By Justin A. DeVault and Mark B. Weinberg
It is now tougher than ever to recruit community members to serve on your nonprofit board. Fiscal problems have brought to the fore many of the most difficult problems that boards of yesteryear seldom faced: which programs to cut, how to downsize staff, and how to keep up with technology that is beyond many older prospects. It is natural to seek out professionals who are normally more familiar with technology and the business choices the board must now face. If you have ever tried to recruit a lawyer to serve on your board, however, you may have encountered the following disappointing response, “I’d love to serve on your board – but I’m a lawyer.” This article will explore the reasons behind this answer and some ways to respond constructively to it. In this, Part 1, we will discuss how conflicts of interest arise and can prevent a lawyer from serving as a director. In Part 2 we will cover the pitfalls of conflicts and how to avoid them.
Consider this scenario: a lawyer serves on the board of a nonprofit organization; the board holds a meeting and tough questions are asked regarding what action the directors should take. It is likely that, at some point, the board will direct the questions to the lawyer due to the lawyer’s expertise and knowledge. However, many questions that come up at board meetings can put any lawyer in a tough position and create a conflict of interest. The conflict can vary depending on whether the lawyer is serving purely as a member of the board or the lawyer is working as the organization’s lawyer, too. It generally makes no difference whether the lawyer is paid or unpaid; that person is a lawyer and, as such, has special responsibilities and limitations.
Anytime a lawyer is serving two or more different parties to the same transaction, there is the possibility of a conflict of interest. This is because each party has different interests and objectives. Under ABA Model Rule 1.7, a lawyer cannot represent a client if doing so will be directly adverse to the interests of another client. It is also improper to represent a client if doing so will materially limit the lawyer’s responsibilities to another client . If a lawyer advises a software company on intellectual property matters, another software company could retain the lawyer to review a lease, but the lawyer must in most cases refuse to represent the second company in a dispute with the first and should carefully consider declining a request for advice on intellectual property matters. Sometimes these conflicts can be knowingly waived by the multiple clients, but sometimes they cannot.
In order to waive a conflict of interest, four requirements must be met: (1) the lawyer must reasonably believe that he or she will be able to provide competent and diligent representation to each affected client; (2) the representation must not be prohibited by law; (3) the representation must not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client must give informed consent, confirmed in writing. An effective waiver is made only if each of the four requirements is fulfilled; without all four, there is a conflict of interest. Where no waiver of the conflict is confirmed, the organization should be aware of the circumstances that may follow as a consequence of the conflict.
For instance, lawyer-directors may limit their ability to draft wills or gift documents for their clients that would benefit the nonprofit. If a lawyer serving on the board drafts such a will or deed of gift the lawyer may be seen by others as exercising undue influence over the decision. At a minimum, the fact that the lawyer has a duty to both the nonprofit and the client creates an apparent conflict of interest. Undue influence is a component of conflict of interest and is governed by the same rules as conflict of interest as well as Model Rule 8.4 which governs the misconduct of lawyers. To avoid undue influence issues, the lawyer must follow general standards of fairness in drafting documents for clients. A lawyer may also represent a client, be it an individual or organization, which may be seeking a grant from the nonprofit. Here, the lawyer-director has the duty of loyalty to act in the best interest of both the grant making nonprofit organization and the client who seeks the grant. A conflict of interest may also arise where the lawyer or the lawyer’s firm represents a client that is engaged in a dispute with the nonprofit.
As mentioned before, directors, officers, or staff of the nonprofit will direct questions to the lawyer serving on its board. If before answering the nonprofit’s question, the lawyer’s position in relation to the nonprofit and the questioner is not clarified, there is a chance that the person asking the question and others joining the discussion may believe what is said between them is privileged. The attorney-client privilege is the cornerstone of client confidentiality under the ABA Model Rules. However, in order for conversations to be privileged there must be a lawyer-client relationship between everyone in the discussion and the lawyer. Therefore, it is imperative that all those connected with the charity ask themselves “In what capacity is the lawyer speaking to me?” And the problems become more complicated from there.
What should the lawyer-director do if a dissatisfied employee confides that he is having an affair with the executive director and produces an incriminating photo, then says, “This is all confidential, right?” The director has a duty to the charity to report such credible evidence to the board and initiate an inquiry into the alleged misbehavior. If the board then fires both the executive director and the employee, the lawyer could well be accused of failing to make it clear he was serving only as a director before the confession was made; at the very least a claim to that effect could be lodged with the Bar Discipline Committee, besmirching the lawyer’s reputation. If, to be safe the lawyer says nothing, the problem surfaces later and the dissatisfied employee reports that he had told the director months before, the nonprofit may contend that the lawyer has violated the duty of a director.
Conflicts of interest are also possible where the lawyer serves as corporate counsel and sits as director on the nonprofit’s board. The ABA Model Rules of Professional Responsibility state that:
“A lawyer for a corporation or other organization who is also a member of its Board of Directors should determine whether the responsibilities of the two roles may conflict… If there is a material risk that the dual role will compromise the lawyer’s independence of professional judgment, the lawyer should not serve as a director or should cease to act as the organization’s lawyer when conflicts of interest arise .”
ABA Formal Ethics Opinion 98-410 identifies four possible conflicts that may occur. The first arises when the lawyer-director has a conflict pursuing the nonprofit’s objectives because the lawyer acting as director opposes the objectives. Typically, you will see this where the nonprofit’s objectives are adverse to the objectives of the lawyer’s other clients. The second situation occurs when the lawyer has difficulty giving an opinion on a matter discussed by the board because of the lawyer’s role as director. Under these circumstances, it may prove difficult for the lawyer to speak independently as counsel to the nonprofit in light of the lawyer’s own interest as a director. The third situation occurs if corporate actions affecting the lawyer or the lawyer’s firm arise. This most commonly occurs if the nonprofit is considering whether to retain or terminate the service of the lawyer or lawyer’s law firm. In each of these cases, lawyers can and should recuse themselves and avoid taking part in the decision-making process. The last situation is when the lawyer or lawyer’s law firm represents the organization, its directors, and its officers as defendants in litigation.
Stay tuned for Part 2 in which we will explore examples of conflicts and how to avoid them.