Untitled Texas Attorney General Opinion ( 1986 )

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