TITLE: B-308037, Legal Services Corporation--Lease with Friends of Legal Services Corporation, September 14, 2006
BNUMBER: B-308037
DATE: September 14, 2006
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B-308037, Legal Services Corporation--Lease with Friends of Legal Services Corporation, September 14, 2006

   B-308037

   September 14, 2006

   The Honorable Charles E. Grassley

   Chairman, Committee on Finance

   United States Senate

   Subject: Legal Services Corporation--Lease with Friends of Legal Services
   Corporation

   Dear Mr. Chairman:

   This responds to your July 18, 2006, request for an opinion regarding
   activities of the Legal Services Corporation (LSC) and Friends of the
   Legal Services Corporation (Friends). LSC created Friends in 2001 in an
   effort to lower its costs of renting office space in the Washington, D.C.,
   rental market. In this opinion, we address whether LSC had the legal
   authority to create Friends and to lease property from Friends. We address
   also whether LSC violated the Antideficiency Act in certain transactions
   with Friends, including a 10-year lease and the possibility of assuming
   Friends' assets if Friends' were to dissolve.[1] As explained below,
   Congress established LSC as a private, nonprofit corporation, and, as
   such, conferred broad powers on LSC enabling it to establish Friends and
   to lease property from Friends for LSC's operations. For the same reason,
   the Antideficiency Act is not applicable to LSC and therefore does not
   restrict LSC's ability to execute a 10-year lease or to assume assets of
   Friends, if it so chooses, were Friends to dissolve its corporate charter.
   Our opinion goes to the legal authority of LSC and is not an evaluation of
   the appropriateness of LSC's actions.

   In reaching our conclusion, we developed our record from publicly
   available sources, including Inspector General reports, hearing testimony,
   and relevant financial information. Additionally, we solicited and
   received legal views and other information from LSC and its Office of
   General Counsel.

   BACKGROUND

   Congress established LSC under the Legal Services Corporation Act of 1974,
   "for the purpose of providing financial support for legal assistance in
   noncriminal proceedings or matters to persons financially unable to afford
   legal assistance." Pub. L. No. 93-355, sect. 2 [sect.1003], 88 Stat. 378,
   379 (July 25, 1974), codified at 42 U.S.C. sect. 2996b(a). LSC provides
   financial assistance to programs furnishing legal assistance to eligible
   disadvantaged clients. 42 U.S.C. sect. 2996e.

   LSC created Friends in 2001 as part of an effort to find an alternative to
   the high costs of renting office space in the Washington, D.C., rental
   market.[2] Letter from Victor M. Fortuno, Vice President and General
   Counsel, LSC, to Susan A. Poling, Managing Associate General Counsel, GAO,
   at 1, 3, Aug. 10, 2006 (Fortuno Letter). Friends was incorporated as a
   nonprofit corporation[3] for multiple purposes, including "raising funds
   to provide funds to support all aspects of the missions of [LSC]" and
   "[a]cquiring, holding and managing assets for use by LSC where doing so
   may result in lower costs or greater efficiencies for Legal Services
   Corporation." Articles, article 4, at 1.

   In 2002, Friends and LSC identified a 65,000 square foot building for
   purchase in the Georgetown section of the District of Columbia, located at
   3333 K Street, N.W. The Bill and Melinda Gates Foundation provided a $4
   million grant to Friends toward the purchase of this building.
   Additionally, to help Friends secure a mortgage, LSC signed a 10-year
   lease at an annual fixed rent with Friends. Fortuno Letter, at 3. The
   lease contains a termination clause providing LSC the right to terminate
   the lease in the event that LSC does not receive its annual appropriation
   from Congress. 3333 K Street, N.W., Washington, D.C., Office Lease
   Agreement, July 1, 2002, article 26, at 21 (Lease). Friends leases space
   at 3333 K Street to several other tenants, in addition to LSC. Oversight
   Hearing on Legal Services Corporation: Leasing Choices and Landlord
   Relations Before the House Subcomm. on Commercial and Administrative Law,
   Comm. on the Judiciary, 108^th Cong. 27-28 (testimony of Thomas Smegal,
   Chairman of the Board, Friends). LSC took possession of its leased
   premises in 2003.

   At its inception, Friends' Board of Directors consisted solely of officers
   of LSC. Fortuno Letter, at 3-4. LSC officers continued to occupy half of
   the seats of Friends' Board of Directors until 2004 when LSC and Friends
   made a concerted effort to ensure Friends' independence from LSC.[4]
   Fortuno Letter, at 3. LSC and Friends share a common business address. See
   Articles, at 3; Bylaws of Friends of Legal Services Corporation, Aug. 27,
   2002, at 2 (Bylaws). Until May 2005, LSC employees satisfied some of
   Friends' staffing needs on a volunteer basis. Fortuno Letter, at 3-4.
   Friends' Articles of Incorporation state that if Friends ceases to exist,
   Friends' remaining assets, after Friends' liabilities are extinguished,
   would be contributed to LSC. Articles, article 7, at 2.

   DISCUSSION

   Congress established LSC as a private, nonprofit corporation in the
   District of Columbia, authorizing LSC to exercise the powers conferred
   upon corporations by the District of Columbia Nonprofit Corporation
   Act,[5] to the extent consistent with its authorizing statute. 42 U.S.C.
   sections 2996b(a), 2996e(a). Although a private corporation, LSC is
   similar to a federal agency in some respects. It is funded through annual
   appropriations;[6] its Board of Directors is appointed by the President
   and confirmed by the Senate;[7] its employees are eligible to receive some
   federal employee benefits;[8] and it is subject to provisions of title 5
   of the United States Code regarding freedom of information and open
   meetings.[9] LSC is a designated federal entity for purposes of the
   Inspector General Act and has had an Inspector General since 1988. 5
   U.S.C. app. sect. 8G(a)(2). These attributes of a federal agency
   notwithstanding, Congress in the Legal Services Corporation Act, as
   amended, clearly specified that, unless otherwise provided, "the
   Corporation shall not be considered a department, agency, or
   instrumentality of the Federal Government." 42 U.S.C. sect. 2996d(e)(1).

   GAO has previously had occasion to consider LSC's relationship to the
   United States government. In the past, we have determined that LSC is not
   an agency or establishment of the government subject to GAO accounts
   settlement authority, B-204886, Oct. 21, 1981, and that LSC, as an
   independent, nonprofit corporation outside the executive branch, is not
   subject to Office of Management and Budget circulars, B-241591, Mar. 1,
   1991. We have also found that even though it is a private, nonprofit
   corporation, by the terms of its authorizing statute, LSC may not expend
   appropriated funds to lobby in support or defeat of legislation. 60 Comp.
   Gen. 423 (1981); B-163762, Nov. 24, 1980. With this legal landscape, we
   turn to the questions presented.

   Authority to Create Friends and Enter into a Lease with Friends

   As part of the annual appropriations process, Congress appropriates
   amounts for an annual "payment to the Legal Services Corporation to carry
   out the purposes of the Legal Services Corporation Act of 1974."[10] E.g.,
   Science, State, Justice, Commerce, and Related Agencies Appropriations
   Act, 2006, Pub. L. No. 109-108, title V, 119 Stat. 2290, 2330 (Nov. 22,
   2005). Since Congress has limited this payment to the purposes of the
   Legal Services Corporation Act, our analysis of LSC's authority to use its
   federal funds must focus on the authorities Congress granted LSC in the
   Act.

   Section 2996e of title 42 of the United States Code defines the powers,
   duties, and limitations of LSC under the Legal Services Corporation Act.
   The powers relevant to the issues we address in this opinion are those
   Congress conferred on LSC by reference to the D.C. Nonprofit Corporation
   Act. Section 2996e states, "To the extent consistent with the provisions
   of this [Act], the Corporation shall exercise the powers conferred upon a
   nonprofit corporation by the District of Columbia Nonprofit Corporation
   Act." 42 U.S.C. sect. 2996e(a). Section 29-301.05 of the District of
   Columbia Code defines the general powers of each nonprofit corporation
   under the D.C. Nonprofit Corporation Act. Exercising these powers, LSC can
   purchase, take, receive, and lease real property, D.C. Code sect.
   29-301.05(4), and "subscribe for, or otherwise acquire . . . use and deal
   in and with, shares or other interests in . . . domestic or foreign
   corporations, whether for profit or not for profit." D.C. Code sect.
   29-301.05(7). Additionally, the D.C. Nonprofit Corporation Act authorizes
   LSC "to have and exercise all powers necessary or convenient to effect any
   or all of the purposes for which the corporation is organized." D.C. Code
   sect. 29-301.05(16). In our opinion, LSC, exercising powers authorized by
   the D.C. Nonprofit Corporation Act, may create a corporation.

   Congress provided, however, that LSC may exercise such powers only "to the
   extent consistent with" the Legal Services Corporation Act. 42 U.S.C.
   sect. 2996e(a). In circumstances similar to this case, B-219801, Oct. 10,
   1986, we examined whether the National Consumer Cooperative Bank (Bank)
   was authorized to incorporate three subsidiaries to engage in corporate
   activities related to the Bank's statutory mandate. Congress created the
   Bank to encourage development of cooperative banks, authorizing the Bank
   to provide specialized credit and technical assistance to cooperatives.
   Although federally chartered, the Bank was owned and controlled by
   cooperative stockholders. Pub. L. No. 97-35, sections 396(b), (h), 95
   Stat. 357, 439-40 (Aug. 13, 1981). The purposes of the subsidiaries were
   to provide debt and equity financing and leasing services for
   cooperatives, and to develop sources of funding for the Bank's lending
   activities. While the Bank had no specific statutory authority to create
   the subsidiaries, the creation of subsidiaries was consistent with the
   Bank's broad authority to exercise "all such incidental powers as shall be
   necessary to carry on the business of banking."

   In this case, we see no inconsistency between LSC's creating Friends and
   the purposes Congress set out in the Legal Services Corporation Act.
   Congress established LSC to provide "financial support for legal
   assistance in noncriminal proceedings or matters to persons financially
   unable to afford legal assistance." 42 U.S.C. sect. 2996b(a). LSC, in
   turn, established Friends to obtain financial support to further LSC's
   purposes. In incorporating Friends, LSC set out as the objects and
   purposes of Friends, "[r]aising funds to provide funds to support all
   aspects of [LSC's] mission"; educating the public "as to the wisdom and
   need (a) to provide equal access to the system of justice in our nation .
   . . ; (b) to provide high quality legal assistance to those who would
   otherwise be unable to afford adequate legal counsel; and (c) to provide
   legal counsel to those who face an economic barrier to adequate legal
   counsel"; and "acquiring, holding and managing assets for use by LSC where
   doing so may result in lower costs or greater efficiencies for LSC."
   Articles, article 4, at 1-2.

   We do not view Friends' purposes as materially different from those of the
   National Consumer Cooperative Bank's subsidiaries that we considered in
   our 1986 opinion. The purposes outlined in Friends' Articles of
   Incorporation serve in various ways to advance LSC's mission of affordable
   legal assistance. Indeed, all of the activities permitted in the Articles
   of Incorporation are activities that LSC itself may perform. Cf. B-219801
   (noting that the Bank's subsidiaries could not perform any activities that
   the Bank could not perform directly). We conclude therefore that LSC acted
   within its powers when it created Friends.

   For the same reasons, we have no objection to LSC's lease of office space
   from Friends. As explained above, LSC's authorities permitted it to create
   Friends to assist LSC in performing activities that LSC itself may
   perform. Clearly, LSC has the authority to acquire office space by either
   purchase or lease. D.C. Code sect. 29-301.05(4), as incorporated by
   reference into the Legal Services Corporation Act. 42 U.S.C. sect.
   2996e(a). Among the purposes set out in Friends' Articles of Incorporation
   is "[a]cquiring, holding and managing assets for use by LSC." Articles, at
   1. In this regard, Friends acquired the Georgetown property for LSC's use,
   and the lease is the vehicle that helped finance Friends' acquisition of
   the property.

   Long-Term Lease and Assumption of Assets

   Whenever a federal agency, operating with fiscal year appropriations,
   enters into a 10-year lease, as LSC did, questions arise whether the lease
   violated the Antideficiency Act.[11] At issue here is whether the
   Antideficiency Act applies to LSC.

   The Antideficiency Act provides, in relevant part, the following:

   "An officer or employee of the United States Government or of the District
   of Columbia government may not--

   "(A) make or authorize an expenditure or obligation exceeding an amount
   available in  an appropriation or fund  for the expenditure or obligation;

   "(B) involve either government in a contract or obligation for the payment
   of money before an appropriation is made unless authorized by law."

   31 U.S.C. sect. 1341(a)(1) (emphasis added). Clearly, one of the
   touchstones for application of the Antideficiency Act is an action or
   actions of "an officer or employee of the United States Government." Id.

   As noted above, LSC, by law, is not a federal agency. Section 2996d(e)(1)
   of title 42 of the United States Code states that "[e]xcept as otherwise
   specifically provided . . . the Corporation shall not be considered a
   department, agency, or instrumentality of the Federal Government." Its
   officers and employees, except for limited purposes not relevant here, are
   not officers or employees of the United States government. Id. ("Except as
   otherwise specifically provided . . . officers and employees of the
   Corporation shall not be considered officers or employees . . . of the
   Federal Government."). As violations of section 1341 are predicated upon
   an obligation of federal funds by an officer or employee of the United
   States government, LSC's transactions are not subject to the
   Antideficiency Act.[12] Indeed, by creating LSC as a private, nonprofit
   entity, Congress provided LSC with certain freedoms and independence to
   act in a manner similar to other private, nonprofit corporations.[13] See
   B-241591, Mar. 1, 1991 (holding that LSC was not subject to requirements
   in Office of Management and Budget circulars). See also B-131935, July 16,
   1975 (stating that the Corporation for Public Broadcasting, as a private,
   nonprofit corporation, is generally not subject to the same restrictions
   and controls on its expenditures as are federal agencies and
   establishments); B-307317, Sept. 13, 2006 (State Justice Institute, as a
   private, nonprofit corporation, is not subject to the miscellaneous
   receipts statute and thus could retain fees for use of advertising space
   in its newsletter).

   Because LSC's transactions are not subject to the Antideficiency Act,
   LSC's authority to enter into a 10-year lease is not governed by federal
   fiscal law.[14] LSC's authority to assume Friends' assets, as provided in
   Friends' Articles of Incorporation if Friends were to dissolve, is
   governed by the Legal Services Corporation Act. The Act authorizes LSC to
   accept money and property "in furtherance of the purposes of" the Act, 42
   U.S.C. sect. 2996e(a)(2), i.e., to provide "financial support for legal
   assistance in noncriminal proceedings or matters to persons financially
   unable to afford legal assistance." 42 U.S.C. sect. 2996b(a).

   CONCLUSION

   This opinion does not address the appropriateness of LSC's actions but
   only whether LSC acted within the confines of its legal authority.
   Congress created LSC as a private corporation conferring broad powers upon
   its Board of Directors to make business decisions. See 42 U.S.C. sections
   2996a, 2996b; D.C. Code sect. 29-301.05. Although it receives payments in
   annual appropriations, LSC, as a private, nonprofit corporation, is not
   subject to many of the fiscal restrictions imposed on federal agencies.
   LSC's broad discretion is constrained only by the limitations Congress
   imposes in the Legal Services Corporation Act and its annual
   appropriations acts.

   The Legal Services Corporation Act and the D.C. Nonprofit Corporation Act
   confer broad investment authority and discretion, allowing LSC to
   establish Friends and to enter into a lease with Friends for office space.
   While Congress has imposed some limitations in the Legal Services
   Corporation Act and in annual appropriations acts, it has not made the
   Antideficiency Act applicable to LSC's transactions. Accordingly, LSC's
   transactions at issue here do not violate the Antideficiency Act.

   Sincerely yours,

   Gary L. Kepplinger
   General Counsel

   ------------------------

   [1] In your letter, you also expressed concern that LSC might assume
   Friends' liabilities if Friends were to dissolve. Friends' Articles of
   Incorporation do not provide for LSC to assume Friends' liabilities upon
   dissolution. Instead, the Articles provide for the possibility that LSC
   will assume Friends' assets, but only after Friends' liabilities are
   extinguished. Articles of Incorporation of Friends of the Legal Services
   Corporation, Apr. 6, 2001, article 7, at 2 (Articles). Therefore, we do
   not address the possibility of LSC's assumption of Friends' liabilities.

   [2] By law, LSC must maintain its principal office in the District of
   Columbia. 42 U.S.C. sect. 2996b(b).

   [3] Both LSC and Friends are tax-exempt organizations under 26 U.S.C.
   sect. 501(c)(3). Application of the tax laws is outside the scope of this
   opinion.

   [4] LSC's and Friends' operational and fiscal relationship has changed
   significantly since 2004. According to LSC, it no longer has operational
   control of Friends. See Fortuno Letter, at 3.

   [5] D.C. Code sections 29-301.01-29-301.114 (2001) (D.C. Nonprofit
   Corporation Act).

   [6] See, e.g., Science, State, Justice, Commerce, and Related Agencies
   Appropriations Act, 2006, Pub. L. No. 109-108, title V, 119 Stat. 2290,
   2330 (Nov. 22, 2005) ("For payment to the Legal Services Corporation to
   carry out the purposes of the Legal Services Corporation Act of 1974,
   $330,803,000 . . .").

   [7] 42 U.S.C. sect. 2996c(a).

   [8] 42 U.S.C. sect. 2996d(d), (f).

   [9] 42 U.S.C. sections 2996d(g), 2996c(g).

   [10] Under 31 U.S.C. sect. 1310, "The Secretary of the Treasury shall
   credit an appropriation for a private organization to the appropriate
   fiscal official of the organization. The credit shall be carried on the
   accounts of --(1) the Treasury; or (2) a designated depositary of the
   United States Government."

   [11] Unless a federal agency has specific statutory authority to enter
   into long-term leases, as a fiscal law matter, the Antideficiency Act
   issue is whether the agency incurred a firm, fixed 10-year obligation in
   advance of appropriations for years 2 through 10. Also, if an agency were
   to assume the assets of another entity, without statutory authority to do
   so, the agency may have augmented its appropriation.

   [12] Given our conclusion, we need not address whether other elements of
   the Antideficiency Act may apply to the LSC.

   [13] Congress, of course, could choose to subject LSC to the
   Antideficiency Act by amending the Legal Services Corporation Act or
   imposing restrictions specifically when it appropriates funds to LSC. For
   an example of a restriction in an annual appropriations act subjecting
   specific appropriations received by private entities to the restrictions
   of the Antideficiency Act, see Department of Transportation and Related
   Agencies Appropriations Act, 1998, Pub. L. No. 105-66, 111 Stat. 1425,
   1435 (Oct. 27, 1997) ("any obligation or commitment by [Amtrak] for the
   purchase of capital improvements with funds appropriated herein which is
   prohibited by this Act shall be deemed a violation of 31 U.S.C. sect.
   1341").

   [14] Were LSC a federal agency, without long-term leasing or contract
   authority, LSC's 10-year lease, in all likelihood, would have violated the
   Antideficiency Act. Generally, a federal agency using fiscal year funds
   may enter into such a multiyear lease only so long as the contract
   includes options to renew after the first fiscal year that may be
   exercised only by the agency, not the contractor, and require affirmative
   action by an authorized agency official. See Leiter v. United States, 271
   U.S. 204, 206-07 (1926). While LSC included a clause in the lease
   reserving a right to terminate subject to the availability of
   appropriations (Lease, article 26, at 21), the lease does not include an
   option to renew exercisable only by LSC.