Who Is the Client: Nonprofits

By Latresa D. McLawhorn

When representing nonprofit organizations, there are a number of circumstances where a lawyer’s ethical duty may be unclear or compromised because federal and state regulations impose heightened responsibilities on the organization to protect its mission, members, or beneficiaries and strict standards to maintain its nonprofit status.

The nonprofit entity, not its board members or officers, is the client when the entity has retained a lawyer’s services. Rule 1.13 of the ABA Model Rules of Professional Conduct states that a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. Although the rule establishes that the entity is the client, the reality is that lawyers often give advice for the benefit of not only the nonprofit organization but also the individual officers, employees, and board members who are entrusted with caring for the nonprofit. For example, nonprofit board members often require advice on making strategic decisions without affecting the organization’s nonprofit status. This is especially important for tax-exempt organizations. Such advice often requires a crash course on board member fiduciary duties. The goal is to ensure that these individuals are aware of the legal and regulatory guidelines to which the entity must adhere to remain compliant and to ensure that the individual board members or officers understand their personal legal and ethical duties and responsibilities to the nonprofit organization. Any advice the lawyer gives to the board members or officers under these circumstances is ultimately done for the benefit of the entity itself.

When a nonprofit organization retains legal counsel, a lawyer may provide advice to both the nonprofit and its board members or officers, but neither the lawyer nor his or her law firm may represent both parties if a conflict arises where their interests are adverse—the lawyer may ultimately need to sue the board members to zealously advocate on behalf of the nonprofit. Rule 1.7(a) of the Model Rules prohibits a lawyer from representing a client if the representation of one client is directly adverse or will materially limit the lawyer’s responsibilities to another client.

Furthermore, Rule 1.13(b) states if a lawyer for an organization knows that an officer, employee, or other person associated with the organization is engaged in action, intends to act, or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization by referring the matter to a higher authority in the organization, including, if warranted, to the highest authority that can act on behalf of the organization.

Consider a situation where the executive director of a family foundation believes that investing in a new office building will not only prevent the foundation from meeting its grant-making goals for the fiscal year but also that the building is an overall bad investment. The organizational documents for the organization should establish that the ultimate authority under such circumstances lies with the board of directors. But if the CEO also reveals that a number of board members had a personal financial interest in selling the office building at an escalated price, a conflict arises between the board of directors and the interests of the foundation. The rule requires that the lawyer notify the chairman of the board, and the lawyer may also need to pursue a claim against those board members individually. Note, however, that although the nonprofit’s interest is in line with the concerns of the executive director, the organization itself remains the client. Although a nonprofit’s lawyer may counsel both the nonprofit and its board members or officers under some circumstances, the nonprofit is the client.

 


  • Latresa D. McLawhorn focuses on estate planning, asset protection, and nonprofits as the founder and principal of the McLawhorn Firm, PLLC, in Washington, D.C.; she may be reached at lmclaw@mclawhornfirm.com .

    Copyright 2010



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