Untitled California Attorney General Opinion ( 1997 )

TO BE PUBLISHED IN THE OFFICIAL REPORTS
OFFICE OF THE ATTORNEY GENERAL
State of California
DANIEL E. LUNGREN
Attorney General
______________________________________
OPINION :
: No. 97-511
of :
: December 5, 1997
DANIEL E. LUNGREN :
Attorney General :
:
GREGORY L. GONOT :
Deputy Attorney General :
:
______________________________________________________________________
THE HONORABLE NORMAN Y. HERRING, COUNTY COUNSEL, COUNTY OF
GLENN, has requested an opinion on the following questions:
1. May a director of an irrigation district contract with the district to obtain private
construction services performed by the district valued at $29,000 in exchange for terminating a preexisting
obligation of the district to repair a bridge located on the director's property, where such repair services are
valued at $47,000?
2. Alternatively, may the irrigation district pay the director $29,000 in consideration
for terminating its preexisting and ongoing bridge maintenance obligation?
CONCLUSIONS
1. A director of an irrigation district may not contract with the district to obtain
private construction services performed by the district valued at $29,000 in exchange for terminating a
preexisting obligation of the district to repair a bridge located on the director's property, even though such
repair services are valued at $47,000.
2. The irrigation district may not, in the alternative, pay the director $29,000 in
consideration for terminating its preexisting and ongoing bridge maintenance obligation.
ANALYSIS
Under the provisions of the Irrigation District Law (Wat. Code, §§ 20500-29978), an
irrigation district may, among other duties, "do any act necessary to furnish sufficient water in the district for
any beneficial use" (Wat. Code, § 22075). We are informed that an irrigation district situated in two counties
in Northern California has constructed bridges in connection with its irrigation and drainage facilities. The
bridges were built in the 1920's when the district constructed large canals throughout the area. In exchange
for the rights of way to construct the canals, the district agreed to build and maintain bridges over the canals,
giving each owner access to his or her own property. One of these bridges presently requires repair work that
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would cost the district $47,000 to perform. This particular bridge provides access only to lands currently
owned by one of the five directors of the district. This director intends to construct additional private roads
on his property estimated to cost $29,000. The district routinely contracts with its customers to provide
private construction services, such as road construction, on a "first come, first serve" basis, depending upon
the availability of personnel and equipment, at established hourly rates.
We are asked whether, under the described circumstances, the district may contract with the
director to construct the private road at a cost of $29,000 in exchange for terminating its obligation to
maintain the bridge on the director's property, currently requiring repair work costing $47,000. Alternatively,
may the district pay the director $29,000 in exchange for terminating its bridge maintenance obligation? We
conclude that under state law the district is prohibited from so contracting due to the director's financial
interest in the proposed transactions.
As the contemplated arrangements concern the making of a contract by a public agency, the
provisions of Government Code section 1090 Footnote No. 1 require our analysis. (See 70 Ops.Cal.Atty.Gen.
42, 47 (1987).) Section 1090 states:
"Members of the Legislature, state, county, district, judicial district, and city officers
or employees shall not be financially interested in any contract made by them in their official
capacity, or by any body or board of which they are members. Nor shall state, county, district,
judicial district, and city officers or employees be purchasers at any sale or vendors at any
purchase made by them in their official capacity.
"As used in this article, ``district' means any agency of the state formed pursuant to
general law or special act, for the local performance of governmental or proprietary functions
within limited boundaries."
The Supreme Court has declared that the purpose of section 1090's prohibition "is to remove or limit the
possibility of any personal influence, either directly or indirectly, which might bear on an official's decision,
as well as to void contracts which are actually obtained through fraud or dishonest conduct. . . ." (Stigall v.
City of Taft (1962) 58 Cal. 2d 565, 569.) The statutory goal is "not only to strike at actual impropriety, but
also to strike at the appearance of impropriety." (City of Imperial Beach v. Bailey (1980) 103 Cal. App. 3d
191, 197.) Section 1090's prohibition applies regardless of whether the contract is found to be fair and
equitable (Thomson v. Call (1985) 38 Cal. 3d 633, 646-649) or whether the official would abstain from all
participation in the decision-making process (Fraser-Yamor Agency, Inc. v. County of Del Norte (1977) 68
Cal. App. 3d 201, 211-212).
However, exceptions to the prohibition have been made for certain "remote interests"
(§ 1091) and "non-interests" (§ 1091.5). (See Citizen Advocates, Inc. v. Board of Supervisors (1983) 146
Cal. App. 3d 171, 178-179; Fraser-Yamor Agency, Inc. v. Del Norte County, supra, 68 Cal.App.3d at
217-218; 67 Ops.Cal.Atty.Gen. 369, 375 (1984).) In addition, a "rule of necessity" has been applied in certain
circumstances to permit the making of a contract that would otherwise be proscribed. (See 73
Ops.Cal.Atty.Gen. 191, 195 (1990); 69 Ops.Cal.Atty.Gen. 102, 107-112 (1986); 65 Ops.Cal.Atty.Gen. 305,
308-311 (1982).)
Here, it is proposed that the irrigation district would enter into a contract with one of its
directors who would have a direct financial interest in the transaction. He would be one of the contracting
parties and would be receiving either services or money from the district in exchange for taking over the
district's obligation to repair and maintain the bridge in question. As stated in Thomson v. Call, supra, 38
Cal.3d at 645: "The proscribed interest certainly includes any direct interest, such as that involved when an
officer enters directly into a contract with the body of which he is a member." We need only determine,
therefore, whether either of the proposed transactions would qualify under one of the exceptions to section
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1090's prohibition.
1. Providing Construction Services
The first question to be resolved is whether the district may furnish private construction
services in exchange for terminating its obligation to maintain the bridge located on the director's property.
We conclude that it may not.
Looking at the exceptions set forth in sections 1091 (remote interests) and 1091.5
(noninterests), we find that section 1091.5, subdivision (a)(3), alone appears to afford any possibility of
finding the proposed exchange transaction to be permissible. Section 1091.5 provides as follows:
"(a) An officer or employee shall not be deemed to be interested in a contract if his or
her interest is any of the following:
". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) That of a recipient of public services generally provided by the public body or board of
which he or she is a member, on the same terms and conditions as if he or she were not a member of the
board.
". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ."
The apparent intent of this provision is to exempt a board member's receipt of public services that are given
under "the same terms and conditions" to the other customers of the public agency.
Here, it may be argued that the "public services" of the district not only include supplying
water, but also furnishing private construction services to its customers on a "first come, first serve" basis at
established hourly rates. Although the construction services are not performed pursuant to a statutory
mandate but only pursuant to a contract, they are offered to all of the district's customers without exception
when personnel and equipment are available. The "same terms and conditions" would be the established
hourly rates set by the district.
However, even assuming subdivision (a)(3) of section 1091.5 is applicable to the district's
hourly rates established for private construction services, the proposal in question involves the termination of
a preexisting obligation to maintain a bridge on the director's property. The maintenance termination element
of the transaction does not meet the "same terms and conditions" requirement of the statute. It would be a
unique exchange applicable only to the director's property. Simply put, the proposed exchange of private
construction services performed in exchange for terminating the district's maintenance obligation is not
available to the other customers of the district at all.
The transaction under consideration is dissimilar to what the Legislature contemplated under
section 1091.5, subdivision (a)(3)--the provision of services in accordance with previously adopted rate
schedules applicable to all customers. Hence, the proposed transaction involving the termination of the
district's bridge maintenance obligation does not escape the prohibition of section 1090 as a "noninterest"
under the terms of section 1091.5.
We also reject the suggestion that the rule of necessity is applicable. In 65
Ops.Cal.Atty.Gen., supra, at 310, we described this doctrine as follows:
"With respect to contractual conflicts of interest the ``rule of necessity' may be said to
have two facets. The first, which is not involved herein, arises to permit a governmental agency
to acquire an essential supply or service despite a conflict of interest. The contracting officer, or
bli b d hi h h ld b th l f l f h ti l l
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a public board upon which he serves, would be the sole source of supply of such essential supply
or service, and also would be the only official or board permitted by law to execute the contract.
Public policy would authorize the contract despite this conflict of interest. (See 59
Ops.Cal.Atty.Gen. 604, 619 n. 18, and opinions cited therein.) The second facet of the doctrine,
exemplified in Caminetti v. Pac. Mutual Ins. Co., [(1943) 22 Cal. 2d 344, 366-367], arises in
nonprocurement situations and permits a public officer to carry out the essential duties of his
office despite a conflict of interest where he is the only one who may legally act. It ensures that
essential governmental functions are performed even where a conflict of interest exists."
The application of this rule has been analyzed in various contexts. (See, e.g., Eldridge v. Sierra View Local
Hospital Dist. (1990) 224 Cal. App. 3d 311, 321; 67 Ops.Cal.Atty.Gen., supra, at 378; 59 Ops.Cal.Atty.Gen.
604, 619 (1976); 57 Ops.Cal.Atty.Gen. 458, 463-465 (1974).)
Here, the proposed trade of bridge maintenance services for road construction services
cannot be described as coming under either facet of the rule of necessity. Even if the district would in fact
save $18,000 by providing the construction services in exchange for terminating its maintenance obligation,
there is no essential supply, service, or governmental function involved. The expected savings from the
transaction do not provide a basis for application of the rule.
Finally, we note that the proposed savings of $18,000, or even more, raises questions of
valuation that the enactment of section 1090 was intended to avoid. Who will provide the estimated cost
savings for the district the next time a director proposes a similar exchange? How will the customers of the
district be assured that a cost estimate is accurate and not based upon any favoritism toward a particular
director? In Thomas v. Call, supra, 38 Cal. 3d 633, these types of questions were addressed by the Supreme
Court with respect to the sale of property to a city by a city council member:
". . . In San Diego v. S. D. & L. A. R. R. Co., supra, 44 Cal. 106, we recognized the
conflict-of-interest statutes' origins in the general principle that ``no man can faithfully serve two
masters whose interests are or may be in conflict': ``The law, therefore, will not permit one who
acts in a fiduciary capacity to deal with himself in his individual capacity. . . . For even if the
honesty of the agency is unquestioned . . . yet the principal has in fact bargained for the exercise
of all the skill, ability and industry of the agent, and he is entitled to demand the exertion of all
this in his own favor.' (44 Cal. at p. 113.) We reiterated this rationale more recently in Stigall v.
City of Taft, supra, 58 Cal. 2d 565: ``The instant statutes [§ 1090 et seq.] are concerned with any
interest, other than perhaps a remote or minimal interest, which would prevent the officials from
exercising absolute loyalty and undivided allegiance to the best interests of the city.' (58 Cal.2d
at p. 569. See, also, City of Imperial Beach v. Bailey (1980) 103 Cal. App. 3d 191, 196; City
Council v. McKinley (1978) 80 Cal. App. 3d 204, 212; People v. Darby (1952) 114 Cal. App. 2d
412, 426; Miller, supra, 28 Cal.App.2d at p. 366; Hobbs, Wall & Co., supra, 109 Cal.App. at p.
319.)
"In Stigall we relied in part on the reasoning of the United States Supreme Court on a
federal penal statute under which a contract was declared to be unenforceable because of a
conflict of interest: ``"The statute is thus directed not only at dishonor, but also at conduct that
tempts dishonor. This broad proscription embodies a recognition of the fact that an impairment
of impartial judgment can occur in even the most well-meaning men when their personal
economic interests are affected by the business they transact on behalf of the Government. To
this extent, therefore, the statute is more concerned with what might have happened in a given
situation than with what actually happened. It attempts to prevent honest government agents
from succumbing to temptation by making it illegal for them to enter into relationships which are
fraught with temptation."' (Stigall, supra, 58 Cal.2d at p. 570, quoting United States v.
Mississippi Valley Generating Co. (1961) 364 U.S. 520 [5 L. Ed. 2d 268, 81 S. Ct. 294].) Implicit
i thi i i th ti th t th f h t t t i `` t l t t ik t t l
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in this reasoning is the assumption that the purpose of such statutes is not only to strike at actual
impropriety, but also to strike at the appearance of impropriety.' (City of Imperial Beach, supra,
103 Cal.App.3d at p. 197 [construing § 1090].)
"It follows from the goals of eliminating temptation, avoiding the appearance of
impropriety, and assuring the city of the officer's undivided and uncompromised allegiance that
the violation of section 1090 cannot turn on the question of whether actual fraud or dishonesty
was involved. Nor is an actual loss to the city or public agency necessary for a section 1090
violation. In Stigall, for example, a city councilman had a financial interest in a plumbing
company which submitted the lowest bids for a municipal contract. Taxpayers sued to have the
contracts declared void. They did not allege ``actual improprieties,' nor did they contend that the
contract was unfair, unjust, or not beneficial to the city. (58 Cal.2d at p. 568.) On these facts, we
nonetheless concluded that the contract violated section 1090, reasoning that the ``object of these
enactments is to remove or limit the possibility of any personal influence, either directly or
indirectly which might bear on an official's decision, as well as to void contracts which are
actually obtained through fraud or dishonest conduct.' (Id. at p. 569. See, also, San Diego v. S. D.
& L. A. R. R. Co., supra, 44 Cal. at p. 13; City of Imperial Beach, supra, 103 Cal.App.3d at p.
197; Fraser-Yamor Agency, Inc., supra, 68 Cal.App.3d at p. 215; Schaeffer v. Berinstein (1956)
140 Cal. App. 2d 278, 290.) And in Shuffleton, supra, we observed that ``it matters not how fair
upon the face of it the contract may be, the law will not suffer [the official] to occupy a position
so equivocal and so fraught with temptation.' (203 Cal. at p. 105.)
"In short, if the interest of a public officer is shown, the contract cannot be sustained
by showing that it is fair, just and equitable as to the public entity. Nor does the fact that the
forbidden contract would be more advantageous to the public entity than others might be have
any bearing upon the question of its validity. (Capron v. Hitchcock (1893) 98 Cal. 427.)" (Id., at
pp. 647-649; fns. omitted.)
Here, regardless of the possible benefit to the district, section 1090 prohibits the proposed transaction
because "the statute is more concerned with what might have happened in a given situation than with what
actually happened." (Id., at p. 648.)
In answer to the first question, therefore, we conclude that a director of an irrigation district
may not contract with the district to obtain private construction services valued at $29,000 in exchange for
terminating a preexisting obligation of the district to repair a bridge located on the director's property, even if
the bridge repair services will cost the district $47,000.
2. Providing A Cash Payment
We are additionally asked whether the district may enter into a contract with the director if,
instead of construction services, the district offers a cash payment of $29,000 in exchange for terminating its
preexisting and ongoing bridge maintenance obligation. We conclude that the district may not so contract.
Although this latter proposal would make for a less complicated transaction and place a
finite limit upon the expenditure of district resources, we do not view this modification as allowing the
noninterest exception of section 1091.5 to become applicable. Similarly, we do not view the receipt of cash,
as opposed to construction services, as having any effect on whether the rule of necessity may be invoked.
There is simply no essential supply or service being acquired by the district.
In short, regardless of the "bargain" given to the district in relieving it of its maintenance
responsibility, the circumstances of the proposed payment would be conducive to the appearance of
impropriety; the transaction cannot be justified on the basis that the district might benefit financially.
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Accordingly, we conclude in answer to the second question that the district may not pay the
director $29,000 in consideration for terminating its preexisting and ongoing bridge maintenance obligation
even though the bridge in question currently requires repair work that will cost the district $47,000.
*****
Footnote No. 1
All section references hereafter are to the Government Code.
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