National Clearinghouse v. Legal Services Corp.

• Decision Date: 30 November 1987
• Docket Number: Civ. A. No. 86-1800.
• Citation: 674 F. Supp. 37
• Parties: NATIONAL CLEARINGHOUSE FOR LEGAL SERVICES, INC., Plaintiff, v. LEGAL SERVICES CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of Columbia

674 F. Supp. 37

NATIONAL CLEARINGHOUSE FOR LEGAL SERVICES, INC., Plaintiff, v. LEGAL SERVICES CORPORATION, et al., Defendants.

Civ. A. No. 86-1800.

United States District Court, District of Columbia.

November 30, 1987.

Thomas F. Cullen, Jr., Jones, Day, Reavis & Pogue, Washington, D.C., for plaintiff.

Susan Grover, Dunnells, Duvall, Bennett, Porter, Washington, D.C., for defendants.

MEMORANDUM AND ORDER

JACKSON, District Judge.

Plaintiff National Clearinghouse for Legal Services, Inc. ("Clearinghouse") is a non-profit Illinois corporation in the business of furnishing information services of use to lawyers who represent the poor. Defendant Legal Services Corporation ("LSC") is a non-profit District of Columbia corporation, chartered pursuant to an act of Congress, the Legal Services Corporation Act of 1974, 42 U.S.C. §§ 2996 et seq. (the "Act") to administer a federally financed program of grants and contracts in support of organizations providing legal services to the poor.¹ After several years in which Clearinghouse had accepted payments under contracts with LSC to make its services available to LSC's beneficiaries, not all of which it spent in doing so, and had earned substantial additional income from the sale of its services to outsiders not connected with LSC, Clearinghouse had accumulated a surplus of sufficient magnitude to cause LSC to question the level of support it required from LSC to remain viable. Consequently, LSC tendered Clearinghouse a contract for fiscal 1986 for significantly less money than it had been paid in prior years to perform the same services, with the expectation that Clearinghouse would be obliged to "spend down" its surplus as a condition of a continued LSC subsidy. Clearinghouse objected, and this lawsuit ensued.

In its amended complaint Clearinghouse charges LSC with breach of an implied contract to pay for its services at the former rate, a "misappropriation" of its property, i.e., its lawfully earned surplus, and violation of LSC's own regulations respecting "fund balances" in the hands of its contractors and grantees. The dispute is now before the Court on the parties' cross-motions for summary judgment. Sufficient material facts appear at various places in the record to be without dispute to enable the disposition of the case hereinafter made, and for the following reasons, therefore, the Court will deny plaintiff's motion for summary judgment, grant that of defendant, and dismiss the amended complaint with prejudice.²

I.

Beginning in 1981 LSC and Clearinghouse entered into a series of written annual contracts under which Clearinghouse supplied its services to various LSC-supported legal assistance activities for sums certain for the year, payable in monthly installments. For the period October, 1981, through December, 1982, LSC paid Clearinghouse $950,000. For January through December, 1983, the fee was $760,000; for 1984, $867,236, and for 1985 $961,851. Each year Clearinghouse spent somewhat less than it was paid by LSC, accumulating a surplus upon which it earned interest. It also earned revenue from sales of subscriptions to its journal to entities not supported by LSC, from duplicating fees charged for copying materials for non-LSC dependents, and from other miscellaneous sources which added to its wealth. At the end of 1985 LSC possessed information to the effect that Clearinghouse held a cash balance in its treasury in excess of $500,000, and it began contemplating a reduction in its level of support for Clearinghouse upon the assumption that it must be paying too much to sustain an organization that was both frugal and partially self-supporting.³ LSC's staff actually recommended to the Board of Directors that LSC dispense with Clearinghouse's services entirely, but the Board voted on December 19, 1985, to continue funding Clearinghouse temporarily through March 31, 1986, at the 1985 level, and accordingly paid it $240,463 over the succeeding three months.

In early March, 1986, LSC's staff again recommended that the contractual relationship with Clearinghouse be broken off altogether, with its functions thence to be assumed by LSC in-house or in a joint venture with some law school. On March 13, 1986, however, the Audit and Appropriations Committee of LSC's Board of Directors met in anticipation of a plenary Board meeting scheduled for the following day, considered and rejected the staff recommendation, and voted to propose to the Board a $400,000 budget item for a contract with Clearinghouse.⁴ On March 14th the full Board met, in public, to consider an agenda which included LSC's entire consolidated operating budget for 1986. (Clearinghouse attended the meeting and was allowed to make a presentation.) As to Clearinghouse's expectancy for the year, debate focused on the "carryover" or "fund balance" then in its possession, estimated to be approximately $550,000, and a consensus developed to pay Clearinghouse at about a $940,000 annual level, with a "Gramm-Rudman" adjustment downwards, against which LSC would take a "credit" for Clearinghouse's $550,000 retained surplus. The Board then voted, nine to two, to budget an additional $200,000 (over and above the $240,463 first quarter payments) for Clearinghouse's services for the remainder of the year. LSC ultimately presented Clearinghouse with a written 1986 contract proposal to that effect which Clearinghouse promptly rejected.

II.

In its original complaint Clearinghouse alleged that LSC had violated Section 1011 of the Act, 42 U.S.C. § 2996j, in suspending or terminating its financial assistance without the hearing the statute requires. It prayed that LSC be enjoined preliminarily from "defunding" it until it had been afforded a hearing. It also asked the Court to declare those portions of its "fund balance," i.e., savings from its payments from LSC accumulated prior to 1984 (when a new "fund balance" regulation became effective and the LSC-Clearinghouse annual contracts modified accordingly), and earnings derived from its sales of services to non-LSC-supported activities, to be immune from any "spend-down" requirements as a condition of future support at the level to which it had become accustomed. Then, the hearing having been held as ordered by preliminary injunction, and the result being adverse to it, Clearinghouse filed an amended complaint advancing its revised claims for relief.

In its motion for summary judgment, however, Clearinghouse presents no evidence at all in support of its theories of an implied contract with LSC for a larger payment for 1986, or a "misappropriation" of its funds; indeed, the evidence is to the contrary.⁵

Its remaining claim expresses the principal theory upon which Clearinghouse now relies for relief in its motion for summary judgment. Clearinghouse contends that the action of LSC's Board of Directors in March, 1986, was an attempt to "recapture" funds earlier lawfully paid to and earned by Clearinghouse in contravention of its own regulations imposing limits upon the "fund balances" its contractors and grantees are permitted to carry over from year to year, 45 C.F.R. Part 1628, and in violation of the terms of its earlier annual contracts with Clearinghouse which purportedly expressly exempted surpluses attributable to unspent pre-1984 LSC payments and non-LSC earnings. LSC responds in its cross-motion that the Board's action merely implemented, as the hearing examiner found, a "funding policy" decision permitted to it by 45 C.F.R. Part 1625.

III.

The hearing was conducted December 16, 1986, by the Hon. Fred Tansill of the U.S. Tax Court, sitting as a hearing examiner. In his decision of December 30, 1986, the hearing examiner found that the Board had adopted a "funding policy" pursuant to 45 C.F.R. § 1625.3(a). He did not reach the Part 1628 "fund balance" issue presented by Clearinghouse.⁶ LSC's reviewing official adopted the hearing examiner's decision on January 23, 1987, qualifying it as a final order under 45 C.F.R. § 1625.11. Clearinghouse now seeks review of that decision.

A preliminary question arises as to the standard of review applicable to final LSC decisions. The Act expressly provides that LSC is a private corporation, and not an agency of the United States government, 42 U.S.C. § 2996d(e)(1). LSC's decisions, therefore, are not technically reviewable under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-06 (1982).⁷ Nevertheless, standards of review analogous to those embodied in the APA have been found to be appropriate in reviewing LSC decisions. National Clients Council, Inc. v. Legal Services Corporation, 617 F.Supp. 480, 485 (D.D.C.1985); Western Center on Law and Poverty, Inc. v. Legal Services Corporation, 592 F.Supp. 338, 342 (D.D.C.1984). Other federal courts reviewing LSC decisions have employed either a "rational basis," Spokane County, 614 F.2d at 669, or an "arbitrary and capricious" standard, Western Center, 592 F.Supp. at 342, but the distinction is of little consequence since both tests "ultimately consider the rationality of the underlying decision." National Clients Council, 617 F.Supp. at 485.⁸

In reviewing LSC decisions, just as in reviewing administrative decisions under the APA, the reviewing court must bear in mind that it is not entitled to substitute its judgment for that of the entity under review. See Western Center, 592 F.Supp. at 343, citing Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). Its review of the facts is limited to the record below, and if there is to be found on the record a rational basis for the decision, and it is supported by the evidence, the decision should stand. See Spokane County, 614 F.2d at 669; Western Center, 592 F.Supp. at 342. The quantum of proof required to establish the facts is, at most, one of "substantial evidence." E.g., National Clients Council, Inc. v. Legal Services Corporation, 617 F.Supp. 480, 485 (D.D.C.1...