Wednesday, July 28, 2004
C.A. Says Nonprofit Firm Must Register With State Bar
By a MetNews Staff Writer
A law corporation must register with the State Bar, even if it is a nonprofit organization, and a client of such an entity may sue for a refund of fees if it fails to do so, the First District Court of Appeal ruled yesterday.
Div. Four reinstated Steven Frye’s suit against Tenderloin Housing Clinic, Inc. of San Francisco. Frye claims the organization is illegally retaining fees that were awarded in his earlier litigation against his landlord and owes the money to him.
Frye and 14 of his fellow tenants retained the clinic to represent them in 1993. The plaintiffs in that action alleged that the owner of the residential hotel where they lived was responsible for defective conditions.
Their contract with the clinic provided for a contingency fee of 331/3 percent of the plaintiffs’ recovery if the case settled prior to the original trial date, and 40 percent of it resolved itself later. In the event of a court award of fees, the agreement provided, the attorneys would be entitled to the full amount of the contingency or of the award, whichever was greater.
Following a 1994 trial, the jury awarded a total of nearly $237,000 in damages, including more than $10,000 to Frye. Following an unsuccessful appeal by the landlord, the attorneys moved for fees pursuant to fee clauses in nine of the 15 leases, as well as under a Civil Code section relating to uninhabitable dwellings.
The judge awarded a total of more than $130,000 in fees, and the landlord eventually paid the damages, attorney fees, costs and interest. The full contingency—40 percent of $465,000—came to $17,300 more than the court award, so the clinic took out the full amount, crediting the court award to the clients and deducting a proportionate share of each client’s recovery to cover the balance.
Frye’s share of the overage was $1,200, leaving him with $11,600, including interest. He subsequently sued the clinic for money had and received, fraud and negligent misrepresentation, breach of fiduciary, breach of contract, and unfair business practices.
A San Francisco Superior Court Judge granted summary adjudication as to the fraud and misrepresentation count, but denied it as to the others. The judge ruled that as a nonprofit, tax-exempt corporation, the clinic was not required to register as a law corporation and therefore did not misrepresent to Frye that it had the right to practice law.
The parties later settled the breach of contract and unfair business practices claims for $1,390, and the clinic moved for judgment on the pleadings on the causes of action for money had and received and breach of fiduciary duty. After allowing the individual attorneys who handled the case to intervene—the attorneys claimed they were entitled to the fees if the corporation was not—the judge granted judgment in favor of the defendant.
But Presiding Justice Laurence Kay, writing for the Court of Appeal, said the trial judge erred in concluding that a nonprofit organization engaged in the practice of law need not register with the State Bar.
The registration statute, Business and Professions Code Sec. 6160, as amended in 1993, applies to both professional corporations organized under the General Corporation Law and to nonprofit public benefit corporations such as the clinic, the jurist noted. He also pointed out that a nonprofit public benefit corporation that is also a registered law corporation cannot enter into contingency fee agreements.
The justice also rejected the clinic’s argument that it is exempt from registration under the First Amendment. The clinic, Kay said, “has failed to establish that the litigation it pursues is a form of political expression.”
As to the intervenors, Kay said the trial court must determine on remand whether they or Frye are entitled to the fees.
Copyright 2004, Metropolitan News Company