MEMORANDUM
FROM:
Sid Hemsley, Senior Law Consultant
DATE:
July 23, 2003
RE:
Conflict of Interest
You have the following question: Would the mayor of the City have a conflict of interest
if he were an employee of the organization referred to below?
In the city there is a 501(c)(3) organization established by a group of businessmen to
promote economic development. They are not a part of the Chamber of Commerce, but work
with the Chamber in the area of economic development. The organization has one source of
income: the city. It is funded 100% by the city. The mayor sits on the board of directors of the
organization. The board of directors of the organization has discussed the possibility of the
mayor becoming an employee of the organization.
I assume for the purposes of this answer that the mayor intends to resign as a member of
the board of directors of the organization. If he does not intend to do so, the answer below may
change.
The mayor, as an employee of the organization, probably would not have a conflict of
interest under Tennessee’s Conflicts of Interest Law found at Tennessee Code Annotated, ' 124-101 et seq. Even if he had a conflict of interest, it would rise only to the level of an indirect
conflict of interest, which he could “cure” by simply publically acknowledging that interest when
he votes on issues related to the organization. However, because the organization receives 100%
of its funding from the city, the mayor might have a common law conflict of interest in the
relationship between the city and the organization. For that reason, the wisest course for the
mayor as an employee of the organization would be to abstain from voting on issues that affect
the organization.
Conflict of Interest under Tennessee Code Annotated, ' 12-4-101 et seq.
Direct:
Tennessee’s Conflicts of Interest Law found at Tennessee Code Annotated, ' 12-4-101 et
seq., entirely prohibits direct conflicts of interest and allows indirect conflicts of interest where
they are acknowledged in the manner prescribed by that statute.
Tennessee Code Annotated, ' 12-4-101(a) provides that:
It is unlawful for any officer, committee member, director, or other
person whose duty it is to vote for, let out, overlook, or in any
manner to superintend any work or any contract in which any
municipal corporation....shall or may be interested, to be directly
interested in such contract. [Emphasis is mine.]
The term “directly interested” is defined as “any contract with the official personally or
with any business in which the official is the sole proprietor, a partner, or the person having the
controlling interest.” The term “controlling interest” means “the person with the largest number
of outstanding shares owned by any single individual or corporation.”
There is no doubt that the mayor has the duty to vote for, and oversee, any contract
between the city and the 501(c)(3) organization. However, it is difficult to see how, under
Tennessee Code Annotated, ' 12-4-101, the mayor, as an employee of the 501(3)(c)
organization, can be “directly interested” in any contract between the city and the organization.
As an employee, he would not operate a “business” in which he is the sole proprietor, and he
would own no interest in the organization, let alone the controlling interest.
A provision of the Conflicts of Interest Law, Tennessee Code Annotated, ' 12-4101(a)(2)(A), does bring members of boards of directors of some non-profit organizations under
the umbrella of that Law [Energy Production Facilities established under Tennessee Code
Annotated, ' 7-54-101, and Resource Recovery and Solid Waste Disposal Systems established
under Tennessee Code Annotated, ' 7-58-101 et seq.], but as I understand the facts, the
organization in question is not one of those, and even if it were, as an employee of the
organization, he would not have a direct conflict of interest.
Indirect:
Tennessee Code Annotated, ' 12-4-101(b) also prohibits “indirect interests,” unless such
conflicts are publically acknowledged. That statute does not define “indirect interests,” except to
say that they include “any contracts in which the officer is interested but not directly so, but
includes contracts where the officer is directly interested but is the sole supplier of goods or
services in a municipality or county.”
It is not clear whether “any contract...” includes only the contracts covered by Tennessee
Code Annotated, ' 12-4-101(a). If it does, the mayor would not even have an indirect conflict of
interest in the contract between the city and the organization. If “any contract” includes contracts
not covered by Tennessee Code Annotated, ' 12-4-101(a), at most the mayor, as an employee of
the organization, would have an indirect interest in the contract between the city and the
organization. However, it has been held that the Conflicts of Interest Law is to be liberally
construed to protect the public from corruption and official oppression [State ex rel. Abernathy v.
Robertson, 5 Tenn. Civ. App. 438 (1914)]. For that reason, the mayor probably should at least
act as if he has an indirect conflict of interest, and publically acknowledge that interest when he
votes on issues affecting the organization.
Common Law Conflict of Interest
In addition, because the organization is funded 100% by the city, and the mayor has
voting and oversight responsibilities as to the relationship between the city and the organization,
an argument can be made that the mayor, as an employee of the organization, would have a
common law conflict of interest, which he could not circumvent by publically acknowledging
that interest.
I do not want to dwell on that argument because the law governing common law conflicts
of interest is murky at best, particularly where the public officer alleged to have a conflict of
interest is an employee of a business or organization with whom the government has a
contractual relationship. It is said in Gardner v. Nashville Housing Authority of Metropolitan
Government of Nashville and Davidson County, 514 F.2d 38 (6th Cir. 1975), that:
Conflict of interest is a phrase which may be given many
meanings. Generally, however, when it is used to suggest
disqualification of a public official for performing his sworn duty,
it refers to a clash between the public interest and the private
pecuniary interest of the individual concerned. [At 41]
A mayor who is an employee of a private organization that is funded 100% by city money
obviously has a pecuniary interest in seeing that the organization is funded. But the question of
when a public official, who is also an employee of a business or organization with whom his
government has a financial relationship, is in a position of having a prohibited common law
conflict of interest is not neatly answered by the cases on that subject. But those cases do
indicate that the consequence of the existence of a common law conflict of interest is that the
action of the government on the issue is subject to being declared void by the courts.
It does appear that if the mayor becomes an employee of the organization, he could avoid
common law conflict of interest issues by abstaining from voting on any matters affecting the
organization. As pointed out above