The Daily Journal - March 10, 2006
Nonprofits Avoid Bar Burden
By Itir Yakar

Nonprofit attorneys are breathing a sigh of relief after the California Supreme Court declined Thursday to require their organizations to register with the State Bar.

But the justices did recommend that the State Bar study whether registration is needed to protect consumers who use the services of nonprofit groups.

As a result of Thursday's ruling, the Tenderloin Housing Clinic, a San Francisco-based nonprofit organization that provides counseling and housing services to low-income tenants, is entitled to continue collecting fees for the legal services it provides clients.

In their unanimous ruling, the justices held that the Legislature did not intend for a regulatory scheme requiring corporate law practitioners to register with the bar to apply also to legal aid and advocacy groups.

"We agree with [Tenderloin Housing Clinic] that the Legislature intended to broaden rather than restrict the existing legal aid exception to the ban on corporate practice of law to include organizations providing legal services to the working poor for a fee," Chief Justice Ronald M. George wrote for the court. Frye v. Tenderloin Housing Clinic, Inc., 2006 DJDAR 2870.

In the case before the court, the housing clinic had won nearly half a million dollars in a judgment and attorney fees for the tenants of a Tenderloin residential hotel in an action alleging defective conditions at the hotel.

One of the tenants, Roy M. Frye, later sued the Tenderloin Housing Clinic, accusing the organization of illegally practicing law without having registered with the State Bar, retaining excessive attorney fees and breaching its fiduciary duty, among other allegations.

In order to register, a nonprofit group must have a board of directors comprised entirely of lawyers, must not issue memberships to any non-lawyers and must certify that at least 70 percent of its clients are poor.

Many public interest groups that employ lawyers do not meet any of these conditions.

Several nonprofit organizations filed amicus briefs in the case supporting the housing clinic, including the American Civil Liberties Union, the Pacific Legal Foundation, the Los Angeles County Bar Association, Disability Rights Advocates and the Environmental Defense Center.

A San Francisco trial court dismissed most of Frye's allegations and concluded that a jury should decide whether the organizations retained excessive attorney fees.

A unanimous 1st District Court of Appeal panel in 2004 reversed parts of that ruling, finding that the clinic should have registered with the State Bar and must return Frye the attorney fees collected.

In Friday's ruling, the high court disagreed.

But the justices pointed out "the practical need for additional regulation."

"[T]he State Bar should reflect upon the rationale supporting the rule against corporate practice of law ... and consider whether the potential for harm to clients warrants regulation of the nonprofit entity itself," George wrote.

Susan M. Popik, the attorney who represented the housing clinic, was pleased with the ruling.

"It's a good day for all nonprofits that provide legal services," Popik said.

She said that if the court had upheld the 1st District's ruling, it would have posed a "very serious threat" to all nonprofit organizations that provide legal services.

Paul F. Utrecht, the attorney who represented Frye, said the most important part of the opinion is the directive to the State Bar to look into whether nonprofit groups should be regulated.

"I expect the bar is going to recommend that there be regulations" and find that the housing clinic and others engaged in inappropriate behavior, Utrecht said.