742 F.2d 1472 (D.C. Cir. 1984), 83-2118, East Arkansas Legal Services v. Legal Services Corp.

Docket Nº:83-2118.
Citation:742 F.2d 1472
Case Date:August 28, 1984
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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742 F.2d 1472 (D.C. Cir. 1984)




No. 83-2118.

United States Court of Appeals, District of Columbia Circuit

August 28, 1984

Argued June 1, 1984.

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Appeal from the United States District Court for the District of Columbia (Civil Action No. 83-02813).

D. Clifford Crook, III, Washington, D.C., with whom Alan R. Swendiman, Washington, D.C., was on the brief, for appellants.

Thomas J. Mack of the Bar of the Supreme Court of California pro hac vice by special leave of the Court, with whom Alan Dockterman, Alexandria, Va., was on the brief, for appellee.

Before MIKVA and STARR, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge MIKVA.

Dissenting opinion filed by Circuit Judge STARR.

MIKVA, Circuit Judge:

Since 1978, appellee East Arkansas Legal Services (EALS) has received annual grants from the Legal Services Corporation (LSC or the Corporation) to provide legal assistance to the poor. In 1983, LSC notified EALS that some of its remaining grant funds for 1983 would be withheld to offset unspent LSC funds which EALS had carried over from prior years. EALS brought this suit against appellants, the Corporation and three of its officials, to enjoin them from withholding any funds until the Corporation granted EALS a hearing pursuant to 42 U.S.C. Sec. 2996j (1976 & Supp. V 1981) and 45 C.F.R. Sec. 1606 (1983). The district court held for EALS and the Corporation appealed. See East Arkansas Legal Services v. LSC, Civil Action No. 83-2813 (D.D.C. October 4, 1983). We affirm.


In 1974, Congress established the Legal Services Corporation as a non-profit corporation to provide legal assistance in civil matters to persons unable to afford adequate legal counsel. Legal Services Corporation Act of 1974, Pub.L. No. 93-355, 88 Stat. 378, 42 U.S.C. Secs. 2996 et seq. In creating a corporation to administer the legal services program, Congress intended to ensure that the program would be independent and "free from any outside interference, political or otherwise." H.R.REP. NO. 247, 93d Cong., 1st Sess. 3 (1973), reprinted in 1974 U.S.CODE CONG. & AD.NEWS 3872, 3874 (1974). Congress considered protection of the Corporation's independence to be a centerpiece of the Legal Services Corporation Act of 1974 (the Act).

The Act authorizes the Corporation to provide financial assistance to individuals, organizations, and state and local governments that provide legal assistance to the poor. 42 U.S.C. Sec. 2996e(a)(1)(A). Pursuant to that authority, the Corporation currently provides annual grants to over 300 legal services programs throughout the country. The Act also establishes strong procedural protections for grant recipients. Before the Corporation reduces a recipient's grant award in a significant manner--whether through termination or suspension of financial assistance or through a denial of refunding at the end of the grant year--the recipient is entitled to notice and a hearing. Id. Sec. 2996j.

For several years, the Corporation did not require the expenditure of grant funds in the year in which the funds were awarded. Under the policy set forth in the Corporation's "Audit and Accounting Guide for Recipients and Auditors", recipients

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were permitted to carry over unspent funds into subsequent years, although each recipient was required to account separately for this "fund balance" in its annual audit. See Memorandum Opinion at 3, 9. Beginning in 1982, however, the Corporation began to develop a new policy designed to limit the amount of unspent funds which grant recipients could carry over into subsequent years. This case involves the Corporation's application of that new fund balance policy to EALS in 1983.

  1. LSC's Development of a New Fund Balance Policy

    Since at least 1980, the Corporation has required every recipient with a fund balance exceeding ten percent of its LSC grant to submit a plan explaining how the recipient intended to spend those funds and over what period of time. In 1982, the Corporation decided to strengthen this policy through an effort to eliminate recipients' excess fund balances. In August, LSC staff prepared a memo for the Committee on Audit and Appropriations of LSC's Board of Directors (the Board), recommending two courses of action. First, the staff suggested that the Corporation take immediate action against any recipients whose fund balances exceeded fifty percent of their current grant. Those programs were to be notified, pursuant to the requirements of 45 C.F.R. Sec. 1623 (1983), that their financial assistance would be suspended for thirty days unless they could show cause why the suspension should not take effect.

    Second, the memo recommended that the Board approve a new policy to be applied during the 1983 grant year. Under that policy--which the full Board eventually adopted--recipients would be permitted to carry over only ten percent of their annual LSC grants. With respect to any carryover between ten percent and twenty-five percent of a recipient's annual grant, the Corporation would permit recipients to apply for a waiver of the ten percent ceiling. In no case, however, would a recipient be permitted to carry over anything in excess of twenty-five percent of its annual grant. The Corporation would recover fund balances exceeding the permissible levels by offsetting the recipient's current grant award.

    The proposed policy could be enforced only if the Corporation knew the amount of funds actually carried over at the end of a program's fiscal year. Because that determination apparently could not be made prior to the beginning of the subsequent fiscal year, the memo recommended that a condition be included in all future grants, beginning with those for 1983. That condition would indicate that the recipient's new grant award would be offset by the Corporation if the recipient carried over impermissible levels of funds.

    The Board's Audit and Appropriations Committee approved the general recommendations contained in the memo and directed the staff to prepare a resolution for Board action on the proposed new fund balance policy. Immediately following the Committee meeting, the Corporation took steps to suspend financial assistance to twenty-two grant recipients, including EALS, with fund balances in excess of fifty percent of their 1982 grants. Both the statute and the regulations require the Corporation to give a recipient reasonable notice and an opportunity to show cause why a suspension should not occur. 42 U.S.C. Sec. 2996j(1); 45 C.F.R. Sec. 1623 (1983). (All references to LSC's regulations refer to the regulations in effect in 1983 when the Corporation took the actions challenged in this lawsuit.) Pursuant to these regulations, LSC sent preliminary determination letters to twenty-two recipients notifying them of the proposed suspension. 45 C.F.R. Sec. 1623.4(a). Two of the programs voluntarily returned sufficient funds to bring their fund balances below the fifty percent level. EALS was one of the sixteen programs that successfully challenged the preliminary determination.

    Following the Committee meeting, the staff also prepared a resolution for Board consideration that set forth a new "instruction" regarding the Corporation's fund balance

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    policy. (Instructions are policy guidelines adopted by the Corporation that are not codified in the Code of Federal Regulations.) The Board adopted the resolution on October 30, 1982, and, in November, a notice of the proposed new Fund Balance Instruction (the Instruction) was published in the Federal Register. 47 Fed.Reg. 53,805 (1982). Following a comment period, the Board, at its December 1982 meeting, adopted the new fund balance policy, directed the staff to publish the final Instruction in the Federal Register, and approved a condition to be included in all 1983 grant contracts incorporating the provisions of the new policy. The Instruction was published in the Federal Register on January 6, 1983, and, pursuant to a statutory requirement that all rules, regulations, guidelines, and instructions be published thirty days prior to their effective date, the Instruction went into effect on February 5, 1983. See 42 U.S.C. Sec. 2996g(e).

    The Instruction required recipients to provide LSC with a statement of their fund balances from 1982 within ninety days after the close of the fiscal year. If a recipient's fund balance exceeded ten percent of its 1982 grant, it was permitted to apply within that same ninety-day period for a waiver of the ten percent ceiling so that it could retain up to twenty-five percent of its 1982 grant. The initial waiver decision was to be made by the Regional Office, but the Instruction permitted recipients to appeal the decision of the Regional Office to the Director of Field Services, whose determinations would be final. The Instruction provided that, "[i]n the absence of a waiver ... any fund balance amount in excess of 10% shall be set off against the recipient's annualized grant award for the next period by pro rata deductions from the remaining monthly allocations to the recipient." Id. The Instruction also provided that recipients would receive notice at least thirty days prior to any deduction in their monthly allocations. The Corporation began implementation of this new policy in early 1983.

    The Corporation awarded its 1983 grants before the Instruction went into effect, but included a special condition in all grant awards regarding the newly adopted fund balance policy. That condition provided:

    Consistent with the Instruction on Recipient Fund Balances to be published by the Corporation, unexpended funds in excess of 10% of the...

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