May 19, 2005
Re: Possible conflicts of interests and purchase of property
Dear Mayor:
You asked for an opinion on whether a conflict of interests would be involved in a
situation in which an alderman worked for about six (6) months for a developer who owns the
building where the city hall is located. This alderman’s son is now the CFO for the developer,
who is planning to build a new building and lease it to the city for a city hall. This alderman is
also an insurance agent, and another alderman is claiming this alderman has a conflict of interests
relative to fire safety and building issues because these would affect his business. The alderman
with the alleged conflict of interests on these other issues also has his office in the same building
and suite as the developer.
There are two (2) general law conflict of interests provisions that are pertinent: Tennessee
Code Annotated, '' 6-54-107 and 12-4-101. These statutes are substantially similar in the
pertinent provisions, so can be discussed together. Both these statutes absolutely prohibit direct
conflicts of interests, but allow indirect conflicts if these are publicly announced. For any conflict
of interest as described by these sections, there must be the prospect of some financial gain on the
part of an alderman or other official in doing business directly or indirectly with the Town.
These statutes define a direct conflict as any contract between the Town and an official
who has the authority to vote for, let out, or superintend the contract, or any such contract with a
business in which the official is the sole proprietor, a partner, or the person holding the greatest
number of outstanding shares of any individual. These statutes prohibit these contractual
arrangements, and the penalty sections impose severe penalties for violations, including joint and
severable liability, forfeiture of all pay, ouster, and a prohibition on holding a similar position for
ten (10) years. None of the situations mentioned above appears to be a direct conflict of interests
because there is no prohibited contract.
The statutes ingeniously define an indirect conflict of interests as any conflict that is not
direct. The penalties for an unlawful indirect conflict, however, are the same as for a direct
conflict. An example of an indirect conflict of interests would be the city contracting with a
company that an alderman had some stock in, but not the greatest number of shares held by an
individual. In the case of an indirect conflict such as this, all the alderman has to do is publicly
announce the conflict before the vote. The statutes do not prohibit the alderman from voting
when he/she has an indirect conflict, but the Attorney General in several opinions recommends
that the alderman abstain.
Since a direct conflict requires a contract between the Town and an alderman or a
business the alderman has an interest in as mentioned above, an indirect conflict must also
involve a contract between the Town and a business an alderman is associated with that could
involve pecuniary gain by the alderman. The first situation listed above in which the alderman
was employed by a developer who had a lease with the Town for the building in which the city
hall is located could be an indirect conflict. The contract would be the lease between the Town
and the alderman’s employer. As I understand the facts, however, the alderman worked for the
owner of the city hall building only about six (6) months. It is likely, therefore, that the lease was
made before the alderman worked for the developer. The alderman, if charged with a conflict,
could argue that the conflict of interests statutes operate prospectively and not retroactively. See
City of Kingsport v. Lay, 459 S.W.2d 786 (Tenn. 1970). In other words, there is, it could be
argued, no conflict if the alderman did not vote on the lease at all because he was not on the
board at the time or did not vote on it while employed by the building owner. If there were a
renewal of the lease during the time the alderman worked for the building owner, however, the
alderman should have publicly acknowledged the conflict before the vote. Failure to do so could
be considered an unlawful indirect conflict.
The alderman’s son being the CFO for the developer who owns the present city hall
building and who is building a new building that will be leased to the city for a city hall would
not be a direct conflict and in most circumstances would not be an indirect conflict. Only if the
alderman and his son commingle their personal funds would this constitute an indirect conflict of
interests. See Op. Tenn. Atty. Gen. 00-064 (April 3, 2000). If the alderman benefits pecuniarily
by having access to funds earned by his son and partially derived from the lease or other contract
with the Town, the alderman should publicly acknowledge this interest before any vote on any
such contract, lease, or lease renewal.
The alderman being an insurance agent and having to deal with building and safety issues
is not a prohibited conflict of interests B either direct or indirect B because there is no contract
with the Town involved. Neither is the situation in which the alderman has his office in the same
suite as the developer.
You also ask whether the Town can buy real property from an employee for an amount
above the appraised value. In my opinion the Town can pay a reasonable amount above appraised
value as long as the Town can make a good case the property is worth to the Town the amount
paid by the Town. The appraised value of real property is supposed to be the amount that a
willing seller and a willing buyer would agree to as the purchase price of the land. As you know,
some sellers are more or less willing to sell than others. The same goes for buyers. It could be
that the appraised value is too low. The value of any property is so subjective and affected by so
many different factors that there is no hard and fast rule at arriving at value when a purchase is
actually made. The appraised value is a guideline, but the law affords it no magic as a standard. I
think you could successfully argue that the value set by the governing body is its value to the
Town as long as this is not excessive.
The wrinkle you might have to deal with since you are dealing with an employee is the
appearance of favoritism if the purchase price greatly exceeds the appraised value. This could
cause bad publicity for the Town. This is more of a political problem than a legal one, however,
and you have more expertise at that than I do.
I hope this is helpful. If you have further questions, please contact us.
Sincerely,
Dennis Huffer
Legal Consultant