[Federal Register Volume 76, Number 24 (Friday, February 4, 2011)]
[Proposed Rules]
[Pages 6381-6383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2488]


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LEGAL SERVICES CORPORATION

45 CFR Part 1609


Fee-Generating Cases

AGENCY: Legal Services Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This Notice of Proposed Rulemaking (NPRM) proposes to amend 
the Legal Services Corporation's regulation on fee-generating cases to 
clarify that it applies only to LSC and private non-LSC funds.

DATES: Comments on this NPRM are due on March 7, 2011.

ADDRESSES: Written comments may be submitted by mail, fax or email to 
Mattie Cohan, Senior Assistant General Counsel, Office of Legal 
Affairs, Legal Services Corporation, 3333 K Street, NW., Washington, DC 
20007; 202-295-1624 (ph); 202-337-6519 (fax); [email protected].

FOR FURTHER INFORMATION CONTACT: Mattie Cohan, Senior Assistant General 
Counsel, 202-295-1624 (ph); [email protected].

SUPPLEMENTARY INFORMATION:

Background

    Generally, the substantive LSC restrictions on LSC recipients fall 
into two categories: ``entity restrictions'' and ``LSC funds 
restrictions.'' ``Entity restrictions'' apply to all activities of a 
recipient regardless of the funding source (except for the use of 
tribal funds as intended) and generally originate in section 504 of 
LSC's FY 1996 appropriations act (the provisions of which have been 
carried forward in subsequent appropriations). In contrast, ``LSC funds 
restrictions'' usually originate from the LSC Act and apply to the use 
of LSC funds and private funds, but not to tribal or public non-LSC 
funds used as intended. LSC's regulation at 45 CFR part 1609, Fee-
Generating Cases, is based on Sec.  1007(b)(1) of the LSC Act, which 
provides that no funds made available by the Corporation may be used to 
provide legal assistance, except as per LSC regulation, with respect to 
any fee-generating case. The fee-generating case provision of the LSC 
Act is an ``LSC funds restriction.'' However, Sec.  1609.3(a), as 
currently written, is not limited to the use of LSC funds. Rather it 
reads as an ``entity restriction'' reaching all of an LSC recipient's 
funds. This language follows the same structure as other entity 
restrictions such as part 1617--Class Actions, which states that 
``Recipients are prohibited from initiating or participating in any 
class action.'' 45 CFR 1617.3.
    From its initial adoption in 1976 through 1996 Part 1609 followed 
the language of the LSC Act and was expressly applied as an LSC funds 
restriction. At that time, Sec.  1609.3 provided that: ``[n]o recipient 
shall use funds received from the Corporation to provide legal 
assistance in a fee-generating case unless'' one of the regulatory 
exceptions applied. 41 FR 18528 (proposed rule May 5, 1976), 41 FR 
38505 (final rule Sept. 10, 1976), and 49 FR 19656 (final rule May 9, 
1984) (the last final rule prior to 1996) (emphasis added).
    In 1996 LSC revised part 1609 in conjunction with the enactment of 
the part 1642 entity prohibition on recipients claiming or collecting 
and retaining attorneys' fees. In the revision the language was changed 
from the prior ``Corporation funds'' prohibition to the more general 
``no recipient'' entity prohibition. Notably though, there is no 
discussion in the preamble to the proposed or final regulation of any 
significant substantive change in scope. 61 FR 45765 (proposed rule 
August 29, 1996) and 62 FR 19398 (final rule April 21, 1997). Nor is 
there any such discussion in any of the relevant LSC Board transcripts. 
Rather, the only mention of the change in language is the following 
discussion of the revised Sec.  1609.3:

    This section defines the limits within which recipients may 
undertake fee-generating cases. This new section reorganizes and 
replaces Sec. Sec.  1609.3 and 1609.4 of the current rule in order 
to make them easier to understand.

Id. (appearing in the preambles to both the proposed and final rules) 
(emphasis added). The regulatory history contains extensive discussions 
of policy and regulatory nuances regarding the then-new attorneys' fees 
provisions and their relationship with the fee-generating case 
restriction in part 1609. These discussions involved the LSC Board, LSC 
management, the LSC OIG and representatives of recipients. Considering 
the attention paid to this and the other regulations implemented in 
1996 and 1997, it seems very unusual that LSC would adopt such a 
significant substantive change to part 1609 without any discussion, any 
description of the change in the preamble to the rule, or any comments 
by the OIG or representatives of recipients.
    Notwithstanding the 1997 regulatory change, LSC has not applied 
part 1609 as an entity restriction, but has rather continued to apply 
it as an restriction applying only to a recipient's LSC and private 
non-LSC funds. For example, the LSC Compliance Supplement to the LSC 
Audit Guide, which provides guidance to auditors regarding recipient 
compliance with the substantive LSC

[[Page 6382]]

restrictions, states that part 1609 means that ``[r]ecipients may not 
use Corporation or private funds to provide legal assistance in a fee-
generating case unless'' one of the regulatory exceptions applies. It 
does not instruct auditors to read part 1609 as applying to tribal or 
public non-LSC funds. The Compliance Supplement was last revised in 
December 1998 (after part 1609 had been amended).
    In addition, LSC's regulation on the use of non-LSC funds at 45 CFR 
part 1610 treats the fee-generating case restriction as an LSC funds 
restriction, rather than as an entity restriction, notwithstanding than 
express language of Sec.  1609.3. Generally part 1610 works in tandem 
with the other regulations; each regulation (other than part 1610) 
expressly specifies whether it applies to a recipient's use of LSC 
funds (usually referred to as ``Corporation funds'') or if it applies 
to the recipient entirely and part 1610 categorizes each substantive 
LSC restriction as either an ``LSC Act restriction'' based on the 
provisions of the LSC Act \1\ or an ``entity restriction'' (based on 
Section 504 of the LSC FY 1996 appropriations act) and then variously 
applies those other regulations to the use of non-LSC funds depending 
on whether the substantive restriction is an LSC Act (funds) 
restriction or a Section 504 (entity) restriction. 45 CFR 1610.3 and 
1610.4. The definitions section of part 1610 includes the fee-
generating case restriction found in section 1007(b)(1) of the LSC Act 
and part 1609 of the Corporation's regulations as an LSC Act 
restriction, not as an entity restriction. 45 CFR 1610.2(a)(3).
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    \1\ Part 1610 actually refers to the fee-generating case and 
other ``LSC fund'' restrictions as ``LSC Act restrictions. Referring 
to these as ``LSC Act'' restrictions is somewhat of a misnomer in 
that some of the restrictions in the LSC Act are entity restrictions 
on all funds and LSC has at times imposed restrictions on 
recipients' LSC and private funds that do not appear in the LSC Act. 
Nonetheless, it is the term used by part 1610.
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    Section 1610.3 provides a general prohibition regarding the use of 
non-LSC funds. It states that a recipient may not use non-LSC funds for 
any purpose prohibited by the LSC Act or for any activity prohibited by 
or inconsistent with Section 504, unless such use is authorized by 
Sec. Sec.  1610.4, 1610.6 or 1610.7.
    Section 1610.4(b) provides a public non-LSC funds exception to the 
LSC Act restrictions but not the Section 504 entity restrictions: ``A 
recipient may receive public or IOLTA funds and use them in accordance 
with the specific purposes for which they were provided, if the funds 
are not used for any activity prohibited by or inconsistent with 
Section 504.'' Thus Sec.  1610.4(b) permits the use of public non-LSC 
or IOLTA funds for all activities categorized as ``LSC Act 
restrictions'' in Sec.  1610.2, which includes part 1609. Normally the 
exception for public non-LSC funds only applies to regulations that 
themselves are limited to LSC funds and private funds. part 1609 is an 
anomaly in that it uses ``entity'' language to apply to the use of all 
funds, but is treated by part 1610 as an ``LSC Act'' restriction that 
does not apply to public non-LSC funds. There is, thus, a conflict 
between the language of part 1610 and part 1609.\2\
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    \2\ It is worth noting that parts 1609 and 1610 were revised 
contemporaneously in 1996 and 1997. Parts 1609 and 1610 were issued 
as interim rules on August 29, 1996. 61 FR 45765 (Part 1609) and 61 
FR 45740 (part 1610). At this time, part 1609 contained the revised 
language while Part 1610 continued to treat it as an LSC Act 
restriction. part 1609 was finalized on April 21, 1997, with the 
revised language, while part 1610 was still under revision. 62 FR 
19398. A new final rule on part 1610 was subsequently published on 
May 21, 1997. 62 FR 27695. Notwithstanding the final language of 
part 1609 (appearing to apply the fee-generating case restriction as 
an entity restriction), the finalized part 1610 continued to apply 
the fee-generating case restriction as applying only to LSC and 
private non-LSC funds as had been the case prior to the revision of 
part 1609.
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    In sum, while the language of part 1609 changed in 1996 from a 
restriction on LSC funds to a restriction on all funds, the preamble to 
the rule indicates that substantive changes to the rule were not 
intended. In addition, parts 1609 and 1610 are in direct conflict 
regarding the scope of part 1609. Finally, LSC has not itself applied 
part 1609 as an entity restriction in practice and has issued guidance 
in the form of the LSC Compliance Supplement to the Audit Guide 
applying the restriction only as a restriction on a recipient's LSC and 
private non-LSC funds (and not applying to a recipient's available 
public-non LSC funds). Accordingly, LSC believes that the part 1609 
needs to be clarified to correct the apparent mistake in drafting and 
to bring the express language of part 1609 into conformance with the 
apparent intent of the Corporation in 1996 when it revised part 1609, 
the clear language of part 1610 and LSC practice.

Proposed Amendment to Part 1609

    As discussed above, LSC believes that the 1997 change to the 
language of Part 1609 appearing to extend the scope of the fee-
generating case restrictions beyond LSC and private non-LSC funds to be 
an entity restriction was not intended, but instead was a mistake made 
in the attempt to ``simplify'' the language of the regulation without 
any substantive change to the meaning of the regulation. LSC bases this 
belief upon the various indicia discussed above, such as the preamble 
to the final rule amending part 1609; the clear scope of the language 
in the LSC Act; the treatment of part 1609 in part 1610; LSC's own 
guidance in the LSC Compliance Supplement to the Audit Guide and LSC's 
ongoing practice. LSC thus proposes to amend the language of Part 1609 
to clarify that it reaches only LSC and private non-LSC funds.
    As an initial matter, LSC believes that amending the regulation in 
this way is preferable to maintaining the status quo. Although LSC has 
not previously encountered significant problems being caused by the 
apparently inaccurate wording of Sec.  1609.3, the matter came to LSC's 
attention through a question raised in the course of a compliance visit 
being conducted by the Corporation's Office of Compliance and 
Enforcement. Given the question being raised internally at LSC and the 
clear conflict between the regulations (1609 and 1610), LSC does not 
believe it would be appropriate to permit this situation to continue, 
particularly when there is a simple and straightforward solution to the 
problem.
    LSC further believes that amending the regulation in this way bring 
the regulation into conformity with the provisions of the LSC Act (and 
not be inconsistent with anything in the applicable appropriations 
acts). Moreover, it would resolve the conflict between Parts 1609 and 
1610 and would appear to reflect the intention of the Corporation in 
1997 to refrain from making a substantive change to the previously 
existing (pre-1997) scope of the regulation. In addition, amending 1609 
in this way would be consistent with the existing LSC guidance and 
practice. As noted above, the LSC Compliance Supplement to the Audit 
Guide guidance to auditors does not instruct them to apply the 
restrictions to a recipient's public non-LSC funds and to our knowledge 
the auditors have not been reporting instances of a recipients use of 
public non-LSC funds as problematic with respect to the regulation. 
Further, LSC's practice has not been to apply the restriction to a 
recipient's public non-LSC funds. Finally, to LSC's knowledge, the 
general understanding and practice in the field has been that the 
restriction does not apply to a recipient's public non-LSC funds. Thus, 
it would appear that amending part 1609 to clarify that it applies as a 
restriction on LSC and private non-LSC funds, rather than as an entity 
restriction, would not create any

[[Page 6383]]

substantive change from current practice.
    Although a question might be raised as to whether amending the 
regulation as proposed could be seen to be encouraging recipients to 
seek out fee-generating cases, LSC notes that the current understanding 
and practice is generally that the restriction does not apply to public 
non-LSC funds, and LSC is not aware that recipients are using such 
funds in any significant measure to undertake fee-generating cases that 
would otherwise be taken by the private bar. Thus, it seems unlikely 
that a clarification of the regulation, which would bring it into 
accord with the LSC Act, prior regulatory language and the current 
practice, would appear to encourage or increase the incidence of 
recipients' taking fee-generating cases. Moreover, recipients are 
subject to the priorities rule (45 CFR part 1620) which requires 
recipients to provide legal assistance (regardless of the source of 
funds used for such legal assistance) only in accordance with adopted 
priorities and the types of cases that the fee-generating case 
restriction would prohibit are generally not within any recipient's 
priorities.
    It has been suggested that the proposed amendment may result in a 
regulation that is more complex in administration, in that if the 
restriction is applied only to LSC and private non-LSC funds, and a 
recipient takes fee-generating cases with available public non-LSC 
funds (without otherwise meeting the criteria and procedural 
requirements of the regulation) the recipient will have to keep 
sufficient records to demonstrate the segregated and proper use of the 
funds. However, this is true for all of the LSC Act-only restrictions 
and tracking and documentation of proper uses of various sources of 
funds has not, to date, proven to be an insurmountable barrier to 
effective administration or oversight. Moreover, the flexibility 
afforded to recipients may be argued to outweigh any complexity in 
recordkeeping occasioned by the application of the restriction to the 
source of funds rather than as an entity restriction. Finally, to the 
extent that current practice has been to enforce the regulation as an 
LSC funds, rather than an entity, restriction, LSC anticipates no more 
complex administration of the regulation than has been the case. If 
anything, having the plain language of the regulation accord with the 
Act and part 1610, as well as reflect the current understanding of the 
scope of the rule will clarify and simplify administration of the 
regulation for both LSC and recipients.
    In light of the above, LSC proposes to amend Sec.  1609.3(a) to 
clarify that a recipient may not use Corporation funds to provide legal 
assistance in a fee-generating case (unless one of the exceptions 
apply). As 45 CFR 1610.4 is not proposed to be amended, that provision 
will continue to subject a recipient's private funds to the fee-
generating case restrictions in Part 1609.

List of Subjects in 45 CFR Part 1609

    Grant programs--law, Legal services.

    For reasons set forth above, and under the authority of 42 U.S.C. 
2996g(e), LSC proposes to amend 45 CFR part 1609 as follows:

PART 1609--FEE-GENERATING CASES

    1. The authority citation for part 1609 continues to read as 
follows:

    Authority:  42 U.S.C. 2996f(b)(1); 42 U.S.C. 2996e(c)(1).

    2. Section 1609.3 is amended by revising paragraph (a) introductory 
text to read as follows:


Sec.  1609.3  General requirements.

    (a) Except as provided in paragraph (b) of this section, a 
recipient may not use Corporation funds to provide legal assistance in 
a fee-generating case unless:
* * * * *

Mattie Cohan,
Senior Assistant General Counsel.
[FR Doc. 2011-2488 Filed 2-3-11; 8:45 am]
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