Opinion 2006-7
(January 2007)
The inquirer asks for an opinion based on the following facts. The inquirer is former counsel to, and former board member of, a local organization holding itself out as a tax-exempt entity. The inquirer rendered legal services to the organization on a pro-bono basis. Prior to the inquirer's involvement with the organization, the organization had been erroneously advised by another attorney that it would be deemed a tax-exempt entity by merely incorporating. Based on this advice, the organization collected donations from contributors who believed they were making contributions to a tax-exempt entity. The organization also recruited a "high-level" politician to serve as an honorary board member on this basis.

During the inquirer’s period of service to the organization, the inquirer made a public disclosure (upon the approval of the organization's President/founder) that the organization had made some "mistakes" and that the organization "would correct those mistakes."1

Subsequently, the inquirer was informed by the organization that the organization had "changed direction" and was in the process of withdrawing its application for tax-exempt status in order to pursue a for-profit venture. The inquirer informs us that the organization elected this course of action against the inquirer's advice and without the inquirer’s legal assistance. According to the inquirer, as of the date of making this present inquiry, the organization had not disclosed to its membership or its board that the organization would be withdrawing its application for tax-exempt status. The inquirer also informs us that the organization's organizational documents have not been revised.2

It is unclear from the facts whether the organization's board approved the decision to move forward with the withdrawal of the tax-exemption filing. It is the inquirer's opinion that only an executive committee of the board approved the action. A volunteer from the organization recently asked the inquirer about the status of the tax-exemption application and the inquirer referred the volunteer to the organization’s President. The President has not responded to that volunteer. The inquirer advises that she is no longer counsel to the organization, but that this has not been disclosed to the Board and no one has replaced the inquirer as counsel. The inquirer has however notified the IRS that she is not longer counsel to the organization.

Based on these facts the inquirer asks the following questions:
1. What duties (if any) does the inquirer have to the organization, its members and volunteers?
2. May the inquirer advise the organization’s volunteers that the application for tax-exemption has been withdrawn?
3. Can the inquirer do anything to protect her reputation, the volunteers and the members?

The Committee draws the inquirer’s attention to the fact that this opinion only addresses ethical considerations arising under the Pennsylvania Rules of Professional Conduct (the “Rules”.) The inquiry also raises issues of the inquirer’s fiduciary obligations under substantive law. These obligations could result in different disclosures to different parties, but those obligations are not addressed herein.

Rule 1.6, Confidentiality of Information, provides in part that,

(a) A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraphs (b) and (c).
(c) A lawyer may reveal such information to the extent that the lawyer reasonably believes necessary:
(2) to prevent the client from committing a criminal act that the lawyer believes is likely to result in substantial injury to the financial interests or property of another;
(3) to prevent, mitigate or rectify the consequences of a client’s criminal or fraudulent act in the commission of which the lawyer’s services are being rendered or had been used;

Rule 1.13, Organization as Client, provides in part that,
(a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.
(b) If a lawyer for an organization knows that an officer, employee, or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization, the lawyer shall proceed as is reasonably necessary in the best interest of the organization…Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to personal outside the organization…

Addressing the inquirer’s first question, Rule 1.13a makes it clear that the inquirer’s sole duty is to the organization, not its members or volunteers. The organization is governed by a Board of Directors and, therefore, the inquirer’s duties as counsel flow directly to that Board. Rule 1.13 (b) requires that the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Prior to her resignation, the inquirer had actual knowledge that: (i) the organization had solicited and accepted funds from contributors who believed the funds would be used for non-profit purposes; (ii) the organization’s President had informed the inquirer that the organization would be taking a different direction by withdrawing the tax-exemption application and, accordingly, pursuing for-profit activities; and (iii) the Board had not approved the action. On this basis, the Committee concludes that the inquirer must now provide written notice to the Board of Directors that she is no longer counsel to the organization, but believes that the organization has created specific risks under substantive law for itself and its members based on the facts set forth in items (i) to (iii) above. The Committee also finds given the facts as provided in this inquiry, that communication with the organization’s President alone of the inquirer’s reservations and concerns is not sufficient.

Turning to the second question, while the inquirer has certain options as outlined in the exceptions to Rule 1.6c, these are permissive and not mandatory. Also Comment [20] to the Rule states that disclosure is permitted, “only to the extent the lawyer reasonably believes the disclosure is necessary to accomplish one of the purposes specified.” In this specific inquiry, the inquirer not only has the obligation to go to the Board about what has happened but must do that prior to making any permissive disclosures of confidential information to either members or volunteers. The reasoning dictating this course is that the Board may decide to take appropriate action which would result in circumstances changing so that the Rule 1.6c exceptions to confidentiality might no longer apply.

In addition, prior to making any decisions about the permissive disclosure of information, the Committee urges the inquirer to make sure what has actually transpired (including but not limited to was the application actually withdrawn, has any notice gone out to volunteers and/or members about this and the change of direction of the organization, and whether in fact what occurred constitutes specific fraudulent or criminal conduct).

Addressing the inquirer’s final question, if the inquirer believes that her services were used in the client’s criminal or fraudulent act then under Rule 1.6c3 she has the option to reveal the minimum amount of confidential information necessary to “prevent, mitigate or rectify the consequences” of that conduct. Again however, as noted above, action which the inquirer might choose to take under this Rule must be done only after disclosure is made to the Board and after an evaluation of what the Board chooses to do or not do in response to her communication. As regards the volunteers and members see the response to Question 2 above.

1. It is unclear from the facts whether the inquirer disclosed the specific deficiency with respect to obtaining tax-exempt status through the appropriate filings.
2. It is unclear what the organizational documents provide for in their current form other than the fact that the organization’s bylaws provided that a quorum of the board was sufficient to take action. There is a cap of 15 members on the Board, and the inquirer states that she believes but is not certain that presently there are 5 board members.

CAVEAT: The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.