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.