MEMORANDUM
FROM:
Sid Hemsley, Senior Law Consultant
DATE:
March 7, 2008
RE:
Courthouse Square Revitalization Grant Program: Potential Conflict of Interest
Your city manager has the following question:
Would it be construed as a conflict of interest if a council member
owning property in the courthouse Square District was the recipient
of a grant from the program [Courthouse Square Revitalization
Project]? The council member would be required to compete in an
application process which would be judged and awarded by the
East Tennessee Development District. The council member would
not be involved in that process; however, he did vote with the full
council to establish the program guidelines and process.
The city manager provided to you the application for the Courthouse Square
Revitalization Act Commercial Building Rehabilitation Program, (which I will refer to as the
CBRP) which not only includes the application itself, but considerable information on how that
program works.
The CBRP is a product of the Courthouse Square Revitalization Pilot Project Act of
2005, codified at Tennessee Code Annotated, ' 6-59-101 et seq. Under Tennessee Code
Annotated, ' 6-59-102, a “Courthouse Square revitalization zone” or “revitalization zone,” is
defined as:
an area in a municipality officially designated by ordinance or
resolution of such municipality as the courthouse Square
revitalization zone, in which the county’s courthouse is located,
that is approved and certified by the department of finance and
administration as meeting the requirements of this chapter.
Tennessee Code Annotated, ' 6-59-103(a) also says that “The governing body of a
municipality may designate the boundaries of a courthouses Square revitalization zone by
adoption of an ordinance or resolution.”
Tennessee Code Annotated, ' 6-59-104(d) formerly provided that three cities, one from
each grand division, would be selected by the commissioner of finance and administration, in
consultation with the commissioner of revenue and the comptroller of the treasury will select one
project from each grand division of the state. An amendment to that statute in 2006 increased the
number of projects to six, two in each grand division. Under Tennessee Code Annotated, '' 659-103(b) and 6-59-104, the municipalities in whose boundaries the three CBRP’s projects were
selected will receive reimbursement for the cost of those projects through a rebate of state and
local sales taxes.
Unfortunately, my opinion is that the city council member in question would probably
have a statutory conflict of interest under Tennessee Code Annotated, ' 12-4-101 et seq. But if
for some reason he does not fall within the scope of that statute, my opinion is that he would
have a common law conflict of interest. I will analyze both kinds of conflicts of interest, but let
me first point to the proposition that no matter how much filtering of the grant applications is
done by the East Tennessee Development District and the historic zoning commission, the
contracting parties under the CBRP are the City and the grant applicants; the City oversees and
supervises the contract, and the CBRP is funded through city appropriations, pending eventual
reimbursement of the city’s expenditures by the rebate of the state sales tax. Indeed, under
PROGRAM SUMMARY in the outline of the CBRP program, it is said that, “The City has
earmarked $500,000 toward the first round of funding for the Commercial Building
Rehabilitation Program.” It is from that city fund that the successful grant recipients will be
reimbursed.
I have carefully reviewed the Courthouse Square Revitalization Project Act and see no
hint of any legislative intent that it supercedes Tennessee’s Conflict of Interest Law found at
Tennessee Code Annotated, ' 12-4-104 or the common law conflicts of interest doctrine.
Tennessee Code Annotated, ' 6-59-104 does provide that:
Each revitalization zone shall be of such size and form as to
include all properties that, in the judgment of the municipality and
the department of finance and administration, constitute an integral
part of the courthouse square. If the department determines that the
boundaries of the proposed courthouse Square revitalization zone
exceed the area that is reasonably deemed to be integral to the
courthouse Square, the department may adjust or reduce the
boundaries of the proposed area....
But it does not appear to me that even that general language reflects any intent on the part
of the General Assembly that members of municipal governing bodies be relieved from the
application of either kind of conflict of interest.
Conflicts of interests in Tennessee are governed principally by two statutes, and a
common law doctrine:
1. Tennessee’s Conflicts of Interest Law, codified at Tennessee Code Annotated, ' 12-4101 et seq.
2. Tennessee also appears to recognize common law conflicts of interest.
3. Tennessee’s new Ethics Law codified at Tennessee Code Annotated, ' 8-17-101 et
seq.
I will analyze the question of whether the city council member in your City has either a
conflict of interest under Tennessee Code Annotated, ' 12-4-101 et seq., or a common law
conflict of interest. It is not necessary to consider whether he would fall under the city’s ethics
policy because if he comes within either that statute or doctrine, that statute or doctrine takes
precedence over the ethics policy.
Tennessee Code Annotated, ' 12-4-101 et seq.
The Tennessee Conflicts of Interest Law is found in Tennessee Code Annotated, '12-4101. It covers many public officials and employees, including municipal officials and
employees. Always confusing, the answer to the question of whether a conflict of interest exists
in a particular case is highly fact dependent. Contracts, including employment contracts, in
which family members of municipal officials are financial beneficiaries, are particularly
troublesome. In addition, the Conflicts of Interest Law does not do a good job of addressing the
problem of public officials and employees who have oversight and supervisory responsibilities
over municipal contracts, but have no duty to vote on them.
Key to conflict of interest
The key to the Tennessee Conflicts of Interest Law is personal financial interest. If
the municipal official in question has no personal financial interest in the municipal contract or
work that raised the question of a conflict of interest, there is no violation of the Conflicts of
Interest Law.
Who and what interests does it cover?
Who Does It Cover?
Officers, committeemen, directors, or other persons who have certain duties with respect
to municipal contracts and work in which a covered official or person has either a direct or an
indirect interest. Those duties include any one or more of the following duties:
o
vote for,
o
let out,
o Overlook, or
o
in any manner to superintend any such contract or work.
Alderpersons and many mayors have a duty to vote for, let out, overlook, and in most
cases, superintend, a wide variety of municipal contracts and work. A recorder might have the
general duty to overlook and superintend a broad range of municipal contracts and work. A
street superintendent might have a specific duty to overlook and superintend municipal street
work. Lower ranking city employees might not have any of those duties.
What Does It Cover?
1. Direct Interests.
2. Indirect Interests.
In light of my conclusion below that the city councilperson in question will have a direct
conflict of interest if he enters into a contract with the city, I will not address the question of
whether he would have an indirect conflict of interest.
A direct interest is a contract between the city and the official himself, or a business of
which the official is the sole proprietor or has controlling interest. Controlling interest means
ownership of the largest number of outstanding shares owned by any single individual or
corporation. [Tennessee Code Annotated, ' 12-4-101(a)(1)]
Generally, municipal officials covered by the Conflicts of Interest Law cannot have a
direct interests; they are entirely prohibited by Tennessee Code Annotated, ' 12-4-101(a)(1).
Exception: Where the municipal official is the sole supplier of the goods and services in
question in the municipality. In that case the direct interest is converted to an indirect interest.
Most of the action under Tennessee Code Annotated, ' 12-4-101 et seq., where direct
interest are at issue have involved municipal or county officials who have contracted with the
local government to provide it some kind of goods and services. [For the most recent cases see
Town of Smyrna v. Ridley, 730 S.W.2d 318 (Tenn. 1987); State ex rel. Kirkpatrick v. Tipton,
670 S.W.2d 224 (Tenn. Ct. App. 1984)] However, it is seems clear under Tennessee Code
Annotated, ' 12-4-101(a), that a contract between the city and a city council person where the
city council person is being paid under the contract to repair a building he owns is a direct
interest, and that it does not matter that there is technically no sale of goods and services by the
city councilman to the city. There is no question but that the contract is between the city council
person and the city, and that the city councilperson is a financial beneficiary of the contract. It is
said in State ex rel. Abernathy v. Robertson, 5 Tenn.Civ. App. 438 (1914), that the Conflicts of
Interest Law is to be liberally construed to effect its purpose. It is difficult to see that contract as
anything but a direct interest that the Conflicts of Interest Law was designed to prevent.
The contract in question itself points to its being a prohibited direct interest. That it is
between the city and the councilperson is clear from the first provision:
THIS AGREEMENT, entered into this _____ day of ______________, 2008,
between the City of ________, Tennessee, a municipal corporation (hereinafter
referred to as the “City”) and the following designated OWNER/LESSEE (here
referred to as Owner/Lessee), to wit.....
Additional sections of the contract provide as follows:
Section 4, entitled DOCUMENT REQUIREMENTS, provides that:
Upon completion of the property improvement and upon its final inspection and
approval by the City’s Building Inspector, the OWNER /LESSEES shall submit to
the East Tennessee District copies of all paid bills, cancelled checks, contractor
lien waivers and/or receipts showing the full cost of and full payment for all
work....The East Tennessee Development District will issue a reimbursement
approval to the City of _________ for payment.....
Section 5, entitled FAILURE TO COMPLETE WORK, provides that:
If the OWNER/LESSEE or his/her contractor fail to complete the improvement
work provided for herein in conformity with the plan, specification and all terms
of this Agreement, the Agreement shall terminate and the financial obligation on
the part of the City shall cease and become null and void.
Section 9, entitled INDEMNIFICATION provides that:
The OWNERS/ LESSEES of the subject property agree to defend and hold
harmless the City, its elected officials officers, agents, Commission and
employees, and East Tennessee Development District and staff from and against
all loss, damage, claims, suits, and proceedings, costs and expenses....assigns
from, caused or occasioned by, or related to the Owner/Lessee’s obligations,
performance and actions not taken or pursuant to this Agreement.
Section 11, entitled OWNER/LESSEES REMEDIES provides that:
Upon a breach of this Agreement, the Owner/Lessees....may secure recission, a
declamatory judgment or the specific performance of the covenants and
agreements herein contained....Before any performance failure of the City shall be
deemed to be a breach of this Agreement, the OWNER/LESSEES shall notify the
City, in writing in the manner provided in Section 12 of this Agreement, of the
alleged failure and shall demand performance.
There are numerous provisions both in the contract itself and in the supporting
information about the CBRP that indicate that the councilperson is somewhat insulated from
decision-making with respect to any grant that he might receive under that project. The East
Tennessee Development District is basically the administrator of the project; it screens and
approve the grants that will be funded, and the owner-lessee of the property submits all his or her
bills to that agency for approval. The historical zoning commission approves the design of the
project. In theory, the City is merely the conduit through which the grant to property owners
approved for grants is funneled.
Here let me emphasize that what I say reflects no suggestion that the councilperson in
question would exercise dishonesty or bad faith dealing in the acquisition or the administration of
the grant if he were to get one. But under both Tennessee Code Annotated, ' 12-4-101 et seq.,
and the common law conflicts of interest doctrine, good faith does not help a person who
illegally contracts with the government. Those laws are as much concerned about appearances as
reality. In that context, besides the general ability the councilperson would have to influence
members of the East Tennessee Development District in both the award and its subsequent
administration, the grant administration process itself contains at least three rubbing points: the
councilperson has the opportunity to use his influence with the historical planning commission to
approve his design; he has the opportunity to use his influence with both the building inspector
and East Tennessee Development officials whose job it is to inspect the work on his project; and
he has the opportunity to collude with the contractor he picks to do the work on his project to
produce fraudulent bills.
Because the contract would be between the city and the councilperson, the councilperson
would be in a position to use his influence with the city to stop the termination of the contract
and the city’s financial obligations, under Section 5 of that contract. He is in a similar position
with respect to indemnification of the city (and other persons) under Section 9, and breaches of
the agreement that he alleges against the city under Section 11.
The penalty for violating Tennessee Code Annotated, ' 12-4-101 et seq., is that:
Should any person, acting as such officer, committee member, director, or other
person referred to in '12-4-101, be or become directly or unlawfully indirectly
interested in any such contract, such person shall forfeit all pay and compensation
therefor. Such officer shall be dismissed from such office the officer then
occupies, and be ineligible for the same or a similar position for ten (10) years.
[Tennessee Code Annotated, ' 12-4-102]
Common Law Conflict of Interest
Common law conflicts of interest generally arise in two contexts: public officials and
employees holding incompatible offices, and public officials having a financial conflict of
interest. This opinion will obviously deal only with the common law conflicts of interest in the
context of public officials having a financial conflict of interest.
As far as I can determine, there is only one Tennessee case that involves the application
of the common law conflicts of interest doctrine where the financial interest of a public official
or employee is involved, although at first glance, it appears to involve a conflict of interest under
what is now Tennessee Code Annotated, ' 12-4-101 et seq. In Ramsey v. Gibson County, 7
Tenn.Civ. App. (7 Higgins) 53 (1916), a cook in a county workhouse supplied food for the
workhouse from a store he owned. The Court denied him payment for the food, declaring:
That it is not material to determine whether Ramsey [the cook] was such an
official as cannot deal with the county under Shannon’s Code, Section 1133 [what
is now Tennessee Code Annotated, ' 12-4-101.] We think that under no
circumstances can the Courts recognize the right of a man occupying the position
of Ramsey to recover upon his contracts. Sound public policy forbids this...The
rule forbids the giving of any validity to such contracts because of the vast
opportunities open for fraud and because such contracts are in flat contradiction of
the soundest ethical and judicial principles. See Madison County v. Alexander,
116 Tenn., 689, and cases there cited....The law forbids the assumption by anyone
of a position where his interest and his duty will conflict. [At 54-55]
At that time, Shannon’s Code, ' 1133, much the same as it does now, provided that: “It
shall not be lawful for any officer, committeeman, director, or other person whose duty it is to
vote for, let out, overlook, or in any manner superintend, any work or any contract in which any
public municipal corporation...shall or may be interested, to be directly or indirectly interested in
such contract.” Note that at that time, the statute entirely prohibited “both direct and indirect
interests.”
The Ramsey Court sounded unsure that Shannon’s Code, ' 1133, covered the workhouse
cook. He certainly had no duty to vote for the contract, and arguably as a cook he had no duty to
overlook or to in any manner superintend the contract. He was on the bottom of the employment
totem pole, so to speak. But even if that was true, the contract was a violation of public policy.
That case appears to indicate that the common law conflict of interest is alive in Tennessee.
At the time of Ramsey, Tennessee’s Conflicts of Interest Law entirely prohibited both
direct and indirect conflicts of interest. It was so strict that it was subsequently changed to allow
indirect conflicts of interest as long as they were disclosed. The purpose for changing the law
was to allow directors and employees of banks and other private entities to serve as public
officials and employees. In such cases the business itself may have a financial relationship with
the government, but the directors or employees of the business may have only an indirect interest
in that relationship. But as the Conflicts of Interest Law stands today, direct interests are
entirely prohibited. In addition, it still appears that under Ramsey, even where a local
government official or employee does not have a conflict under Tennessee Code Annotated, '
12-4-101 et seq., that person could have common law conflict of interest in a matter in which he
had the ability to influence the outcome to his financial advantage, especially if he were a public
officer who had a right to vote on such matters, and/or if he had oversight responsibilities with
respect to the contract.
There seems to me no doubt that the councilperson in question would have a common
law conflict of interest even if, for some reason, Tennessee Code Annotated, ' 12-4-101 et seq.,
were found not to apply to the contract at issue. As said in Ramsey, “The law forbids the
assumption by anyone of a position where his interest and his duty will conflict.” I have pointed
out above in the analysis of your question under Tennessee Code Annotated, ' 12-4-101 et seq.,
why the contract would violate that statute. The same analysis applies to the analysis of the
question under the common law conflict of interest doctrine.
A number of Tennessee Attorney General’s Opinions also opine that the common law
conflict of interest applies in Tennessee, even as to financial conflicts of interest on the part of
public officials, even though those opinions point to no Tennessee cases for support. It is said in
TAG 94-073 that:
There exists a strong public policy which opposed an official placing himself in a
position in which personal interest may conflict with public duty...A public office
is a trust conferred by the public. The duties of that office must be exercised with
fairness and impartiality. The good faith of the officer is not a consideration, for
the policy exists to prevent an officer from being influenced by anything other
than the public good. (Op. Tenn. Att. Gen. 83-278 (August 15, 1983). See also
Op. Tenn. Att. Gen. 90-73 (July 27, 1990); Op. Tenn. Atty. Gen.85-036 (February
14, 1985). Thus, if gifts received by a county official put him or her in a position
in which personal interest may conflict with public duty there would be common
law conflict of interest. If the gift is so trivial that it would not have the potential
for affecting the official’s impartiality in fulfilling his or her duties, there may be
no conflict of interest.
It is also said in TAG U93-48, that
Whenever a legislator or other public official has placed himself in a position
where, for some advantage gained or to be gained for himself, he finds it difficult
if not impossible to devote himself with complete energy, loyalty and singleness
of purpose to the general public interest. The advantage that he seeks is
something over and above the salary, the experience, the chance to serve the
people, and the public esteem that he gains from public office. Op. Tenn. Atty.
Gen. 85-036 (February 14, 1985), quoting 1958 Minnesota Governor’s Committee
on Ethics and Government Report 17, quoted in Note: Conflict of Interest: State
Government Employees, 47 Va. L. Rev. 1034 (1961) (footnote 1).
As the TAG opinions above indicate, that doctrine might be triggered even when the
public official or employee acted in good faith on a matter in which he had a financial interest;
some common law conflict cases from other jurisdictions declare that it is the appearance of
absence of impartiality that triggers the doctrine.