[Federal Register Volume 76, Number 81 (Wednesday, April 27, 2011)]
[Rules and Regulations]
[Pages 23502-23504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10116]


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LEGAL SERVICES CORPORATION

45 CFR Part 1609


Fee-Generating Cases

AGENCY: Legal Services Corporation.

ACTION: Final rule.

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SUMMARY: This final rule amends the Legal Services Corporation's 
regulation on fee-generating cases to clarify that it applies only to 
LSC and private non-LSC funds.

DATES: This final rule becomes effective on May 27, 2011.

FOR FURTHER INFORMATION CONTACT: 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].

SUPPLEMENTARY INFORMATION: 

Background

    This final rule follows the publication of a Notice of Proposed 
Rulemaking published by the Legal Services Corporation (LSC) on 
February 4, 2011 proposing to amend LSC's regulation at 45 CFR part 
1609 on fee-generating cases to clarify that it applies only to LSC and 
private non-LSC funds. 76 FR 6381. On April 15, 2011, the LSC Board of 
Directors adopted the proposed changes and authorized the publication 
of this final rule.
    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. Its wording 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 617.3.
    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

[[Page 23503]]

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 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 contains a general prohibition regarding the use of 
non-LSC funds, providing that 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 of this part. Section 1610.4(b) 
contains a public non-LSC funds exception to the LSC Act restrictions 
but not the section 504 entity restrictions, providing that 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 parts 
1610 and 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 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.

Amendment of 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 proposed to amend the language of part 1609 to clarify 
that it reaches only LSC and private non-LSC funds. 76 FR 6381 (Feb. 4, 
2011). LSC received only three comments on the proposed rule, all of 
which fully supported the change. Accordingly, LSC is amending part 
1609 as proposed without further change.
    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

[[Page 23504]]

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 
brings the regulation into conformity with the provisions of the LSC 
Act (and is not inconsistent with anything in the applicable 
appropriations acts). Moreover, it resolves the conflict between parts 
1609 and 1610 and reflects 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 part 1609 in 
this way is 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 recipient's 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. This understanding was confirmed 
in the comments LSC received on the proposed rule. Thus, amending part 
1609 to clarify that it applies as an restriction on LSC and private 
non-LSC funds, rather than as an entity restriction, does not create 
any substantive change from current practice.
    In light of the above, LSC amends 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 being 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 amends 45 CFR part 1609 as follows:

PART 1609--FEE-GENERATING CASES

0
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).


0
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:
* * * * *

Victor M. Fortuno,
Vice President & General Counsel.
[FR Doc. 2011-10116 Filed 4-26-11; 8:45 am]
BILLING CODE 7050-01-P