B-308037, Legal Services Corporation--Lease with Friends of Legal Services Corporation, September 14, 2006

B-308037 Sep 14, 2006 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights Congress established the Legal Services Corporation (LSC) as a private, nonprofit corporation with broad investment authority and discretion conferred by the Legal Services Corporation Act and the District of Columbia Nonprofit Corporation Act. As such, LSC was authorized to create a second private, nonprofit corporation, and to lease property from that corporation. Both transactions were consistent with the statutory purpose of LSC under the Legal Services Corporation Act. View Decision 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, 108th 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.