‘A Bad Divorce’

Ex-EPA Official’s Legal Advocacy Outfit Embroiled in Vicious Leadership Struggle

The problems began when David Schnare took a leave of absence from FME Law to join Trump’s EPA.

Photo illustration by The Daily Beast

A leading conservative legal advocacy group is at risk of dissolving amid an ugly internal fight over control of the organization.

The Free Market Environmental Law Clinic is known for its use of the legal system to advance conservative energy and environmental policy goals. But now its executives—including a former senior official at Scott Pruitt’s Environmental Protection Agency—are waging a legal battle for control of the group.

At the center of the allegations is David Schnare, the ostensible head of FME Law. Schnare founded and led the group until he was appointed to a senior EPA position in January 2017. Now Schnare’s onetime colleagues are accusing him of, among other things, misrepresenting the group’s structure to the IRS in order to obtain tax exempt status, attempting to extract hundreds of thousands of dollars from the group for himself and a partner, and threatening to report FME Law for allegedly illegal fundraising practices unless it agrees to the “payout.”

Schnare denies all of the allegations. “The arguments aren’t grounded in facts,” he told The Daily Beast in an interview. “It’s all based on incorrect data.”

Some of the legal issues will be hammered out in a Virginia court this week, where Schnare is set to present evidence countering his former colleagues’ allegations. The whole thing, he says, is “like a bad divorce.”

The spat represents a dramatic and sudden decline for an organization at the vanguard of conservative legal advocacy efforts. It also illustrates the challenges and divisions that have popped up in segments of the conservative movement as it’s transitioned from pure opposition during the Obama years to, under Trump, a position of major influence on high-profile policy-making decisions.

Schnare first joined the EPA in 1978 and served as an attorney in the agency for 33 years. He returned in January 2017 as a member of the Trump administration’s “beachhead” team. But he lasted less than two months in the post. Schnare quickly clashed with EPA Administrator Scott Pruitt, whom he felt was not aggressive enough in rolling back Obama-era regulations on carbon dioxide emissions. After Schnare’s departure in March, he vowed to publicly expose his internal adversaries, but declined to go into detail about his interactions with Pruitt or internal deliberations at EPA.

“He wanted to be treated like he was the president,” Schnare said of Pruitt. “I think you could describe me as prescient.

FME Law is one of a handful of groups that has used the courts to attempt to enact conservative energy and environmental policy reforms. It has been party to nearly two dozen federal lawsuits against the EPA, the Federal Energy Regulatory Commission, and other federal agencies, seeking to roll back environmental regulations and produce public records revealing regulators’ internal discussions and decision-making process.

At FME Law’s helm since its founding were Schnare and Chris Horner, a member of Trump’s EPA transition team and an attorney affiliated with the Competitive Enterprise Institute, a leading free market think tank. Horner is a prolific filer of open records requests and lawsuits seeking to compel their production. The author of the the 2012 book The Liberal War on Transparency: Confessions of a Freedom of Information “Criminal,” Horner was a frequent thorn in the side of Obama’s EPA, exposing, among other revelations, then-Administrator Lisa Jackson’s use of a private email address, and the alias Richard Windsor, in some internal communications.

Schnare and Horner conceived FME Law, initially called the George Mason Environmental Law Clinic, in 2011. According to an email from Schnare, it “came out of Chris and my joint efforts to build an organization that can push back against the overreach of government action.”

After years of collaboration, and some notable victories, Schnare and Horner are now at each other’s throats. And FME Law may shutter altogether as a result.

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The problems began when Schnare took a leave of absence from the group to join Trump’s EPA. He told colleagues that he expected to spend three or four years at the agency and then retire. As his last official act, he installed another attorney, Chaim Mandelbaum, as FME Law’s executive director, and stepped back from day to day operations.

But Schnare insists that he retained his official position atop the group, and that he resumed day to day management after leaving the EPA. He also had significant control over the group’s finances, having at one point deposited FME Law funds in a savings account opened under his social security number. After he left for EPA, Schnare says, financial control was handed off to Mandelbaum. But internal documents show that the group’s directors had to take action in late June 2017 to remove Schnare’s name from one of the group’s bank accounts, though Schnare says that FME Law was always the account’s official owner.

In late 2017, a new board prepared to take the helm at FME Law. On a conference call, the board, including its incoming chairman, Matthew Hardin, asked to review the organization’s financial position. Mandelbaum provided a one-page, bullet-pointed list of liabilities and assets, showing it had about $920,000 of the latter.

But when the board requested all of the group’s books and financial records, according to the complaint, Mandelbaum balked. He indicated that he did not recognize the new board’s authority to request the information—and in fact said that the board did not have any authority at all.

In an email two days later, Schnare explained the problem. “It appears I made some significant errors when preparing the by-laws and related papers for FME Law,” he admitted. In particular, the group was structured to give controlling authority to its board, but under Virginia law a law clinic’s board members must be registered to practice in the state, and only one of the new board members was. Schnare had assumed that he was the sole “member” of the corporate entity housing FME Law. But its bylaws appeared to contradict that conclusion as well.

Schnare and Hardin agreed to hire an outside law firm to sort out the matter. But what they found was even more damning: The group was legally paralyzed. “As currently organized, FME cannot act,” the firm, Gross & Romanick, concluded in a January 2018 memo. “The board of directors is not properly constituted to manage a [professional limited liability corporation].” Schnare could be considered a governing member, but “in signing the bylaws that indicates there are no members, he disclaimed any membership interest that he may have had.”

Schnare says the latter conclusion was erroneous, that the law firm was working with incomplete documentation, and that FME Law never had bylaws or an operating agreement.

Ordinarily, the firm wrote, those sorts of issues could be resolved by a court-appointed receiver brought on to address the problems with its corporate structure. But it turned out that Schnare hadn’t just goofed up FME Law’s bylaws; Gross & Romanick concluded that he also made material misstatements in his application to the IRS for 501(c)(3) nonprofit tax status that could land the group in legal jeopardy if a court-appointed receiver reported the issues to the IRS, as it would be legally obligated to do. (Schnare says he did inform the IRS of the underlying issues, and while the group’s later annual tax filings note that it is a professional limited liability company, not a corporation—the distinction at issue—he has acknowledged that its initial application for tax exempt status misstated its corporate form.)

That left the group in limbo, and its ostensible corporate officers fighting it out over control of the organization. And according to Schnare’s internal antagonists, this is when the threats began.

FME Law’s legal complaint says that Schnare began requesting “a payout” to “keep things quiet” about the legal issues created by the group’s initial tax filing in 2011. “If the IRS were to investigate and rule that tax exempt status was improperly obtained, FME would likely be forced to disgorge any monies raised and any contributors would have to amend their personal tax returns to reflect donations to a nonexempt entity,” Gross & Romanick had warned. “In such a scenario, it is likely that the members of the board would have some exposure for misrepresenting the status of the organization.”

The “payout” was to be in the range of $280,000. Schnare says that it wasn’t hush money, but simply an effort to reconcile contractual obligations to contractors. The bulk of the funds were owed to Mandelbaum under the terms of his contract, he said. He declined to say where the rest of the funds would go.

Schnare, FME claims in its complaint, also threatened to sick Virginia authorities on the group, and on Horner in particular. “Things are getting out of hand,” he wrote in a Jan. 27 email to Horner. “It is in no one’s interest to end up in court, especially yours as it would be discovered that you engaged in fundraising without FME Law or yourself being registered to do so, placing you subject to criminal penalties.”

At a meeting the same day, according to FME Law’s legal complaint, Schnare suggested that “the Democratic attorney general of Virginia” would be keen to investigate the group due to its conservative political leanings.

Asked whether those amounted to threats, as his former colleagues alleged, Schnare said, “I have no idea how thin their skin is.” He quickly added, “There were no threats, absolutely none,” and noted that a recent investigation by the Virginia Bar had cleared him of allegations surrounding those statements.

But that hasn’t smoothed relations between Horner, Hardin, Schnare, and others who once worked together amiably. “It might be possible that we would dissolve,” Schnare said, “in which case there are people with whom we have longstanding relationships who would like to carry on the work we’ve been doing.”

“There’s no reason not to carry on those relationships,” he said, “even though the friendships have died.”