ETHICAL AND PRACTICAL ISSUES ARISING FROM ATTORNEY SERVICE ON NONPROFIT BOARDS Tax Section

Transcription

1 ETHICAL AND PRACTICAL ISSUES ARISING FROM ATTORNEY SERVICE ON NONPROFIT BOARDS Tax Section Katherine E. David Strasburger & Price San Antonio D Ann Johnson Texas C-Bar Austin Friday, June 19, :40 a.m. 11:40 a.m.

2 Katherine E. David counsels clients on tax matters, including federal income taxation and state margin and sales taxation. A significant part of her practice includes advising tax-exempt organizations. She also has extensive experience advising clients with respect to like-kind exchanges. Katy is Board Certified in Tax Law by the Texas Board of Legal Specialization. PROFESSIONAL AFFILIATIONS Admitted, Texas Admitted, U.S. Tax Court American Bar Association Section of Taxation, Section CLE Committee, Chair ( ); former Vice Chair ( ); Pro-Bono Award Committee, Chair ( ), Member ( ); former Vice Chair ( ); Young Lawyers Forum, former Chair ( ), former Vice Chair ( ), former Programs Coordinator ( ); former Chair, Presentations and Speakers Subcommittee ( ) The College of the State Bar of Texas San Antonio Bar Association San Antonio Bar Foundation San Antonio Young Lawyers Association EDUCATION Georgetown University Law Center, J.D., 2003 Johns Hopkins University, B.A., 2000, with honors Katherine E. David counsels clients on tax matters, including federal income taxation and state margin and sales taxation. A significant part of her practice includes advising tax-exempt organizations. She also has extensive experience advising clients with respect to like-kind exchanges. Katy is Board Certified in Tax Law by the Texas Board of Legal Specialization. PROFESSIONAL AFFILIATIONS Admitted, Texas Admitted, U.S. Tax Court American Bar Association Section of Taxation, Section CLE Committee, Chair ( ); former Vice Chair ( ); Pro-Bono Award Committee, Chair ( ), Member ( ); former Vice Chair ( ); Young Lawyers Forum, former Chair ( ), former Vice Chair ( ), former Programs Coordinator ( ); former Chair, Presentations and Speakers Subcommittee ( ) The College of the State Bar of Texas

3 San Antonio Bar Association San Antonio Bar Foundation San Antonio Young Lawyers Association EDUCATION Georgetown University Law Center, J.D., 2003 Johns Hopkins University, B.A., 2000, with honors PUBLICATIONS Editor of Family Foundation Advisor, published by Civic Research Institute Co-author. Political Activity and I.R.C. 501 (c)(3) Organizations, Strasburger Tax Strategies (November 2012) Co-author. Sales of Church Real Property to Parishioners, Taxation of Exempts (July/August, 2012) SPEAKING ENGAGEMENTS Texas Tax Update, San Antonio CPA Society Speaker Series (December 2014) Exempt Organizations Update, San Antonio CPA Society Speaker Series (October 2014) Texas Taxation Update, Rio Grande Valley Chapter of CPAs (October 2014) State & Federal Issues in School Fundraisers, Strasburger Educator s Law Forum (September 2014) Tax-Exempt Organizations Update, Strasburger Tax Symposium (August 2014) Texas Taxation Update, Strasburger Tax Symposium (August 2014) Course Director. 12th Annual Governance of Nonprofit Organizations Course (August 2014) Lobbying and Political Campaign Activity by Tax-Exempt Organizations, BDO Nonprofit Seminar (May 2014) Series LLCs: Seriously?, San Antonio CPA Society (May 2014) Lobbying and Political Campaign Activity by Tax-Exempt Organizations, San Antonio CPA Society Speaker Series (March 2014) Panelist. Working with CPAs and CFPs, Tax Practice Management and Young Lawyers Forum (February 2014) Federal and State Tax Issues Arising from Nonprofit Fundraising, 21st Annual Legal and Accounting Institute (December 2013) Lobbying and Political Campaign Activity by Tax-Exempt Organizations, 61st Annual Taxation Conference (December 2013) Texas Margin Tax: Cost of Goods Sold, Combined Reporting and Other Issues, Strasburger Tax Symposium (August 2013) Political, Lobbying and Other Issues Facing Tax-Exempt Organizations, Strasburger Tax Symposium (August 2013) Panelist. Working with CPAs and CFPs, Tax Practice Management and Young Lawyers Forum (May 2013)

4 Nonprofit Executive Transaction Management, BDO Nonprofit Seminar (May 2013) COGS in Practice: Use of the Cost of Goods Sold Deductions in Texas Margin Tax, San Antonio CPA Society Speaker Series (April 2013) MEDIA MENTIONS How To Make Sure Your Donation Is Going to a Worthwhile Charity, San Antonio Express-News (November 2014) Holidays a Time for Giving, San Antonio Express-News (November 2013) COMMUNITY Alamo Community College District Foundation, Director, Secretary Saint Mary s Hall Alumni Advisory Council, Member St. Luke s Catholic Church, Member, Catechist RECOGNITION Named among Texas Rising Stars by Thomson and Reuters ( ) Named among the Rising Stars by San Antonio Scene Magazine (2013, 2014) Named among the 40 Under 40 by San Antonio Business Journal (2011) Awarded the Nolan Fellowship by the American Bar Association Section of Taxation (2010) Named among the Best Lawyers Rising Stars by San Antonio Scene Magazine ( )

5 D Ann Johnson Texas C-Bar Legal Experience Branch Manager, Texas RioGrande Legal Aid (Current): Oversees the operation and management of a staff of 50 lawyers, paralegals, and support personnel in the direct legal services program, and in coordination with the Executive Director, develops and executes initiatives to provide improved civil legal services to the poor. Counsels supervisory attorneys; manages federal, state and local contracts; establishes relationships with pro bono lawyers, law school legal clinics, judges, private bar members, and community-based organizations; develops and oversees community outreach, supervises on and off-site intake and community training initiatives; co-manages free walk-in legal clinics; and participates in fundraising, education, public relations, and media events. Director, Texas C-BAR (Current): Coordinates delivery of pro bono transactional legal services to nonprofit community development organizations working to revitalize low-income communities. Develops training programs, online resources, and manuals addressing critical legal issues for nonprofit organizations and microentrepreneurs. Conducts legal training programs for attorneys, nonprofit staff, and board members. Topics include compliance, governance, tax, and employment matters. Works with coalitions to devise strategies to overcome systemic legal obstacles to economic self-sufficiency and establish worker-owned cooperatives and affordable housing for low-income persons. Participates in fundraising, strategic planning, and grant compliance. Supervises staff attorneys, law clerks, and interns. Speaks frequently at state and national legal conferences on issues facing low income workers, nonprofit legal compliance, employment law, and establishing worker-owned cooperatives. Assistant General Counsel, Texas Department of Banking: Authored legal opinions, rules, legislation, and testimony on issues related to financial services, administrative law, and employment law. Successfully handled or supervised the majority of departmental litigation and regulatory enforcement actions against financial institutions, including the 30-mile loophole case regarding interstate branching. Provided legal training to staff. Presented workshops at national conferences for legal counterparts. Federal Liaison, Texas Office of State-Federal Relations, Washington D.C.: Represented the Governor, Banking Commissioner, State Treasurer, and other state officials and coordinated their responses to federal legislative initiatives relating to financial services matters. Drafted legislation, talking points, correspondence, and testimony for state officials. Coordinated strategies and proposals among various stakeholders, other states, and national organizations, served as a representative of state banking interests at meetings with White House, Federal Reserve, Office of the Comptroller of the Currency, and House and Senate Banking Committees. Justice of the Peace, Precinct Two, Travis County: Presided over small claims and justice court matters, conducted weddings, issued warrants, supervised staff and managed office finances. Assistant Travis County Attorney, Travis County: Supervised civil litigation and represented public officials and the County in state and federal courts. Trained lawyers and public employees throughout the state, testified before legislative committees, developed programmatic solutions to reduce legal liability. Implemented procedures to reduce backlog of thousands of collection cases, including tax delinquent property tax cases. Represented management in all employee grievance hearings and lawsuits. Presented workshops at state conferences for legal counterparts. Education University of Texas School of Law, J.D., with Honors 1987 Texas A & M University, B.S., Magna Cum Laude 1980 Selected Bar Service and Membership Pathfinder Award, Travis County Women Lawyers Association, 2014 Board Member, Travis County Women Lawyers Scholarship Committee Pro Bono Award, Travis County Women Lawyers Association, 1999 President, Travis County Women Lawyers Association,

6 Ethical and Practical Issues Arising from Attorney Service on Nonprofit Boards Speakers: D Ann Johnson Director, Texas C-Bar djohnson@texascbar.org Materials: Kate McFarland Associate, Strasburger & Price, LLP kate.mcfarland@strasburger.com Katherine E. David Partner, Strasburger & Price, LLP katy.david@strasburger.com /SPSA/15556/2126/041315

7 Ethical and Practical Issues Arising from Attorney Service on Nonprofit Boards ETHICAL AND PRACTICAL ISSUES ARISING FROM ATTORNEY SERVICE ON NONPROFIT BOARDS I. INTRODUCTION To serve on the board of directors of a nonprofit organization can be a valuable experience for a practicing attorney. Board participation allows an attorney to give back to the community and can provide quality business development opportunities. For organizations, attorneys are desirable candidates for board positions: they bring legal and business knowledge and typically have standing and contacts in the community. While an attorney s service on a nonprofit organization s board of directors can be beneficial for both parties, it presents some unique challenges. To avoid role confusion, an attorney should make clear whether he or she is operating as a director, or as the organization s attorney. Attorneys should understand the heightened duties that apply to them, compared to those that apply to non-attorney directors. Attorneys must be alert to potential conflicts of interest and confusion regarding attorneyclient privilege. This article explains each of these issues and suggests practical strategies to help address them. A. Multiple Capacities When an attorney serves on the board of a nonprofit corporation, confusion might arise as to whether the attorney is acting in his or her capacity as director or providing legal advice. For example, if the board of directors is considering a particular course of action, with an eye to the legal risks thereof, the attorney/director might be asked to weigh in based on his or her legal knowledge. If the attorney/director does not represent the corporation in his or her capacity as an attorney, he or she will need to make it very clear to the rest of the board that he or she is responding in his or her capacity as a director and not providing legal counsel to the corporation. If, however, the attorney/director or his or her law firm does represent the corporation as legal counsel, the attorney must distinguish between situations in which he or she is providing business advice as a director and situations in which he or she is providing legal advice to the corporation as legal counsel. In order to avoid confusion, the attorney/director should avoid providing legal advice during the course of a board meeting, when his or her role is most ambiguous. If a legal question arises or the attorney/director s legal opinion is sought during a board meeting, the attorney/director should consider stating that he or she is only able to provide a business opinion during the board meeting but is willing to analyze the issue from a legal perspective outside of the meeting. An attorney who represents a nonprofit corporation and is asked to serve on the corporation s board of directors should consider executing a new engagement letter with the corporation to clearly define the scope of his or her legal representation. For example, an attorney who intends to accept a board position might intend to represent the corporation only with respect to employment law matters. The attorney does not intend (and might not have the skill) to represent the corporation with respect to other matters, such as real estate, tax, or charitable solicitation. In such case, the engagement letter should clearly set forth the limits on the representation to avoid confusion or improper reliance by the organization. The attorney also should make clear that he or she represents the nonprofit corporation and not its board of directors or individual board members. Clear communication about the dual roles that the attorney/director fills is the best way to prevent potential confusion regarding the capacity in which an attorney/director is acting at any given time. B. Heightened Standard for Attorney/Director Under Texas law, the director of a nonprofit corporation shall discharge the director s duties in good faith, with ordinary care, and in a manner the director reasonably believes to be in the best interest of the corporation. 1 Like any other director on a nonprofit board, an attorney/director is bound by these duties when acting in his or her capacity as a director. However, a director who is an attorney may have additional duties. According to a report of the Task Force on the Independent Lawyer of the American Bar Association s Section of Litigation, an attorney for a for-profit organization who is also a director is expected to have more extensive knowledge and to conduct more extensive investigations into the facts than other outside directors. 2 The same heightened standard might apply in the non-profit context, in which case an attorney/director may be expected to have more extensive knowledge and to conduct more 1 Tex. Bus. Org. Code See Melissa Longamore, Esq., Attorneys Serving on Nonprofit Boards of Directors Face Ethical Balancing Acts, American Bar Association s Pro Bono and Special Interest Litigation Committee Newsletter, (June 18, 2012), available at awanola.org/wp-content/uploads/2013/09/cle-8.pdf /SPSA/15556/2126/041315

8 Ethical and Practical Issues Arising from Attorney Service on Nonprofit Boards extensive investigations into the facts than other outside directors. 3 This heightened expectation of an attorney/director s knowledge may be due in part to additional weight placed on the opinions provided by the attorney/director due to his or her legal knowledge and experience. An attorney who agrees to serve as director on a nonprofit board should be aware of these heightened expectations and be prepared to expend time and energy engaging in more extensive research and investigations than the other directors on the board. C. Conflicts of Interest A conflict of interest exists when an attorney serves as a director of an organization that the attorney or his or her law firm represents. The conflict of interest must be managed in accordance with the Texas Business Organizations Code and the Texas Disciplinary Rules of Professional Conduct. The Texas Business Organizations Code addresses conflicts of interest that arise when a director of a nonprofit corporation has a financial or other interest in a transaction into which the nonprofit wishes to enter. 4 The provision applies to a contract or transaction between a nonprofit corporation and one of its directors, or an entity in which one of its directors is a manager, or member or has a financial interest. 5 The Code provides that, an otherwise valid and enforceable contract or transaction is valid and enforceable (and is not void or voidable) if either one of two conditions is met. The first condition requires that the material facts of the relationship or interest be disclosed to the board of directors (or other decisionmaking body of the organization), and the board or other decision-maker must authorize the interested transaction in good faith and with ordinary care. 6 The second condition requires that the transaction be fair to the corporation when it is authorized, approved, or ratified. 7 The attorney/director with the interest in the transaction can be present at and vote at the meeting. 8 So long as either of the two conditions is satisfied, neither the organization nor any of its shareholders will have a cause of action against the attorney/director or the attorney/director s law firm. 9 3 Id. 4 Tex. Bus. Org. Code Tex. Bus. Org. Code (a). 6 Tex. Bus. Org. Code (b)(1). 7 Tex. Bus. Org. Code (b)(2). 8 Tex. Bus. Org. Code (d). 9 Tex. Bus. Org. Code (e). An attorney/director who wants to perform legal work for the organization (or who wants his or her law firm to perform legal work for the organization) should disclose his or her interest in the transaction and should ensure that the engagement is fair to the organization at the time it is entered into. Rule 1.06(b)(2) of the Texas Disciplinary Rules of Professional Conduct provides in pertinent part a lawyer shall not represent a person if representation of that person reasonably appears to be or become adversely limited by the lawyers or law firm s responsibilities to another client or to a third person or by the lawyers or law firm s own interests. 10 The Model Rules Committee of the State Bar of Texas has provided the following guidance for an attorney/director facing potential conflicts of interest: 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. The lawyer may be called on to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer s resignation from the board, and the possibility of the corporation s obtaining legal advice from another lawyer in such situations. If there is material risk that the dual role will compromise the lawyer s independence of professional judgment, the lawyer shall not serve as a director. 11 To illustrate how this comment might be relevant: an attorney/director votes to hire a particular candidate as Executive Director of the organization. A candidate who was not selected files a discrimination claim against the organization. The claim implicates the attorney/director s actions as a director, and it would be a conflict of interest for the attorney or his or her firm to advise the corporation about the legality of the election in which the attorney/director voted. The Model Rules Committee comment encourages the attorney considering service as a director to anticipate these types of potential conflicts before they arise and to abstain from serving as a director if the attorney believes there is a risk that these conflicts could compromise his or her professional judgment. 10 Tex. Disciplinary Rules Prof l Conduct R. 1.06(b)(2). 11 Tex. Disciplinary Rules Prof l Conduct R cmt /SPSA/15556/2126/041315

9 Ethical and Practical Issues Arising from Attorney Service on Nonprofit Boards Should an attorney/director encounter a conflict of interest such as the one described above after accepting a role on a board of directors, the attorney should advise the organization to retain other counsel to provide legal advice on the action taken by the board. D. Lawyer-Client Privilege Lawyer-client privilege is governed by the Texas Rules of Evidence. The general rule states: A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client: (A) between the client or a representative of the client and client s lawyer or representative of the lawyer; (B) between the lawyer and the lawyer s representative; (C) by the client or a representative of the client, or the client s lawyer to a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein; (D) between representatives of the client or between the client and a representative of the client; or (E) among lawyers and their representatives representing the same client. 12 The rule does not extend to all communications made between a corporation and its counsel; rather, it is limited to communications made in the process of rendering legal services. This distinction is significant when communications to or from an attorney/director are involved. The communications are protected by lawyer-client privilege only if they are made while the attorney/director is acting in his or her capacity as the corporation s attorney while making or receiving the communications. Opinions provided by the attorney/director in his or her capacity as board member are not privileged communications, and the attorney/director might be forced to testify as to those statements at a later time. It is imperative that the attorney/director, the other board members, and all other individuals present at board meetings or interacting with the attorney/director in his or her capacity as director are aware of this distinction. II. CONCLUSION An attorney s service on a nonprofit board of directors can be meaningful to the individual and beneficial to the organization. By understanding the unique issues that arise when an attorney also acts as a director, attorneys can minimize challenges and risks to themselves and the organizations they serve. 12 Tex. R. Evid. 503(b)(1) (emphasis added) /SPSA/15556/2126/041315