How the benefit corporation could ensure access to justice for
the underserved
On Jan. 30, 2014, more than 500 attorneys descended on the State
House to lobby their elected representatives to push for increased
funding for civil legal aid in the 2014 state budget. With a goal
of $17 million, attorneys from throughout the commonwealth sought
to highlight the importance of such aid, particularly in a climate
that has withstood a 51 percent decrease in funding since 2008,
despite a nearly 200,000 person growth of those eligible for free
legal representation.
Although the continued support for civil legal aid is paramount,
there exists an even larger segment of the population that, while
ineligible for free legal aid, are incapable of affording legal
representation and remain grossly underserved in their basic legal
needs. For example, only individuals making less than $14,588, or
just under $29,813 for a family of four, qualify for the free
assistance offered by organizations such as Greater Boston Legal
Services. This results in a significant gap between those who
qualify and those who can afford "market" rates. What is needed is
an increased effort to promote the availability of low cost legal
services, in addition to the pro bono civil aid provided
to those who qualify.
One way to help bridge this gap might come from an unlikely place
- our tax code. Specifically, for-profit law firms and attorneys
dedicated to serving underserved populations should receive
preferential tax treatment, akin to the tax breaks afforded to
others engaged in "charitable" pursuits.
Within the past decade, the Supreme Judicial Court (SJC) has taken
a somewhat broader view of once strict charitable tax laws. In
particular, the SJC's decisions in New Habitat, Inc. v. Tax
Collector of Cambridge, 451 Mass. 729 (2008), and
Bridgewater State University Foundation v. Board of Assessors
of Bridgewater, 463 Mass. 154 (2012), have been viewed by many
commentators as a liberalization of the commonwealth's treatment of
tax-exempt charitable organizations. That the SJC is willing to
revisit and modernize its application of charitable tax laws
suggests that it is time to reconsider the tax status of what some
consider "non-traditional" or "quasi-charitable" endeavors.
Indeed, significant inroads have already been made at the
liberalization of once strict limitations on a charitable
organization's operations. Although charitable entities remain
prohibited from distributing their income to non-charitable uses,
charities are already permitted to charge substantial fees for
their services and pay significant salaries to their
employees.
For example, in New Habitat, the charity charged an
"entrance fee" of $150,000 in addition to $17,000 a month for the
brain-injured residents of its long-term housing facility.
Moreover, it has become commonplace for charities to spend
significant amounts of money in salaries to their employees.
According to the Attorney General's 2013 report, "Massachusetts
Public Charities CEO Compensation Review," CEO compensation ranged
from a "low" of $487,397 to a high of $8,827,494 for CEOs of the 25
largest public charities throughout the commonwealth from
2009-2011.
Given these staggering numbers, a solo-practitioner or law firm
charging $40 or $50 an hour to a client, who does not qualify for
free assistance or cannot afford representation, in exchange for a
lower tax bill is certainly a "quasi-charitable" endeavor. If bona
fide charitable organizations are permitted to make their directors
and CEOs millionaires while avoiding taxation, then it is certainly
time to consider expanding the umbrella for charitable
organizations to those engaging in much needed, low-cost legal
services, even if they make a modest profit.
Such an expansion is unlikely to come through judicial decisions
alone. Fortunately, however, an appropriate framework and
enforcement mechanism largely exists already for the legislature to
follow: the benefit corporation. Statutorily, benefit corporations
are for-profit entities with a purpose of creating a positive
impact on society. Enacted in 2012, the Massachusetts Benefit
Corporation Act added Massachusetts to the 19 states and the
District of Columbia that also recognize the socially conscious
corporate entity.
Benefit corporations differ from traditional corporations in three
significant ways. First, benefit corporation fiduciaries are
permitted to prioritize social responsibility and its impacts over
the corporation's bottom line without incurring the risk of
shareholder litigation. Second, benefit corporations are subject to
heightened oversight within the organization by virtue of the
statutorily mandated "benefit director." The benefit director
oversees and reports on the corporation's public benefit goals,
must be independent, and may not serve in any other role within the
corporation. Finally, benefit corporations are required to issue an
annual benefit report, which evaluates the corporation against an
independent third party metric. Consequently, benefit corporations
are subject to increased accountability and oversight by both third
parties and their shareholders.
Building on this concept, I propose the establishment of a new
corporate entity, the "legal benefit organization" (LBO), by the
legislature. Essentially, an LBO would serve clients with income
higher than the eligibility guidelines for existing civil legal aid
programs, but not nearly high enough to afford market-priced legal
services. In exchange for reduced taxation, attorneys would be
required to charge sub-market rates relative to the client's
income. Such rates could be set by the Board of Bar Overseers
or he SJC and enforced by the Attorney General's
Office.
Further restrictions could require legal benefit corporations to
engage in a set amount of pro bono work annually. In
addition to being the first mandated pro bono service in the
commonwealth, it would also have the beneficial effect of reducing
the tremendous burden on civil legal aid programs - programs that
have seen more than $14 million cut from their annual funding since
2008.
While it may be challenging to find the right mix of tax breaks
needed to incentivize a significant number of attorneys to take on
this work, it is well worth the effort. Without question, the legal
needs of low-income Massachusetts residents often go unmet. This is
particularly true with respect to residents who earn too much to
qualify for traditional civil legal aid, but not nearly enough to
pay an attorney $200 or more an hour. It is also no secret that
traditional legal employment opportunities are scarce. The lack of
affordable legal services coupled with the annual increase in new
attorneys has resulted in a paradoxical situation where there is
both an over-supply and an unmet demand. The legal benefit
corporation could serve to mitigate both problems concurrently. By
incentivizing for-profit work on behalf of low-income individuals
through reduced taxation, many attorneys would be encouraged to
engage in such work, knowing that their own financial stability
would not be compromised.
As U.S. former Supreme Court Justice Louis Brandeis stated in
New State Ice Co. v. Liebmann, a "state may, if its
citizens choose, serve as a laboratory; and try novel social and
economic experiments without risk to the rest of the country." With
the evolving liberalization of the charitable tax treatment, the
SJC's decision in New Habitat, and minor adjustments to the
existing benefit corporation framework, Massachusetts has a chance
to serve as one of Brandeis' "laboratories." Providing reduced
taxation in exchange for sub-market hourly rates, be it through a
legal benefit corporation or some other mechanism, would affirm
that Massachusetts is serious about the plight of its underserved
population and could position itself as a leader in the struggle to
provide all of its residents with affordable access to justice.