Untitled Texas Attorney General Opinion

I The Attorney General of Texas February6, 1986 JIM MATTOX Attorney General Supreme Court Building Gary E. Miller.N.D. Qpiaion No. m-414 P. 0. Box 12548 cotmnissioner ~ustln.TX. 79711.2549 Texas DepartmentelfMental Health Re: Scope of article 988b. 512,475.2501 and Mental Rctrrdation V.T.C.S.,with respectto mam- Telex 910/674.1367 Telecopier 51Z475-0266 P. 0. Box 12668 hers of the Board of Trustees Austin,Texas 7E711 of a Mental Realth/MentalRe- tardationConmuaity Center 714 Jackson, Suite 700 Da11mTX. 752024508 Dear Dr. Miller: 214i742-9944 You ask several questions about article 988b, V.T.C.S., which 4824 Alberta Ave.. Suite 160 relates to confl:tctof interest by local public officials. The El Paso. TX. 79xX-2793 statuteprovidesIn part: 91515353484 sec. 3'. (a) Except as provided by Section 5 1001 Texas, Suite 700 of this Act, a local public official commits an Houston. TX. 77002.3111 offenaeif he kmwingly: 7132235855 (1) participatesin a vote or decision on a matter imvolvinga business entity in vhich the 606 Broadway, Suite 312 Lubbock, TX. 7WW3479 local ptiblicofficial has a substantialinterest SOSi747-5238 if it in reasonablyforeseeablethat an action on the matterwould conferan ceonomicbenefit to the business,entityinvolved.. . . 4309 N. Tenth. Suite S McAllen, TX. 75501-1685 5121882-4547 . . . . (b) ha offenseunder this sectionis a Class A 200 Main Plaza, Suite 400 misdemeamr. San Antonio, TX. 782052797 512/2254191 You first ask whexher the term "businessentity" as used in article 988b includesa nonprofitcorporation.We concludethat the term does An Equal OpPWtWitYl includea nonprofitcorporation. Attlrmative Action EmPloYOr Article988b, :aection l(2), defines"businessmtlty" as a sole proprietorship, partnership,firm, corpora- *, holding company, joint-stockcompany, re- ceivershtp,trust, or any other entity recognized la law. l@phasis added). p. 1939 I Dr. Gary E. Miller - Page :! (~~-424) .< A nonprofit corporation is a corporate antity which does not distribute its income to :itsmembers, directors,or officers. It does, hovever, pay compensationfor services rendered. See Taxas Non-Profit CorporationAct, V.T.C.S. art. 1396-1.01 et r + legislatureenacted a brord definitionof "businessentity vhichThe is not limited to corporat1cm.s incorporatedunder the Texas Business CorporationAct aad does not exclude those incorporatedunder the Texas Non-ProfitCorporationAct. Compare V.T.C.S. art. 988b. §1(2) with V.T.C.S. art. 6252-!Ib,02(11) (defining"business entity" to mude “any other entity . . . throughwhich business for profit is conducted"). You ask as your secondquestionwhether article988b appliesto a member of the board of truwees of a conwnity mental health or mental retardationceater who receiveda salary in excess of ten percent of his gross income for the ~~reviousyear as an employeeof a nonprofit corporation. We believe that a member of such a board is a "local public official"within tht!definitionfound in article988b: 'Local public official' means a member of the governingbody 01:anotherofficer,whether elected or appointed, paid or unpaid, of any district (including a sc'hool district), county, city, preciact, centr,n:Lappraisal district, transit authorityor dis!xict.or other local governmental entitywho exerc::aesrespoasibiliti~s beyond those that are advisor1la nature. V.T.C.S.art. 988b. 51(l). Conaaunity ceatershave characteristicsof both an agency of the state aad of a local governmentalbody. V.T.C.S.art. 5547-203;8ee, a, Attorney General Qlinions JM-12 (1983); H-850 (1976); R-450 (1974);M-1266 (1972);M-3:.6(1968). They are supervisedand assisted by the Department of Mexal Health and Mental Retardation. See V.T.C.S.arts. 5547-203,§!i3.05,3.11; 5547-204,164.01.4.03. - On the other hand. camluaitycentersare establishedand operated by counties. cities, hosllitaldistricts, school districts, or any combination of those. They are governed by boards of trustees composed of the governingbody of a single city, county, hospital district, or school distril:tor designatedby the governingbodies which organized the center. See V.T.C.S. art. 5547-203, 53.02; AttorneyGeneralOpiaionMo.l.266 (1972). Cf. AttorneyGeneralOpinions JM-38 (1983);B-850 (1976). In our opinion.a communitycenter is a local governmentalentity within article 98813,V.T.C.S., and its trusteesare local public officialswithin that statute. -See V.T.C.S. art. 5547-203, 053.05. 3.Oti. p. 1940 Dr. Gary E. Miller - Page 3 (m-424) A trusteewho receivw a salary in excess of tea percent of his gross income from the previousyear from a nonprofitcorporationwould have a substantialinterest in that corporation. See V.T.C.S. art. 988b, 02(a)(2). Thus, transactionsbetveea the aonpzfit corporation which employs the trustee and the community center he serves as trusteeare subjectto scrutinyunder article988b, V.T.C.S. You aext ask whether a.rticle 988b, V.T.C.S.,overrulesor merely supplementsearlierAttoracyGeneralOpiaioasoa conflictof interest, in particular Attorney General Opinions M-340 (1969) and H-1309 (1978). Attorney General Opinion M-340 (1969) determined that the governing board of a commmity mental health, mental retardation center could not contractwith a corporationin which a board member was interestedas a direc':or and stockholder. The oalnioa relied oa the declaratioaof public policy made in Meyers v. Walker, 276 S.W. 305, 307 (Tex.Civ. App. - Eastland1925, no writ): If a public offj,cial directlyor indirectlyhas a pecuniary iatermt in a coatract,no matter how honest he may b#c, sad although he may not be influencedby the interest, such a coatract so made ~1sviolativeof the spirit and letter of our law, aad is againstpublicpolicy.. The court declaredthe coatractmade in violationof this policy to be illegalsad void. Id. The comma law doctrineexpressedin Meyersv. Walker has repeatedFbean :celicd upon to invalidatecontractsmade by public officialswith a pwuniary interesttherein. See, e.g., City of Edinburg v. Ellis, 59 S.W.2d 99 (Tax. Comm. App. 1933. holding approved);Delta Electric'$astructioaCo. v. City of San Antonio,437 S.W.2d 602 (Tex. Civ. API'.- San Antonio 1969, writ ref'd a.r.e.); Bexar Couaty v. Wentvortl!,, 378 S.W.Zd 126 (Tex. Civ. App. - San Antonio 1964, writ ref'd n.r.e.); Attorney General Opinions JM-171 (1984); MU-179 (1980): E.-l.309 (1978): H-916 (1976): M-340 (1969): w-1362 (1962); O-2924 (1942). See -also Wooldridgs- v. Folsd, 5hi S.W.2d 471 (Tex. Civ, Apl~.- Dallas 1978, no writ). A subsequent AttorneyGeneralOpiniond~!tcmiaedthat aa employee'sinterestla his company was sufficient tl) create a conflictinginterest with his duties as a public officer. AttorneyGeneralOpinionR-916 (1976). Attorney General Opir~ion H-1309 (1978) concludedthat a govern- mental body could not coatract with a private,noaprofitcorporation which a member of the :Jovernmeatal body served in a management positioa. Such transactims were barred by the cocoa law policy against dual agency: an ;ngeatmay not representboth sides in a contract unless the pr~v:ipal coasents. The state's agent may thereforeaot represent the opposite side in a transactionla the absenceof legislativeconwnt. see generallyV.T.C.S.art. 2529c. p. 1941 I Dr. Gary E. Miller - Page 1. (JM-424) In our opinion, artic:le988b changes the common law rules on conflictof interest. For example,section2(c) imputesto the local public officialthe pecunimy interestsof his relatives: Au interest of 8.person related in the first or second degree by (eitheraffinityor consanguinity to the local public official is a 'substantial interest.' V.T.C.S.art. 988b. 52(c). The comon law doctrinedid not extend to pecuniaryinterestsof the 'officer's relatives. See AttorneyGeneral Opinion E-354 (1974) (coun,ty commissionerscourtly contract with corporationowned by a comd.ssioner'sbrother). Article988b also dif!iers from the coumon law in that it applies only to transactions in which a local public official has a "substantialbusinessinterest."definedas follows: Sec. 2. (a) A person has a substantial interestin a bur&nessif: (1) the interestis ownershipof 10 percentor more of the vothg stock or sharesof the business entity or owner&p, of.$2,500or more of the fair market value of i:h.e businessentity:or (2) funds received by the person from the businessentity r:xceed10 percent of the person's gross income for the previousyear. (b) A person has a substantial interest in real property if the interest is an equitableor legal ownershipHth a fair market value of $2,500 or more. (c) An interazstof a person related in the first or second degree by either affinity or consanguinityto the local public official is a 'substantialIntorest.' This office has. however,held that a negligibleownershipinterestin a business constitutesa pecuniary interest. See Attorney General Opinion H-624 (1975) (comissiouers court may notpurchase supplies from a farmer's cooperativein which a commissionerowns a small share). But see V.T.C.S.,P:ct.988a (legislativeoverrulingof result in AttorneyGeneralOpiniorl N-624). Article 988b differs;from the cowon law with respect to remedies: p. 1942 Dr. Gary E. Miller - Page !i (JM-424) Sec. 4. If a local public official. . . has a substaatialInWrest in a business entity that would be peculiarly affected by any official action taken by the governing body, the local public official,'beforea vote or decisionoa the matter, shall fib an affidavitstatingthe nature and extent of the interestand shall abstain from further particiEn.or mandamus. The findingby a court of a violationunder this articledoes not render an actioliof the governingbody voidable unless the mea&e that was the subject of an action involving;conflict of interest would not have passed the governingbody without the vote of this artfcle. (Emphasis the person who -r:Lolated added). V.T.C.S.art. 988b. 664, 6. Under the common lab,,an officer cannot cure his conflict of interestby recusinghimself. See Delta ElectricConstructionCo. v. City of San Antonio, up=. Moreover, the common law doctrine declares public contracts in which uublic officers are oecuniarilv interestedto be void, whjle article588b urovidesthat th& are onl; voidable and only ih ljmited circumstances. See Delta* Elect& Coustructionco. v. City of San Antonio,supra; city of Edinburgv. Ellis, supra, Meyers v. Walker, su ra; -- JH-171 (1984); MU-179 (IWO); -+~79p;~‘~;;6 MW-34 7;;;;;. ';E; opinion, article 988b was ,Lntendedto repeal and replace the common law doctrine. Legislativehistorydocumentsthis intent. Article 988b was e~xlctedby Senate Bill No. 1044 of the Sixty-eighthLegislature. Acts 1983, 68th Leg., ch. 640 at 4079. Its enactmentwas recommendedby the Public Servant Standardsof Conduct Advisory Committee,a bod:restablishedby a statute directingit to study laws on the conduct.of public servants and to report to the legislatureIts recommendationsfor ravising them. Acts 1981, 67th Leg., ch. 151, 09 at 371. The statute expresslystated that "[tlhe legislature shall consider the committee's recommendations."-Id. 59(b). p. 1943 I Dr. Gary E. Miller - Page f' (JM-424) The Advisory Comitl:e:estudied conflicts of interest which centered around voting, purchasing and contracts, and eventually recommendedsolutionsbass,don a form of financial disclosurewith abstentionfrom participation. BackgroundReport on Local Officers' Conflictof InterestProbltmls,publishedin Final Report of the Public ServantStandardsof ConduzrAdvisoryCommittee,at 17 (August1983). Its retommendationsfor legislationwere primarilybased on the work of its Conflictof InterestSubcommittee.The subcommitteesought to establish a degree of personal financial interest in a transaction above which a conflictoccurred. Relying in part on AttorneyGeneral Opinion M-1236 (1972),whi.chheld that a 10 percent stock ownership constituteda substantialjnterest.the subcommitteedeterminedthat a thresholdfinancialintere!$tof 10 percent or $2,500would cover most potentially conflicting tnterests. See generally V.T.C.S. art. 6252-Vb,52(12) (defining;Lstate officer's"substantialinterest"in a business entity). The subcommitteealso developedproceduresfor preventingthe interestedpublic official from participatingin the governmentalbody's actlot,. The Advisory Committee recommendedthe proposedlegislationwhich eventuallybecame articleVSSb, V.T.C.S. The bill analysisto I,e,nate Bill No. 1044 statedas follows: The only current:statutes covering conflicts of interestfor loct,l officialsdo not cover all such officersand do 'lotprovide guidelinesfor deter- mining when a conflict exists or proceduresfor handlingsuch situations. Bill Analysis to S.B. NC. 1044, prepared for Rouse Committee on Judicial Affairs, filed ir Bill File to S.B. No. 1044, 68th Leg., LegislativeReferenceLibrary. Testimonyat a public hearing on the bill reflectsthe understandingthat it would supplantthe common law for officers it covered. One witness stated that current law prohibited a governmentalbody from contracting with a business controlledby a member oi: the governmentalbody, but article 988b would allow such a contractto be made. Public Bearing on S.B. No. 1044 before the Senate Committeeon IntergovernmentalRelations,68th Leg. (April 7, 1983) (testimonyof Dick Brovn, ExecutiveDirector of Texas MunicipalLeague). 'lhewitness also stated that the purpose of the bill was to inform rho public that a member of the governmental body has a business interest in the proposed contract. Id. Re explained that if the interested officer signs an affidax and abstainsfrom voting, the governmentalbody can conductbusinesswith that company. Id. Unlike the common law, which deals with conflict of interest by~ohib1tir.g contracts altogether,article 988b was anacted to allow the goveeumantalbody to make the contract if the interestedofficialdisclo:res his interestsand recuseshimself. See also V.T.C.S.art. 6252-Vb,86 (concerningcertainofficialsof state boards and commissionswith privateinterestsin officialmatters). p. 1944 Dr. Gary E. Miller - Page 7 (m-424) Our conclusion that ,thelegislatureintended article 988b to change the common law is mt inconsistentwith the judicialapproach to conflict of interest questions. The judicial decisionsrest in part on statutesvhich codlCiedthe comon law doctrine. For example, forstararticle 988, V.T.C.S., prohibited city officers from being interestedin transactionsfinanced from public funds. Acts 1981, 67th Leg., ch. 527, 02, alt: 2230. An earlier criminal law penalized city or county officersw'iowere pecuniarilyinterestedin contracts made by their political subdivisions. Acts 1874, 14th Leg., ch. XXXIX, at 47 (formerPenal ICodeart. 373 (1925) (repealed1973)). The courts viewed these statutesas expressingthe public policy of the state, and implementedit by holding that contractsmade in violation of it were void. City OE Edinburgv. Ellis, w; Delta Electric ConstructionCo. v. City of San Antonio, supra; Bexar County v. Wentworth,supra; Meyers ;. Walker, supra. See also Lower Colorado River Authorityv. City ~2: San Marcos, 523 S.W.2d 641 (Tex. 1975) (violationof open meetiu$;slaw subjects action taken to judicial invalidation); Cruthfield1. Rambo, 86 S.W. 950 (Tex. Civ. App. 1905, writ ref'd) (contractto divide lottery winninas is contrarv to law and public policy and une:lforceable);Annot., 5% A.L.R.2d 481 (1957) (discussesvalidityof contractsmade in violationof criminalstatute which does not specificallydeclarethe contractinvalid). With one exception,the judicial decisionshave not considered legislationwhich diverged from the common law. In Wooldridge v. Folsom, 564 S.W.2d 471 (Tex. Civ. App. - Dallas 1978, no writ), residentsof Dallas sued thlemayor to nullifycertaincontractson the ground of conflictof intc:rest.The court held that the now-repealed article988 did not apply tiehome rule citiessuch as Dallas, and that the contractswere not void. Under the city charter, contracts in which officersor employeeswere financiallyinterestedwere "voidable by the city manager or tlw city council." 564 S.W.2d at 472. The court determinedthat a home rule city could adopt its own method of dealingwith conflictsof interest. The legislatureintend~ed to change the common law when it enacted articlevaab. TranSaCtiOns in which a public officialhas less than a substantialinterest are no longer for that reason contrary to the public policy of Texas. Where the transaction involves the "substantialinterest"of a "local public official"within article 988b. the governmental body may legallyenter into it if the statutory proceduresare followed. Ihe contractor transactionwill not in that case be void on account 'of that official's conflict of interest. Finally, the contract is voidable under the conditionsset out in article vaab. The statutoryprocedures for disclosureand recusal replace the absolute common law prohibitionsagainst transactionsin which a member of the governmental body is pecuniarilyinterested. In answer to your third question, article988b has changedthe'coaunon law upon which numerous judic:lal decisionsand attorney general opinions were based. p. 1945 Dr. Gary E. Miller - Page ii(m-424) Your third question also inquires whether the principles of conflict of interest and dual agency would prevent public officials from contractingon behalf of the politicalsubdivisionwith a private entity which provides them a salary or other benefit of less than 10 percent of their gross iucome for the previous year. As we have noted, the 10 percent luterest is the threshhold amount for identifying a conflict of interest under section 2(a)(2). The legislaturehas determinedthat lesser amounts simply do not create conflictsof interest. Cf. V.T.C.S. art. 988b. 12(a)(l) (ownership interest cannot exceed73,500); Attorney General Opinion JR-291 (1984). The policy against du,alagency, discussed in Attorney General Opinion H-1309 (1978) serras a similar function as the conflict of interest doctrine. We do not believe the legislatureintended the policy of dual agency to prohibit the contracts authorized under articlevaab. Thus, this policydoes not prohibita local board from contractingwith a nonprofit corporationthat employs one of its members in a managementposition,whether or not his salary consti- tutes a "substantial interest" under the statute. We caution, however,that his conduct eust be consistentwith the requirementsof other civil and criminalc,tatutes.See, e.g., Penal Code art. 39.01 (officialmisconduct). Our answer to your thfed questionmakes~itunnecessaryto answer your fourthquestion. You finallyask whether the Texas Departmentof Mental Health and Mental Retardationhas auth'ority under article5547-204,V.T.C.S.,to enact a rule which rendersa communitycenter ineligiblefor a grant- in-aid if one or more mambe,rsof its board of trusteesalso serve on the board of a nonprofitorganizationwith which the center conducts financialtransactions. The Sixty-ninthLegislatureenacted Senate Bill No. 633 which replacedthe grant-in-aidnode of financingfor communitycenterswith a method based on contract,8 for connaunitybased servicesbetween the departmentand communityproviders. Acts 1985, 69th Leg., ch. 496 at 4155. Section4.03, which :formerlyconcernedeligibilityfor grants, has been amended, and now concerns eligibilityof communitycenters and other providers for community based services contracts. The changes in your statuteheve mooted your last question. If you wish to reframe and resubmityour question in the context of the amended provisions,we will addressit at that time. SUMMARY A trusteeof a Mental Health/MentalRetardation CommunityCenter :Lsa local public officerwithin article 9aab, V.T.C.S. Article vaab, v.T.c.s., p. 1946 Dr. Gary E. Miller - Page !I (JM-424) modifies the common law conceruingthe pecuniary interestof a lcscalpublic official in contracts entered into by the governmentalbody they serve. A governmental body may now contract with a private entity in which a member of the govern- mental body is pecuniarily interested If he follows the dis~zlosureand recusal procedure stated in articlrVSSb, V.T.C.S. The contractis voidable under th'sconditionsset out in article vaab, V.T.C.S. J I M MATTOX AttorneyGeneralof Texas JACK HIGHTOWER First AssistantAttorney Goneral MARY KELLER ExecutiveAssistantAttornq General ROBERT GRAY SpecialAssistantAttorneyGeneral RICK GILPIN Chairman,OpinionCommittee Preparedby Susan L. Garrison AssistantAttorneyGeneral p. 1947