Frye v. Tenderloin Housing Clinic, Inc.

• Decision Date: 09 March 2006
• Docket Number: No. S127641.,S127641.
• Citation: 129 P.3d 408,40 Cal.Rptr.3d 221,38 Cal.4th 23
• Court: California Supreme Court
• Parties: Steven FRYE, Plaintiff and Appellant, v. TENDERLOIN HOUSING CLINIC, INC., Defendant and Respondent.

40 Cal.Rptr.3d 221

38 Cal.4th 23

129 P.3d 408

Steven FRYE, Plaintiff and Appellant, v. TENDERLOIN HOUSING CLINIC, INC., Defendant and Respondent.

No. S127641.

Supreme Court of California.

March 9, 2006.

Law Offices of Andrew M. Zacks, Law Offices of Paul F. Utrecht, Zacks Utrecht & Leadbetter, Andrew M. Sacks, Paul F. Utrecht and James B. Kraus, San Francisco, for Plaintiff and Appellant.

Chapman, Popik & White, Susan M. Popik, Kyle D. Kickhaefer, Benjamin J. Riley, San Francisco; Tenderloin Housing Clinic and Stephen L. Collier, San Francisco, for Defendant and Respondent.

Heller Ehrman, Steven V. Bromse, Warrington S. Parker III, Ethan C. Glass, San Francisco; The Impact Fund, Brad Seligman, Berkeley, and Sarah Varela, for the American Civil Liberties Union Foundation of Northern California, the American Civil Liberties Union Foundation of Southern California, the American Civil Liberties Union Foundation of San Diego and Imperial Counties, The Impact Fund, Natural Resources Defense Council, the Center for Biological Diversity, the Center on Race, Poverty & the Environment, Disability Rights Advocates, the Environmental Defense Center, the Utility Reform Network, Equal Rights Advocates, Electronic Frontier Foundation and Charles D. Weisselberg, as Amici Curiae on behalf of Defendant and Respondent.

Western Center on Law and Poverty, Richard A. Rothschild, Los Angeles; Latham & Watkins, Amos E. Hartson, Kathryn M. Davis, Beth A. Collins, Keith Wesley, Los Angeles; Greines, Martin, Stein & Richland and Robin Meadow, Los

Angeles, for the Los Angles County Bar Association as Amicus Curiae on behalf of Defendant and Respondent.

Carroll, Burdick & McDonough and Don Willenburg, San Francisco, for Eviction Defense Collaborative, Inc., as Amicus Curiae on behalf of Defendant and Respondent.

Anthony T. Caso, for Pacific Legal Foundation as Amicus Curiae on behalf of Defendant and Respondent.

Legal Services of Northern California, Gary F. Smith, Sacramento; Western Center on Law and Poverty, Richard A. Rothschild, Los Angeles; and Julia R. Wilson, for Legal Aid Association of California as Amicus Curiae on behalf of Defendant and Respondent.

Marie M. Moffat, Lawrence C. Yee, Karen Segar Salty, San Francisco, and Rachel S. Grunberg, for the State Bar of California as Amicus Curiae.

GEORGE, C.J.

The present case concerns the authority of nonprofit corporations to practice law. The Court of Appeal held that Corporations Code section 13406, subdivision (b) (section 13406(b)) provides the sole authority under which a nonprofit public benefit corporation is authorized to practice and that, in failing to comply with section 13406(b), defendant Tenderloin Housing Clinic, Inc. (THC), engaged in the unauthorized practice of law.¹ In a significant and unusual instance of unanimity across the political spectrum, THC, joined by organizations as diverse as the Pacific Legal Foundation and the American Civil Liberties Union as amici curiae, urges that we reverse the judgment of the Court of Appeal.

Reviewing the background of the doctrine prohibiting the corporate practice of law, the exceptions to this doctrine that developed prior to the enactment of section 13406(b), the constitutional problems that would be created by the Court of Appeal's interpretation of the statute, and the text and legislative history of the measure, we conclude that section 13406(b) does not occupy the entire field of law governing the corporate practice of law by nonprofit corporations.

The question remains under what authority THC practiced law. THC claims it is authorized to practice law pursuant to an exception to the common law rule against corporate practice of law. THC relies upon United States Supreme Court authority recognizing that First Amendment principles restrict the ability of the state to limit the associative and expressive rights of advocacy groups to employ litigation to further their goals. The Court of Appeal, reaching the issue in the context of THC's claim that section 13406(b) could not be applied retroactively, disagreed with THC's claim that it was authorized to practice law pursuant to this exception, holding that THC failed to establish that its activities warranted protection under the First Amendment of the United States Constitution.

Although the Court of Appeal viewed the applicable constitutional doctrine too narrowly, because of the procedural posture of the case we do not reach a final conclusion respecting the nature of THC's activities or its claim that it enjoyed a right to practice law that is protected by the Constitution. Although we could order a remand for further proceedings in this litigation, which already has consumed many years, we decline to do so, because we agree with the trial court that plaintiff Roy M. Frye, was not entitled to the remedy he sought.

I

THC was incorporated in 1980 pursuant to the Nonprofit Public Benefit Corporations Law. (§ 5110 et seq.) According to its articles of incorporation, it was incorporated for "public and charitable purposes" and apparently enjoys tax-exempt status pursuant to section 501(c) of the Internal Revenue Code (26 U.S.C.). The articles of incorporation stated that THC's purpose was "to provide housing law education and information to low-income tenants in San Francisco, CA." The bylaws added to that purpose "the preservation of the Tenderloin community as a residential neighborhood, the preservation and improvement of housing, particularly residential hotels, assisting tenants to assert their legal rights, using legal skills as necessary to serve the low and moderate income residents of the Tenderloin community."

THC's bylaws directed that a majority of the directors of the corporation should reside in or have familiarity with issues in the Tenderloin neighborhood and that the board of directors should reflect the neighborhood's diverse population.

THC employed several attorneys, all of whom were active members of the State Bar of California. The attorneys represented tenants in administrative and court proceedings and were required to convey to THC any legal fees they received in the course of providing such representation.

The record does not detail THC's activities over the entire period of the present litigation, but does indicate that THC undertook a number of responsibilities in addition to representing clients in litigation. According to a THC attorney, THC provided various services for homeless persons and, beginning in 1993, its nonlegal services constituted more than 50 percent of its activities. For the 1996 tax year, THC received substantial government funding for providing housing and other general social services such as counseling involving substance abuse and employment for persons of limited means. In a contract entered into with the City and County of San Francisco (the City) for the period July 1, 1998 to June 30, 2000, THC agreed to provide "comprehensive housing services for the homeless and other low-income adults." It appears THC administered an element of the City's housing program for homeless persons, assigning needy persons to shelters as they became available and offering other social services.

In April 1993, THC entered into a retainer agreement with Roy M. Frye² and several other tenants of a residential hotel in the Tenderloin neighborhood of San Francisco for THC to represent the tenants in an action against their landlords alleging defective conditions at the hotel. The agreement contained the following language concerning attorney fees: "A client shall pay the attorney, as attorney[ ] fee[s] for such representation, thirty-three and one-third percent (33-1/3%) of any settlement reached prior to the original date set for trial in the matter, or forty percent (40%) of any recovery by settlement or trial judgment achieved on or after the original date set for trial.... [¶] ... [¶] If the Clinic's work results in the client or the Clinic being awarded attorneys fees either by statute or by a provision in a rental agreement, the Clinic shall recover whatever amount is greater between the attorneys fee award and the amount of the contingency fee." THC Attorney Stephen Collier and Frye both signed the agreement.

In May 1993, Collier filed a complaint on behalf of Frye and 14 other tenants. (Frye et al. v. Skyline Realty et al., Superior Ct. SF. City and County, 1994, No. 952016.) At various times during the pendency of the action, Collier and other THC attorneys appeared on behalf of Frye and the other tenants.

After a one-month trial in May 1994, the jury awarded the 15 tenants $239,005.00 in damages. Of this amount, $10,355.00 was awarded to Frye. By stipulation, the court deducted amounts that the San Francisco Rent Board previously had awarded, reducing the total award to $236,943.85 and Frye's award to $10,242.50. The landlords subsequently appealed from the judgment, which was affirmed in its entirety, and the landlords' petition for review was denied by this court.

The tenants petitioned for attorney fees and costs, relying upon Civil Code section 1942.4 and the attorney-fee provisions in nine of the 15 pertinent rental agreements.³

The trial court awarded attorney fees in the amount of $96,000.00 for services provided at the trial and $35,560 for the appeal, for a total of $131,560.00. The court also awarded costs of $10,164.45 through trial and $332.88 for the appeal. In December 1996, the landlords paid a total of $464,723.33 to satisfy the judgment, consisting of $296,179.45 in damages plus interest and $168,543.88 in attorney fees and costs plus interest. Defendants satisfied the judgment by issuing checks made payable to THC and to each plaintiff tenant. Frye's check was made out in the amount of $12,803.00. THC deposited all of the checks and deducted costs in the amount of $10,497.33 and attorney fees in the amount of $185,889.33, the latter figure representing its contingency fee of 40 percent...