therefore not authorized to practice law. THC and numerous amici contend that nonprofit corporations have a First Amendment right to practice law without any regulation by the State Bar.

THC currently employs four attorneys, who represent all classes of tenants from the poor to the rich. Much of its legal work is representing tenants in contingency fee cases that would otherwise be handled by private law firms. While THC's stated mission "is to preserve and improve housing for low-income people," it is also one of the city's most frequent evictors, having filed lawsuits for eviction against more than 130 low-income persons residing in single-room-occupancy hotels in 2004 and 2005 alone. Since SRO hotels are housing of last resort for the poorest members of our society, THC's evictions send its former tenants straight into a spiral of homelessness.

THC is a nonprofit conglomerate with annual revenue exceeding $11 million. In addition to operating a law firm, THC engages in such disparate activities as leasing and owning SRO hotels (more than $5 million in rental income in 2004), lobbying (more than $950,000 spent in 2001), coordinating traffic studies, operating an alternative local news Web site known as Beyond Chron, and running a lead hazard program. Randall Shaw, the executive director and founder of THC, admitted in his 2001 book, "The Activist's Handbook," that THC uses legal fees earned from clients to "generate unrestricted" funds to spend on its political activities, such as ballot initiatives.

Roy Frye was an elderly resident of a rundown Tenderloin hotel in San Francisco. Frye and a group of other hotel residents attended a meeting organized by THC, which offered to sue their landlord for damages caused by deplorable conditions in the hotel. Lawyers working for THC explained that it would represent Frye and the other tenants "for free." Of course, to THC "free" means for a contingent fee. Little did Frye know that by signing a contingency fee agreement, the "nonprofit" would claim that it was entitled to 40 percent of the entire $464,723.33 judgment in the case, including an award of attorneys' fees. THC kept $196,386.66, which was 40 percent of the total judgment, plus more than $10,000 in costs that was already included in the total judgment used to calculate its contingency fee.

Frye believed that the law firm should have been content with the court's award of $168,543.88 in fees and costs. When he disputed the amount of fees and costs that had been deducted from his judgment, THC refused to deposit the disputed amount into a trust account, which would have been required of any law firm registered with the State Bar. Instead, THC simply kept the disputed amount as a fee under the contingency agreement. Frye sought our counsel and we advised him that he was correct about the amount of the fee; we also advised him that THC was not registered with the State Bar in violation of California law.

All three residents sued THC alleging both that THC had charged more than was allowed by the contingency fee agreement and that the entire fee should be refunded because THC was not authorized to practice law and collect legal fees because it did not register with the State Bar. The complaint also sought an injunction prohibiting any future practice of law until THC registered. Of course, there was a reason that THC chose not to register with the State Bar: nonprofit law corporations are not allowed to charge contingency fees.

The trial court concluded that THC could not be required to disgorge attorneys' fees even if it was required to register.

The First District reversed and remanded for further proceedings. Justice Laurence Kay, writing for a unanimous panel, concluded that THC was not authorized to practice law because it failed to register with the State Bar as a nonprofit law corporation: "Here, the THC fee agreement calls for a contingent fee prohibited by statute (Corp. Code, §13401, subd. (b)) Moreover, we are concerned that THC intends to continue the practice of law without registering with the State Bar." The Court of Appeal held that registration with the State Bar is mandatory and THC must comply with all applicable State Bar regulations in order to engage in the practice of law.

While cloaking itself in a mantle of a do-gooder nonprofit, THC is simply not what it claims to be. As one of San Francisco's largest evictors, THC is operating at odds with its stated mission of preserving housing for poor people. As noted in the Court of Appeal opinion, "While claiming that it serves the needs of low-income plaintiffs, THC somewhat inconsistently also argues that Corporations Code §13406, subdivision (b)(2)(C) constitutes "content-based" discrimination by reason of its requirement that 70 percent of its clients must be low income."

The Supreme Court should find that every entity that is engaged in the practice of law must register with the State Bar of California and thereby be subject to appropriate regulatory oversight. The court should reject the contention that the First Amendment requires all nonprofit corporations be allowed to practice law without accountability or ethical restraints. California law should not provide carte blanche to organizations like THC, which are operating in direct conflict with their stated mission, refuse to comply with Rules of Professional Conduct and are unwilling to live with the Legislature's determination that nonprofit law corporations may not charge contingency fees.

Andrew Zacks is managing partner at Zacks & Utrecht, P.C., which represents the plaintiffs in Frye v. Tenderloin Housing Clinic.