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August 19, 1985


The opinion of the court was delivered by: HOGAN

Thomas F. Hogan, United States District Judge.


 The principal defendant in this action, the Legal Services Corporation (LSC), is a nonprofit organization created in 1974 by the enactment of the Legal Services Corporation Act (LSCA/the Act), 42 U.S.C. § 2996, et seq.1 Under the Act, LSC administers a program of contracts and grants of federal funds to a variety of legal-service related organizations. The vast majority of these grantees provide free legal assistance and representation in non-criminal matters to individuals who are otherwise financially unable to afford such services. See id. §§ 2996b(a). However, the Act also authorizes LSC to award grants to organizations that do not directly provide legal assistance to the poor, but instead fulfill other functions necessary to effectuate the purposes of the Act. See id. § 2996e(a)(1)(B) & (a)(3).

 Pursuant to this latter authority, LSC awarded a total of approximately $4 million in yearly federal grant funds to the plaintiff, the National Clients Council, Inc. (NCC) from 1976 to 1983. Under these grants NCC was to provide technical assistance and training to the boards of local Legal Services organizations throughout the country, as well as individual Legal Services clients. Likewise, NCC was to educate local program board members as to their responsibilities, inform clients of the function of legal services projects and their rights under those projects, and serve as a conduit for client input into the legal services network.

 The National Clients Council has brought this action challenging a July 15, 1985 final determination of the Legal Services Corporation to deny NCC refunding for fiscal year 1984. *fn2" Plaintiff is challenging the 1984 refunding decision now, in 1985, despite the fact that it received interim funding throughout the period of administrative review by LSC from January 1984 to July 1985. NCC contends that this issue is not moot because it will have a material impact on its 1985 application for refunding, held in abeyance by LSC pending final resolution of the 1984 funding issue. NCC maintains that unless it prevails in this action, and the Court determines that LSC improperly denied it refunding for 1984, NCC will not be deemed to have been an official grant recipient during 1984, and therefore will not be entitled to a presumption of refunding for 1985 enjoyed by existing grantees.

 This case was originally brought before the Court on plaintiff's motion for a preliminary injunction, filed contemporaneously with the complaint on July 26, 1985. NCC contends that, due to LSC's final determination denying refunding and the resulting cessation of interim funding to NCC, it will have exhausted all of its financial resources by approximately August 16, 1985. NCC therefore sought a preliminary injunction requiring LSC to continue interim funding to NCC, and precluding LSC from taking any adverse action on NCC's pending application for funding 1985, or from committing elsewhere any funds to which NCC may be entitled for 1984 and 1985, until resolution of the merits of this action. However, at the August 7, 1985 hearing on plaintiff's motion, the parties concurred, upon inquiry from the Court, that the merits of the action may be resolved at this time on the basis of the record and pleadings currently before the Court. Accordingly, the Court shall treat this matter as one presenting cross-motions for summary judgment. See Fed.R.Civ.P. 65(a)(2). *fn3"

 I. Statement of Facts

 A. The Review Team

 On October 20, 1983 the defendant, Legal Services Corporation, notified NCC that a review team was being sent to NCC headquarters on October 26, 27, and 28 to monitor NCC's operations and interview NCC staff. This notification also requested that NCC compile copies of "policy statements, position papers and other presentations of the National Clients Council." In addition, LSC requested access to twenty-four other categories of documents relating to NCC's activities and management. See Plaintiff's Memorandum in Support of Motion for Preliminary Injunction, Exhibit 3.

 In accordance with the notice, the review team visited NCC's Washington, D.C. headquarters on the days indicated. In addition, two members of the team also visited selected NCC regional offices. The review team, appointed by LSC to perform the task of an organization-wide review of NCC, consisted of both outside independent consultants and LSC employees. *fn4"

 During the review team's on-site visits, NCC refused to grant access to certain documents and records, including training files, technical assistance files, and correspondence files. Despite the failure to gain access to all of the requested records and documents, the review team nevertheless completed its evaluation of NCC and submitted a report to the Legal Services Corporation.

 B. Preliminary Denial of Refunding

 On the basis of the review team's evaluation and report, LSC notified NCC on January 4, 1984 of its preliminary determination to deny refunding to NCC for the 1984 calendar year under section 1625.3 of LSC's regulations, which provides that a grantee may be denied refunding when "there has been a significant failure by the recipient to comply with a provision of law or a rule, regulation, guideline or instruction issued by the Corporation, or a term or condition of a current or prior grant from or contract with the Corporation." 45 C.F.R. § 1625.3(b). The notification cited seven deficiencies in NCC's operations as revealed by the October review, generally alleging an extensive pattern of financial abuse by NCC's Board and personnel, as well as numerous organizational and managerial failings, and the failure to provide the review team access to documents. See Plaintiff's Memorandum in Support of Motion for Preliminary Injunction, Exhibit 4. Despite the preliminary determination to deny refunding, under the Legal Services Corporation Act and LSC's own regulations, NCC was entitled to continue receiving interim funding at its 1983 level pending a final determination on the issue. 42 U.S.C. § 2996f(a) (9) (1976); 45 C.F.R. § 1625.15.

 C. The Administrative Review Process

 On January 13, 1984, NCC notified LSC of its intent to challenge the preliminary determination to deny refunding, and requested an administrative hearing on the matters set forth in the January 4, 1984 notice. In response, LSC appointed Richard S. Gebelein, a former Attorney General for the State of Delaware, who was then in private legal practice but has since been appointed to the Delaware Superior Court bench, to serve as Presiding Officer in this matter. See 45 C.F.R. § 1625.6.

 Upon initiation of the administrative review process by the Presiding Officer, NCC asserted its intention to contest all of LSC's factual bases for the denial of refunding. On March 5, 1984 the parties commenced an administrative hearing before the Presiding Officer, which continued for twenty hearing days, concluding on April 19, 1984. The record of the hearing includes 5000 pages of transcript, including the testimony of sixteen witnesses, as well as 227 separate exhibits. After the conclusion of the hearing and the rendering of the Presiding Officer's post-hearing ruling on evidentiary matters, the plaintiff sought leave to file two affidavits of its President, Ms. Nelwynne Hollie, which primarily contained information relating to efforts undertaken by NCC to modify, change and improve its own operations after January, 1984, and even after conclusion of the administrative hearing. Over the strenuous objection of LSC, the Hollie affidavits were admitted by Judge Gebelein.

 On May 1, 1985 Judge Gebelein issued his Opinion and Recommended Decision, setting forth his factual findings and legal conclusions, and reaching his recommendation that NCC be denied refunding. Four of Judge Gebelein's findings and conclusions supported his recommended decision to deny refunding.

 Second, the Presiding Officer found that NCC had improperly withheld documents from the review team, constituting a "significant failure to comply with a grant condition in that it is a major violation of the ability of LSC to adequately monitor NCC's compliance with other conditions, law, regulations, etc." Again, the Presiding Officer found that under the circumstances of the case, this alone was enough to deny refunding. (Recommended Decision at 8-10; 36-37.)

 Third, the Presiding Officer found that NCC failed to provide an effective mechanism for input to the Legal Services establishment by clients and client board members and that NCC was not effectively or efficiently using the resources at its disposal to fulfill its function of providing information to local program board members and clients. Specifically, he found that NCC did not maintain adequate mailing lists of its own members and discontinued its regular newsletter purportedly due lack of funds. Furthermore, Judge Gebelein found that NCC failed to serve as a funnel of information from the local program boards and clients council to LSC, and found especially lacking any regular contact between NCC and LSC regional offices. The Presiding Officer found that NCC thereby failed to fulfill one of its primary purposes - "to find out the problems of local board members and present those matters to the Legal Services Corporation Board and regional offices." Recommended Decision at 37-38. The Presiding Officer concluded that, in light of the additional problems with NCC, this constituted a substantial basis for denying refunding. (Recommended Decision, at 23-25; 37-38.)

 Finally, the Presiding Officer concluded that "nothing has become more obvious during this hearing and review of the evidence than that NCC lacked any effective or economical plan for delivery of its specialized services to its clients." Recommended Decision, at 40. The decision found that NCC persistently failed over a number of years to correct the financial abuses, and generally failed to properly monitor its own activities. Because of this, the decision found that NCC impeded its ability to provide ...

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