Spokane County Legal Services, Inc. v. Legal Services Corp., s. 77-3200

Citation614 F.2d 662
Decision Date28 February 1980
Docket Number77-3179,Nos. 77-3200,s. 77-3200
PartiesSPOKANE COUNTY LEGAL SERVICES, INC., Ben Franklin Legal Aid Associates, Plaintiffs-Appellants, v. The LEGAL SERVICES CORPORATION, Defendant-Appellee. SPOKANE COUNTY LEGAL SERVICES, INC., Ben Franklin Legal Aid Associates, Plaintiffs-Appellees, v. The LEGAL SERVICES CORPORATION, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

William Fremming Nielsen and Joseph F. Valente (argued), Spokane, Wash., for plaintiffs-appellants, cross-appellees; Hamblen, Gilbert & Brooke, P. S., Spokane, Wash., on brief.

Robert H. Whaley (argued), for defendant-appellee, cross-appellant, Winston & Cashatt, Repsold, McNichols, Connelly & Driscoll, Spokane, Wash., on brief.

Neil Haight, Steven L. Bunch, Montana Legal Services Ass'n, Helena, Mont., on brief, amicus curiae.

Theodore R. Mitchell, Daniel H. MacMeekin, Robert L. Keogh, Micronesian Legal Services Corp., Saipan, Mariana Islands, on brief, amicus curiae.

Appeals from the United States District Court for the Eastern District of Washington.

Before COWEN, * Senior Judge, TRASK and HUG, Circuit Judges.

COWEN, Senior Judge:

This case is before the court on cross-appeals from the judgment of the district court. Plaintiffs below, Spokane County Legal Services, Inc. (Spokane) and Ben Franklin Legal Aid Association (Ben Franklin), are both nonprofit corporations providing legal services to low income persons in various counties of eastern Washington. Defendant, Legal Services Corporation (LSC), is a private nonprofit corporation created by Congress in the Legal Services Corporation Act of 1974. 1 Pursuant to this Act, LSC makes grants to legal services programs such as those run by plaintiffs "for the purpose of providing financial support for legal assistance in noncriminal proceedings or matters to persons financially unable to afford legal assistance." 42 U.S.C. § 2996b(a) (1976). This action arose out of a decision by LSC to reorganize the delivery of such support in Washington state by transferring the funding of appellants' programs to a statewide program. Spokane and Ben Franklin sought declaratory and injunctive relief from the decision in the district court, but the court dismissed the complaint. We affirm the dismissal as to the first and fourth causes of action, but reverse the decision with respect to the issues raised by the second and third causes of action alleged in the complaint and remand the case for further proceedings in the district court. 2

I.

The issues presented for decision are:

1. Does the district court have jurisdiction of the suit under 28 U.S.C. § 1331;

2. Were plaintiffs denied procedural due process in the action taken by LSC to terminate financial support for their programs, and 3. What is the appropriate standard for judicial review of the LSC decision challenged in the second amended complaint?

II.

On March 29, 1976, LSC awarded Spokane a 3-month grant to fund three legal services offices located between 71 and 111 miles outside the city of Spokane, where Spokane's main office was located. These three outlying offices, known as the Tri-County, Grant-Adams, and Asotin County offices, were part of Spokane's program, but had been funded by sources other than LSC in the past. During the period of the LSC grant, Spokane, the Washington State bar association, and various other groups began a study of the structure of the legal services program in Washington. After the 3-month grant had expired, LSC continued funding for the three offices on a month-to-month basis while the study continued. As a result of that study, LSC proposed on September 15, 1976, to transfer funding for the three offices from Spokane to a new statewide legal services program, Evergreen Legal Services (Evergreen). The regional director of LSC explained that the reason for this transfer of funding was:

In the communities served by the three offices, Evergreen Legal Services is more capable than Spokane County Legal Services of maintaining the highest quality of service and professional standards, and is also more capable of ensuring the delivery of legal services in the most economical and effective manner * * *.

Spokane objected to the proposed transfer of funding and requested that LSC conduct a hearing on the proposal. LSC initially refused to conduct such a hearing, whereupon Spokane filed suit for declaratory and injunctive relief. 3 Spokane objected to the notice it had received of the transfer and, inter alia, sought to enjoin the transfer of funding until it received proper notice and a hearing under section 1011 of the Legal Services Corporation Act. 4 After suit was filed, LSC agreed to conduct a hearing on the proposed transfer of funding and the district court denied the injunction.

LSC appointed the special assistant to the President of LSC to conduct the hearing. All together, 5 days of hearings were held with the first day in Spokane and each of the other days in the towns where the three county offices and Ben Franklin's office In May 1977, LSC moved for summary judgment in the district court on the grounds that the defect in the notice of the funding transfer, of which plaintiffs had complained, had been remedied and that the hearings which Spokane had requested had been held. Plaintiffs opposed LSC's motion and moved to file a second amended complaint. The second amended complaint set forth four causes of action. The first and fourth causes complained that the appointment of a hearing examiner, who was an employee of LSC, violated the fair hearing requirement of section 1011 of the Act and the due process clause of the Fifth Amendment. The second cause of action complained that LSC's decision was arbitrary and capricious, because it was not supported by the evidence. The third cause of action was closely tied to the second, and alleged that the decision violated section 1007(a)(3) of the Act, 5 because the action taken by LSC would not result in the most effective and economical delivery of legal services to the communities affected.

were located. Oral testimony and documentary evidence were introduced and cross-examination of witnesses was allowed. After the hearings were concluded in the latter part of December 1976, the hearing examiner issued a report in which he recommended that the Tri-County office continue to be funded through Spokane, but otherwise approved the proposed transfers of funding to Evergreen. The President of LSC adopted the recommendations of the hearing examiner and issued a final decision on the transfer of funding on February 9, 1977.

The district court held a hearing on these motions and issued a decision in an order dated June 20, 1977. In the order, the district court allowed the filing of the second amended complaint; denied LSC's motion for summary judgment on the basis that it was moot in light of the causes of action set forth in the second amended complaint, and then dismissed the second amended complaint on the ground that the court lacked subject matter jurisdiction to review LSC's decision. 6 Plaintiffs then filed a motion for reconsideration of the dismissal.

The district court denied the motion for reconsideration in an order dated July 26, 1977, which found that in terminating financial assistance to plaintiffs, LSC had complied with all provisions of the law and all applicable regulations, both in affording the plaintiffs notice and opportunity for a timely, full, and fair hearing, and in the denial of the refunding. The order also affirmed in all respects, the "Summary Judgment, Findings of Fact, and Conclusions of Law" made in the previous order of June 20, 1977, and stated that:

Plaintiffs' said Second Amended Complaint does not state a claim upon which relief can be granted, and therefore should be and hereby is dismissed, pursuant to Rule 12(b)(6) and (c), and Rule 56, Federal Rules of Civil Procedure.

III.

We consider first whether the district court had subject matter jurisdiction of the claims set out in plaintiffs' second amended complaint. 7 They contend that jurisdiction is conferred by 28 U.S.C. § 1331 The district courts shall have original jurisdiction of all civil actions wherein the matter in controversy * * * arises under the Constitution, laws, or treaties of the United States * * *.

(1976), which provides in pertinent part that:

The claims in the second amended complaint raise questions regarding the construction of two different sections of the Legal Services Corporation Act. Spokane and Ben Franklin contended that the use of an LSC employee to conduct the administrative hearings denied them the "full" and "fair" hearing to which they were entitled by section 1011 of the Act and that the transfer of funding violates LSC's mandate under section 1007 "to provide the most economical and effective delivery of legal assistance." The claims, therefore, "really and substantially" involve "a dispute or controversy respecting the validity, construction, or effect of (a law of the United States), upon the determination of which the result depends." Standage Ventures, Inc. v. State of Arizona, 499 F.2d 248, 249 (9th Cir. 1974), quoting Shulthis v. McDougal, 225 U.S. 561, 569, 32 S.Ct. 704, 706, 56 L.Ed. 1205 (1912). Nor can there be any question but that the Legal Services Corporation Act is "a direct and essential element of the plaintiff's cause of action." Smith v. Grimm, 534 F.2d 1346, 1350 (9th Cir.) cert. denied 429 U.S. 980, 97 S.Ct. 493, 50 L.Ed.2d 589 (1976). While there is a dispute as to whether the complaint stated a claim on which relief can be granted, it is not contended that the claim is frivolous or insubstantial. See Hagans v. Lavine, 415 U.S. 528, 536-43, 94 S.Ct. 1372, 1378-82, 39 L.Ed.2d 577 (1974). We conclude, therefore, that the district court has subject matter jurisdiction over the suit by virtue of 28 U.S.C. § 1331. See Legal Services Corp. v. Ehrlich, 457 F.Supp. 1058, 1061 (D.Md.1...

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