Nonprofit organizations frequently seek the expertise of attorneys to serve as members of their Board of Directors. The Board of Directors is legally responsible for ensuring the nonprofit organization operates according to its mission, safeguards its assets and operates in the public interest.[1] Directors serve as fiduciaries who must uphold the duties of care, loyalty and obedience throughout their board service.[2]

Similarly, the Oklahoma Rules of Professional Conduct prescribe duties an attorney must uphold in their service to a client.[3] Attorneys serving as directors may be explicitly requested to provide legal counsel to the nonprofit organization, or a presumption may exist by other directors that opinions offered by such attorney are, in fact, legal advice. The conundrum of the dual role –  attorney and director – likely triggers conflicts between these roles, especially concurrent conflicts that require thoughtful examination by an attorney.[4] The Oklahoma Rules of Professional Conduct underscore that an attorney in this dual role must ensure the duality will not compromise the attorney’s “independence of professional judgment.”[5] To address potential conflicts, clarity should be sought as to the expectations of both the organization and the attorney for the attorney’s role on the Board of Directors. Attorneys should clarify whether the nonprofit organization desires their involvement as an independent director or as legal counsel for the organization. Initial clarity will aid the attorney in determining where the dual role may run afoul of the Oklahoma Rules of Professional Conduct or result in conflicts of interest that disable the attorney from serving in either capacity.

This article will highlight the concurrent conflicts that may arise in an attorney’s service as a director and will discuss ways to mitigate such conflicts. Additionally, it will underscore the ethical implications attorneys should consider throughout their service as directors of nonprofit organizations.

DUTIES OF A NONPROFIT DIRECTOR

Nonprofit organizations generally seek directors who provide the necessary expertise and experience for effective oversight of the management and operation of the nonprofits. Directors must uphold the primary duties of loyalty, care and obedience in fulfilling their roles and obligations to the nonprofit organization.[6] The Board of Directors bears ultimate responsibility to ensure the nonprofit organization operates in accordance with relevant law in serving its clientele, utilizing donor funds and interacting with the broader public.[7]

The duty of care requires a director to stay informed, remain attentive and act in a manner consistent with a reasonably prudent director under similar circumstances.[8] The duty of obedience focuses on a director’s obligation to ensure the nonprofit organization is acting within its mission and tax-exempt purpose.[9] This duty further focuses on the director’s obligation to ensure corporate assets are used in line with donative intent and restrictions.[10] The duty of loyalty, however, focuses on transactions where the director has a direct or indirect conflict of interest with the nonprofit organization.[11] Service as both legal counsel and director may trigger a conflict of interest, breaching the attorney’s duty of loyalty to the organization.

COMPETENT REPRESENTATION AND LIABILITY PROTECTIONS

Oklahoma law on nonprofit corporations provides immunity protections to directors in certain circumstances. Directors are provided immunity for vicarious liability stemming from “the negligence of corporate employees or other directors.”[12] This immunity, however, is not unlimited, and directors may be personally liable for “intentional torts or grossly negligent acts or omissions personal to any director of the nonprofit corporation.”[13] A director will also be liable where they breach the duty of loyalty to the nonprofit organization or where they derive an improper personal benefit from a transaction with the organization.[14] An attorney, therefore serving both as a director and paid legal counsel, may trigger this exception where they derive an improper personal benefit from the organization’s payments for their legal services.

More often, the attorney provides legal counsel at no cost to the nonprofit organization. This pro bono service, however, must be provided in line with competent representation.[15] Hence, where an attorney who is unfamiliar with the requirements of a tax-exempt 501(c)(3) organization modifies the organization’s bylaws to permit concurrent service of family members on the Board of Directors, this action may trigger the organization’s reclassification as a private foundation. This error, therefore, runs afoul of competent representation, and the organization – the client – is faced with raising a malpractice issue against its own director acting as its legal counsel. A highly precarious decision for both parties.

The Oklahoma Rules of Professional Conduct stipulate that an attorney may handle legal problems with which they are unfamiliar, but it requires necessary study of this field of law.[16] An attorney unfamiliar with the Oklahoma nonprofit corporation law and Internal Revenue Code requirements for operating a nonprofit organization thus should spend considerable time studying the law and regulations prior to effectively providing legal counsel. Failure to stay abreast of the law in this area may result in malpractice issues for the attorney.

Furthermore, many nonprofit organizations have director’s and officer’s (D&O) liability insurance policies to cover certain acts or omissions of a director acting in their official capacity. An attorney serving as a director, however, may not be covered by the organization’s D&O policy for legal advice offered in this dual role.[17] The attorney’s professional liability or malpractice insurance may additionally exclude coverage where the attorney is acting in this dual capacity.[18] Hence, both the nonprofit organization’s liability policy and the attorney’s own malpractice liability policy should be reviewed to determine if this legal service will be excluded from insurance coverage.

ROLE CONFUSION

Dual service as director and attorney may result in a presumption by other members of the Board of Directors that any statements made by this individual are, in fact, legal advice. An attorney should, therefore, clarify to the recipient in which capacity they are speaking – as legal counsel or as director.[19] This clarity should also be recorded in the board meeting minutes to reflect when an attorney is acting within their capacity as a director and not as legal counsel.[20] A lack of clarity may result in another director’s deference that it is legal advice and unwarranted reliance on such advice. But where the attorney’s statements are, in fact, legal advice, fellow directors may not treat it as advice if they are unaware of “which hat [the attorney] is wearing.”[21] To remedy role confusion, the attorney should provide sufficient information for the nonprofit organization and fellow directors to understand the risks inherent in this dual capacity and to clarify in which role they are serving at all times.[22]

Service as legal counsel requires loyalty and independent judgment to the client.[23] This judgment may be materially limited where the attorney has dual responsibilities – as legal counsel and as director.[24] A material limitation may arise where the Board of Directors chooses a course of action contrary to the attorney’s legal advice or desired course of action. In this situation, the ethical dilemma focuses on whether the attorney is materially limited by their responsibilities as a director or legal counsel to the organization and how this limitation may affect independent judgment in either role.[25] In essence, is the attorney capable of carrying out the desired course of action if it is, in fact, contrary to their stated legal advice or their independent judgment as a director of the organization? Thus, an attorney faced with this situation should openly communicate with the nonprofit organization – the client – about perceived conflicts of interest or material limitations that may result in their decision to step down as a director.[26]

CONFIDENTIALITY AND ATTORNEY-CLIENT PRIVILEGE

Within this dual role, an attorney must maintain confidentiality and refrain from compromising the attorney-client privilege of the nonprofit organization. The Oklahoma Rules of Professional Conduct dictate that an attorney should not reveal information relating to a client’s representation without their informed consent.[27] This duty of confidentiality is similar to a director’s duty as a fiduciary to maintain confidential information of the nonprofit organization.[28] The challenge arises when the attorney gives legal and business advice as a director.

The American Bar Association issued an ethics opinion highlighting several cases in which attorney-client privilege was limited because a corporate director acting as legal counsel provided purely business advice.[29] Thus, to maintain attorney-client privilege, an attorney should clarify that a meeting is solely to provide legal advice and refrain from offering business or financial advice, except where it affects legal considerations like the application of the business judgment rule.[30] Additionally, an attorney may have a duty to disclose information to third parties that may limit this privilege. For instance, within the role of a director, the attorney has an obligation to disclose information to an auditor of the nonprofit organization.[31] But within the role of legal counsel, this disclosure would be impermissible without the informed consent of the nonprofit organization.[32] As underscored in Marco v. Dulles, “[t]he line between [acts as a director and acts as legal counsel] is entirely too fine to permit the professional obligation as a lawyer and the fiduciary obligation as a director to be placed in convenient separate boxes.”[33] Hence, knowledge obtained in this dual role may be imputed to additional members of the attorney’s law firm and the attorney-client privilege limited where an attorney may ethically be required to resign as legal counsel for the organization.[34]

CONCLUSION

Nonprofit organizations frequently solicit attorneys to serve on their Board of Directors. Within this role of director, an organization may request the attorney provide legal advice. Though not precluded by the Oklahoma Rules of Professional Conduct, an attorney should clarify the expectations for this dual capacity. In an ethics opinion by the American Bar Association, a written memorandum prepared by the attorney is recommended to outline the distinctions in the attorney’s role as legal counsel and service as a director.[35] Expectations should also be clearly discussed initially as to the role of an attorney as a director. If a nonprofit organization stipulates that it desires the attorney to serve as its legal counsel, the attorney may determine that the dual role creates distinct conflicts of interest, and service as a purely independent director is desired.

Attorneys serving in this dual capacity should routinely state in which capacity they are speaking and make sure that is captured in corporate minutes. If the attorney is offering legal advice, inform fellow directors in advance that any scheduled meetings are only for legal advice. Without this clarity, fellow directors may be confused as to “which hat” the attorney is wearing and misconstrue any statements as legal advice.

Additionally, prior to undertaking the dual role, an attorney should also verify any limits on D&O insurance coverage or their own malpractice insurance for board service. Both the attorney and nonprofit organization should understand where liability protections may be limited from this dual capacity.

Finally, where an attorney undertakes this dual role, any legal counsel provided should be in line with the Oklahoma Rules of Professional Conduct and competent representation. The attorney should keenly uphold their independent judgment and analyze situations where material limitations may preclude their ethical representation of the nonprofit organization. In the end, termination of either role may be necessary to avoid ongoing conflicts of interest.

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ABOUT THE AUTHOR

Jennie A. Hill is a skilled attorney with Nonprofit Solutions Law PC and serves as managing attorney. She represents tax-exempt entities from formation to dissolution and advises nonprofit entities on employment, board governance, for-profit joint ventures and excess benefit issues. Ms. Hill graduated with distinction from the OU College of Law, where she served on the editorial board of the Oklahoma Law Review and was inducted into the National Order of Scribes. Ms. Hill is also the author of “The Cost of Benevolence: Effective Legal Counsel for Nonprofit Entities” in Law Practice Today.

 

 

 

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ENDNOTES

[1] BoardSource, “Understanding Nonprofit Board Legal and Compliance Issues” (last updated Aug. 25, 2023), https://bit.ly/4efuerK.

[2] Id.

[3] Oklahoma Rules of Professional Conduct, Rule 1.7.

[4] Id. at Comment 35.

[5] Id.

[6] “Board Roles and Responsibilities,” National Council of Nonprofits, https://bit.ly/48y60b0 (last visited July 9, 2024).

[7] Indep. Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations 21 (2d ed. 2015).

[8] Thomas Lee Hazen and Lisa Love Hazen, “Punctilios and Nonprofit Corporate Governance - A Comprehensive Look at Nonprofit Directors’ Fiduciary Duties,” 14 U. PA. J. BUS. L. 347, 375 (Winter 2012).

[9] Id. at 385-87.

[10] Id.

[11] Id. at 381.

[12] 18 O.S. §865 (OSCN 2024).

[13] Id. at §866(B).

[14] Id. at §867(1)-(3).

[15] Oklahoma Rules of Professional Conduct, Rule 1.1.

[16] Id. at Comment 2.

[17] Michelle Berger and Gene Takagi, “Advice for Attorneys Serving on a Nonprofit Board,” Alameda County Bar Association Blog (June 1, 2017),  https://bit.ly/4f9ZAkR; See also Thomas C. Grella, “Service to Nonprofits: Dealing with the Conflict-of-Interest Dilemma of Dual Service,” Law Practice Magazine. (July 1, 2024), https://bit.ly/4fwqcwj.

[18] Id.

[19] D.C. Bar, Ethics Opinion 382 (August 2021), https://bit.ly/4eebqZZ (discussing lawyer-directors representing entity-clients).

[20] Id.

[21] Id.

[22] Id.

[23] Oklahoma Rules of Professional Conduct, Rule 1.7 at Comment 1.

[24] Id.

[25] Id. at Comment 8 (“Even where there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer's other responsibilities or interests.”).

[26] Id. at Comment 35 (“If there is 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 corporation's lawyer when conflicts of interest arise.”).

[27] Oklahoma Rules of Professional Conduct, Rule 1.6(a).

[28] ABA, Formal Op. 98-410 (Feb. 27, 1998) (discussing lawyers serving as a director of a client corporation).

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] Id. (citing 169 F. Supp. 622, 631 (S.D.N.Y.) app. dismissed, 268 F.2d 192 (2d Cir. 1959)).

[34] Oklahoma Rules of Professional Conduct, Rule 1.7 at Comment 35 (“The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer's recusal as a director or might require the lawyer and the lawyer's firm to decline representation of the corporation in a matter.”).

[35] ABA, Formal Op. 98-410 (Feb. 27, 1998) (discussing lawyers serving as a director of a client corporation).