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September 10, 1990


D. Lowell Jensen, United States District Judge.

The opinion of the court was delivered by: JENSEN


 On July 11, 1990, the Court cross-motions for summary judgment in this action. Appearing for plaintiff were Jack W. Londen and Samantha J. Smith of Morrison & Foerster and John F. O'Toole, counsel for the National Center for Youth Law. Appearing for defendants were Hugh J. Cadden of Barger & Wolen and Timothy Shea, general counsel for the Legal Services Corporation.

 Upon consideration of the submissions of the parties, the argument of counsel and the applicable law, the Court finds that defendants have violated the statutory mandate of the Legal Services Corporation, and therefore GRANTS summary judgment for plaintiff.


 This action seeks declaratory relief and damages to restore to plaintiff federal funds cut by defendant following a determination that plaintiff was not in compliance with federal law.

 Defendant Legal Services Corporation ("LSC") is a federally chartered private non-profit corporation established by Congress under the Legal Services Corporation Act of 1974, 42 U.S.C. § 2996 et seq. ("LSC Act"), to administer grants to legal service programs and national support centers which give legal assistance to the indigent. Plaintiff National Center for Youth Law ("NCYL") is a private non-profit corporation based in California which has been an eligible recipient of LSC funds since 1978.

 Once funded, LSC grant recipients are entitled to refunding in subsequent years unless they are "afforded reasonable notice and opportunity for a timely, full, and fair hearing . . .". 42 U.S.C. § 2996j. LSC regulations identify four grounds for denial of refunding: (1) denials required by implementation of new law or regulations as applied to a certain class of recipients; (2) "significant failure" by a recipient to comply with statutory or regulatory requirements; (3) "significant failure" by a recipient to provide economical and effective legal assistance; or (4) determination by LSC that another organization could better serve eligible clients in the recipient's service area. 45 C.F.R. § 1625.3.

 In 1989 LSC determined that plaintiff was in violation of statutory conditions on funding and reduced NCYL's 1990 grant by 9.95% without holding the hearing required by statute. *fn1" LSC determined that, by participating in litigation challenging a newly-adopted California law requiring parental consent for a minor to obtain an abortion, NCYL had violated the LSC Act's statutory prohibition on use of LSC or other funds by recipients to support availability of abortion.

 NCYL's participation in the lawsuit, American Academy of Pediatrics v. Van de Camp ("AAP"), was funded not by its LSC grant, but by a grant from the California Legal Services Trust Fund ("state Trust") of the California State Bar, which was established by California statute to provide grants to programs providing civil legal services to indigent persons. Cal. Bus. & Prof. Code §§ 6210-6228 (West 1990). While the LSC Act bars use by LSC recipients even of non-LSC funds to promote abortion availability, LSC Act § 1010(c), 42 U.S.C. § 2996i(c), the Act provides a safe harbor for such use of "public funds" expended for the purpose for which they are provided. Id. LSC concedes that this safe harbor on its face permits an LSC funding recipient to use state funds for litigation supporting abortion availability, even though such expenditure is prohibited under the federal Act. LSC further concedes that the state Trust funds are public funds as contemplated under § 1010(c). However, LSC determined that pursuant to the state Trust regulations and guidelines, the AAP funds were not used for the purpose for which they were provided, because no indigent persons were directly represented in the litigation. LSC therefore demanded that NCYL withdraw from the AAP litigation.

 NCYL responded to the demand by requesting a determination from the Legal Services Trust Fund Commission ("state Commission"), which administers the state Trust for the State Bar, as to whether its participation in AAP was a purpose for which its state Trust grant was provided. After accepting written submissions from both NCYL and LSC, the state Commission determined that AAP was "being litigated primarily in the interest of, and for the benefit of indigent persons, and that expenditures in the case constitute a permissible use of NCYL's Trust Fund Program grant in accordance with the purposes for which such funds are provided." Legal Service Trust Fund Commission, Minutes (Mar. 31, 1989).

 LSC refused to accept the state Commission's ruling, however, and made its own independent review of California law, including the state Trust's regulations and guidelines. On this basis LSC decided that the state Commission was in error and that NCYL was not using the state Trust funds for the purpose for which they were provided. Therefore, LSC determined that NCYL's participation in the AAP litigation fell outside the § 1010(c) safe harbor, and the 9.95% funding sanction was imposed without affording NCYL notice and an opportunity for hearing.

 The parties agree that the only issues in this litigation are issues of law and that summary judgment is the most appropriate means of determining the merits of this action. Therefore, the parties have filed cross-motions for summary judgment, and LSC has submitted its administrative record. Two national organizations supporting LSC recipients have also filed a joint amicus brief in support of plaintiff. The parties further agree that LSC's finding was based on an interpretation of state law contrary to the state Commission's own; and that the 9.95% sanction was imposed on NCYL for cause, based on LSC's determination that NCYL participated in the AAP litigation in violation of the LSC Act, notwithstanding the safe harbor provision for receipt and use of public funds. *fn2"


 A. Review of the Funding ...

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