The Recorder – August 27, 2007
Nonprofits Could Be Off the Hook
By Mike McKee

Nonprofit groups aren't any worse than the average law firm when it comes to client complaints, but a report (.pdf) being released today says it might still be in their best interests to register with the State Bar.

The 44-page report, pulled together by a State Bar task force, states that while there is "not a compelling need" for the state's hundreds of nonprofits that do legal work to register as "public benefit professional law corporations," doing so could be a plus.

"A key benefit of incorporation, distinct from the partnership, association or sole proprietorship as a form of practice," the report says, "is that the corporation's employees, officers, shareholders and directors are not personally liable for the obligations and liabilities of each other or of the corporation."

The report also suggests amending the Rules of Professional Conduct so that registered nonprofits with non-lawyer managers and governors could still practice and charge fees.

The State Bar Board of Governors' Committee on Regulation, Admissions and Discipline meets today to decide whether to send the proposals out for 45 days of public comment. Any changes would be made after that, and the report will be forwarded to the state Supreme Court — which ordered the study  last year — for a final look.

"We're floating a concept out there to see if the court signs off on this," Robert Hawley, the State Bar's deputy executive director, said Friday. "They could recoil from this in horror or buy into it or whatever."

The report stems from the California Supreme Court's ruling last year in Frye v. Tenderloin Housing Clinic, 38 Cal.4th 23 (.pdf). In that decision, the justices affirmed nonprofit groups' rights to practice law without registering, but told the State Bar to conduct a study to determine whether such groups imperil clients and, if so, whether registration could solve the problem.

The case was filed by 15 residents of a shabby hotel in San Francisco's Tenderloin district who weren't pleased with their share of the financial reward in a landlord dispute in which they were represented by the Tenderloin Housing Clinic. More than 70 nonprofits — from the liberal American Civil Liberties Union to the conservative Pacific Legal Foundation — signed on as amici curiae in support of the THC.

The report coming out today states that studies and interviews indicate the number of complaints against nonprofits by clients is fairly similar to that of any other law practice. "From this," the report says, "we conclude that nonprofits imperil client interests to no greater extent than do for-profit law practices."

The report simply concludes that registration, while not a necessity, has its advantages for nonprofits. It also spells out exactly how registration would be handled, including the fact that only the head lawyers of nonprofits would register.

The only drawback for some, Hawley said, might be that once registered, nonprofits will be required to carry malpractice insurance. But, he added, research indicates most already do that.

Paul Utrecht, who represented the plaintiff in Frye, said Friday that while he doesn't like the fact that the report suggests letting nonprofits charge contingency fees, the rest of the report is "great."

"The Bar is now recommending exactly what we said the court should have said in the Frye case," the Zacks Utrecht & Leadbetter attorney said. "This demonstrates that the State Bar effectively agrees with us that nonprofits need to be regulated by the State Bar."

Stephen Collier, a staff attorney for the THC, disagreed.

The report "affirms there wasn't any real, big problem out there," he said, "and, therefore, the State Bar is proposing that the existing nonprofit structures simply be allowed to continue to operate as they have been under the rubric of registration."

Collier also pointed out that Utrecht had argued before the Supreme Court that nonprofits were required to register with the State Bar, and if they weren't registered, couldn't practice law and couldn't charge contingency fees.

"Well, the regulations being suggested by the State Bar would allow all three things and, specifically, does not assert that registration is even required," he said. "So it clearly vindicates our position and so did the Supreme Court in Frye."