Who is the Client? Legal Representation in Nonprofit Disputes

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When a conflict develops involving a nonprofit, its leaders, or its programs, one of the first calls is usually to the nonprofit’s lawyer.  But when the time comes to call the nonprofit’s attorney, two important questions arise: (1) Who should properly make that call, and (2) On whose behalf is the call being made?  These two questions highlight a more foundational and general question:  Who or what is the attorney’s client in a conflict involving third parties or internal disputes?

On its face, the answer seems plain:  the nonprofit’s attorney is the attorney for the nonprofit.  Its directors and officers often have working relationships with outside legal counsel.  The leaders may  individually see the nonprofit’s attorney as “my attorney,’ especially when a contentious dispute erupts. Whether a nonprofit’s attorney may also represent individual nonprofit leaders is a complex question implicating numerous ethics rules concerning attorneys’ duties in representation.  Generally, nonprofits and their leaders should obtain separate counsel to navigate disputes implicating both the nonprofit and its leaders.  But joint representation may be pursued with care and close attention to potential conflicts of interest together with related impacts on the attorney’s duties to her clients. 

The following hypothetical involves a nonprofit, a lawsuit, and nonprofit leaders working with legal counsel to handle and resolve the significant problems that arise, all in the nonprofit’s best interests and for protection of individual leaders.  Similar issues can arise within other contexts, such as internal board disputes (apart from any resulting litigation) and potential nonprofit mergers with conflicting leadership agendas.  Attorneys’ ethical obligations become critically relevant in sorting through the foundational question of who is the client, and therefore what nonprofit leaders need to know about legal representation. 

Hypothetical Nonprofit:  STEM Chicago Inc.

STEM Chicago Inc. (“STEM”) is a fictional nonprofit corporation dedicated to educating children about science, technology, engineering, and mathematics.  Five years ago, STEM’s directors hired Mary Magistrate to serve as corporate counsel for STEM. Since then, Mary has assisted STEM navigate numerous legal issues within her area of knowledge and experience – nonprofit corporate and tax law. 

Part 1:  The Complaint

Last Tuesday, the Cook County Sheriff showed up at STEM’s corporate headquarters and served a subpoena on the registered agent for the corporation.  Later that day, each of STEM’s five directors also received a subpoena.  The complaint alleges that a child in STEM’s programs was injured due to STEM’s negligence.  The Complaint similarly alleges that each of the directors were negligent and are liable for damages to the child resulting from their negligence.  The Board asks Mary if she can represent everyone -- STEM itself and each of the directors individually. 

Question 1:  May Mary take on such joint representation at the Board’s request?

Answer:  Possibly, with careful assessment of conflicts of interest and applicable consent.

As an initial matter, remember Mary is the attorney for STEM the corporation - not its individual directors.  While it may be economical or otherwise efficient for Mary to engage in joint representation of STEM and its directors, such joint representation is neither required nor necessarily appropriate.  Both STEM’s Board and Mary need to be mindful of the potential conflicts involved and possible impacts on the interests of both STEM and the individual directors.  Indeed, Mary should remind the STEM Board of Directors of their fiduciary duties of loyalty and care to the STEM, which may or may not align with their own personal interests as individual directors in this case. 

Assuming that after Mary’s reminder the Board is still interested in joint representation, what should Mary do?  Under the Illinois Rule of Professional Conduct, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.”[1] The rules require Mary to first determine whether a conflict of interest exists.  Accordingly, Mary should assess whether representation of any of the directors would be adverse to the interests of STEM (and vice versa), and whether she would materially limited in her representation of STEM or any of the directors through her representation of the other.[2]  For example, if Mary determined that the complaint implicated a third-party business owned by one of the directors, she may be precluded from representing STEM and that director simultaneously since the interests of the director might be indirectly adverse to the interests of STEM.  With these initial considerations in view, if no such conflict of interest exists, Mary may represent both STEM and the individual directors. 

If Mary determines that a conflict of interest exists, Mary’s representation of STEM and the directors may still be possible if:

(1) Mary reasonably believes that the lawyer will be able to provide competent and diligent representation to STEM and each director;

(2) Mary’s representation is not prohibited by law;

(3) Mary’s representation does not involve the assertion of a claim by STEM or director against another director; and

(4) STEM and each director gives informed consent (preferably in writing).[3]

To be sure, the threshold of requirements for joint representation is high, but that high threshold is intended to safeguard the nonprofit and its directors’ rights and to ensure that each party receives the best possible, uncompromised legal representation.

Part 2:  The Discovery

Mary performs the appropriate assessment of the complaint and all initially known facts.  After informing all the clients about the case, the nature of the representation and the attendant risks and responsibilities, Mary obtains written consent from each director for joint representation.  One month later, Mary is conducting a review of internal STEM records.  In her review, Mary finds a document that details specific careless and dangerous actions by one of the STEM directors – Bob Bumbler, whom Mary now represents!  Based on Mary’s review, Bob’s actions appear to be directly linked to the harm allegedly suffered by the child.  Furthermore, it appears that Bob may have tried to hide information related to his actions so that the other four directors were unaware. 

Question 2:  Upon her discovery of this new information about Bob, may Mary continue to represent Bob together with STEM and the other directors? 

Answer:  No, Mary must withdraw from representation of both STEM and all the individual directors. 

Upon her discovery of the new damaging information about Bob, Mary is on the horns of a serious dilemma.  Attorney Rules of Professional Responsibility require Mary to pursue a matter on behalf of STEM and all the directors and take whatever lawful and ethical measures are required to vindicate STEM’s and the directors’ cause.[4]  Mary thus has a duty to disclose and zealously use the damaging corporate records she has discovered about Bob to vindicate STEM and the other four directors.  Mary is prohibited from revealing the corporate records, however, because they also relate to her representation of Bob (unless Bob gives his informed consent, which is virtually certain not to happen!).[5] 

What is Mary to do?  Under this unfortunate set of circumstances, Mary needs to withdraw from all clients.  While Mary had obtained written consent to jointly represent both the nonprofit and the individual directors, the discovery of this new information has made it impossible for Mary to comply with her duties to Bob and her duties to STEM and the other four directors. 

Given the possibility of such untenable conflicts of interest emerging in disputes, nonprofit directors should individually retain separate corporate counsel. If, however, a nonprofit chooses to permit joint representation, and the individual directors similarly elect to retain joint counsel, the scope of dual representation should be determined in advance, memorialized in an agreement, and kept with all the nonprofit’s corporate records. Directors should also review and sign annual conflict of interest disclosures, which detail the current status of the dual representation. 

Summary

While it is natural for a nonprofit’s directors to view their nonprofit corporation’s legal counsel also as their personal “go to” in times of legal disputes, such joint representation should be cautiously approached, and may be strictly prohibited.  The nonprofit’s attorney is the attorney of the nonprofit.  Only in certain carefully evaluated circumstances should an attorney additionally take on advocacy responsibilities for the nonprofit’s leaders, individually.  Nonprofit leaders considering such joint arrangements should carefully document the terms and conditions of the representation including any applicable limits on the scope of representation and the handling of emergent untenable conflicts of interest, such as through withdrawal of representation from all clients.

 


[1] IL R S CT RPC Rule 1.7(a).

[2] Id.

[3] Id. 

[4] IL R S CT RPC Rule 1.3.

[5] IL R S CT RPC Rule 1.6.