By Joe Forward, Legal Writer, State Bar of Wisconsin

Sept. 15, 2010 – Thinking of serving on the board of directors for a local nonprofit organization as a volunteer? Doing so can forge new relationships that lead to an expanded client base while benefitting the local community. But what happens when the nonprofit organization turns to you, as member of the board, for legal advice?

More than 30,000 nonprofit organizations operate in Wisconsin. Many require a board of directors, and lawyers, with specialized knowledge, make good candidates. The arrangement benefits both sides. The lawyer gets exposure and satisfaction, and the organization scores a board member with specialized knowledge.

But serving as volunteer board member may lead to a situation in which the lawyer is asked to offer legal advice. After all, part of the value of obtaining a lawyer on the board is access to the lawyer’s legal expertise. But offering legal advice invokes a dual role and more to think about.

You’re a lawyer, what do you think about this?

According to State Bar Ethics Counsel Tim Pierce, once a lawyer offers legal advice, the organization becomes the lawyer’s client with respect to the matter, whether serving in a pro bono capacity or not. Serving a dual role as director and legal counsel is not unethical per se, but wearing “two hats” means juggling more legal and ethical considerations.

“Once you start giving legal advice to some entity upon their request … you are their lawyer, and all the obligations and potential pitfalls apply,” Pierce said. But lawyers that want to serve both roles can minimize the pitfalls by understanding the implications.

On top of the fiduciary duties that a director owes to the organization, serving in a dual role could lead to conflicts of interest, threats to attorney-client privilege, and other issues. Pierce said potential problems can be cured by discussing matters before offering legal advice.

In addition, nonprofit lawyer Kathy Brost says lawyers contemplating a nonprofit board of director position without corporate or nonprofit law experience should learn the basics of nonprofit corporation law, and the “red flag” issues that can arise in the area.

“Serving on the board of a nonprofit organization is a great way to network,” said Brost of Brost & Associates Law Offices LLC in Neenah. “I see a lot of attorneys volunteering, but many aren’t grounded in nonprofit law.”

For instance, different tax rules apply to different nonprofit organizations. Those tax rules will impact the organization’s operations and its tax-exempt status. According to Brost, lawyer-directors should understand those tax implications.

In fact, an estimated 6,000 nonprofit organizations in Wisconsin are a month away from losing their tax-exempt status, if they have not already filed IRS Form 990, a relatively new requirement under the Pension Protection Act of 2006. Those organizations that have not filed in the last three years will lose their tax-exempt status unless they file by Oct. 15.

Brost will talk about tax implications and other nonprofit law basics at the Wisconsin Solo & Small Firm Conference in Wisconsin Dells. In her Oct. 30 presentation, Brost will also discuss how serving as a board member of a nonprofit organization can help build a lawyer’s practice.

In particular, Brost will discuss the different types of nonprofit organizations, the different rules that apply to each, the transactions that nonprofits are prohibited from undertaking, nonprofit tax implications, the impact of Sarbanes Oxley, the new IRS Form 990 requirements, and the keys to good corporate governance.

Basic considerations as director-lawyer

Assume a lawyer is hired to serve as a volunteer board member, not as legal counsel. Two months later, the board of directors turns to the lawyer and asks for legal advice. If the lawyer does not refuse the possibility of serving as legal counsel, Pierce says the lawyer should consider and discuss with the organization the implications of rendering such advice.

Pierce said that before undertaking the dual role of lawyer-director, a lawyer should obtain informed consent from the organization to serve in the dual role capacity after explaining the positives and negatives of such an arrangement.

For instance, while the nonprofit organization may get the benefit of legal counsel plus volunteer director, there is the possibility that a conflict would force the attorney to cease his or her representation. That is, the organization should consider, at the outset, whether the dual-role capacity will best serve the organization’s interests and whether a reasonable alternative exists. In some cases, it may be best if the lawyer serves as director only.

In addition, the lawyer should consider whether his or her legal malpractice insurance policy would cover the situation in which he or she, as a volunteer board member, is also serving as legal counsel. In a dual-role circumstance, it could become unclear whether discussions or conversations relating to the organization’s business fall under the category of “business” or “legal” advice, or if pro bono activities are covered.

“In that situation, coverage will depend on the policy and the facts and circumstances,” said Thomas J. Watson, senior vice president at Wisconsin Lawyer’s Mutual Insurance Company. “Lawyers should certainly consult their carriers and fully explain the work they are doing.”

The lawyer should also consider how his or her participation as a lawyer-director will impact the organization’s interests. In other words, a lawyer’s dual-role could threaten confidentiality unless the lawyer and the entity can segregate legal advice from business discussions.

For instance, both legal and business considerations may arise during a board of director meeting. If the lawyer is offering legal and business opinions during a board meeting, how will the legal advice be segregated to ensure that legal discussions remain confidential?

Another consideration is the duty of competence. Wisconsin Supreme Court Rule 20:1.1 states that “[c]ompetent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”

As attorney Brost advises, lawyers considering a volunteer directorship at a nonprofit organization should brush up on nonprofit law, especially if they anticipate providing legal services in a dual capacity as director and legal counsel.

The foregoing considerations represent some of the many conflicts that could arise in one’s dual capacity as director and lawyer, depending on the circumstances. But taking precautions, Pierce and Brost say, can minimize risks and allow attorneys to enjoy the benefits of serving their community while gaining valuable experience and community exposure.

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