Original Author: Hemsley, Sid
Date of Material: 02/06/2009
Conflict of interests
Reviewed Date: 06/21/2021
MTAS was asked about the application of Tennessee's Conflicts of Interest Law and the doctrine of Common Law Conflicts to an Alderman's contract with the City.
FROM: Sid Hemsley, Senior Law Consultant
DATE: February 6, 2009
RE: Contract between city and alderman
The City presents the following facts: There is a monthly bluegrass show held in the City. An alderman is currently organizing the show, which is held at the Community Center. The alderman currently pays the city a fee to rent the building. He now asks that the fee be waived to rent the building and whatever profits are made are to be turned over to the city. Is such an arrangement legal?
That question actually produces two questions:
1. Is the current arrangement under which the alderman rents the city' s building in which his show is performed legal?
2. Is the arrangement in which the alderman will receive a waiver of rent and turn the profits from the show over to the city legal?
The answer to both questions is no.
Analysis of Question 1
The answer to the first question is governed by the state' s Conflict of Interest Law found at Tennessee Code Annotated, '12-4-101 et seq. Under that law, the alderman in question probably has a direct conflict of interest, which is entirely prohibited. I have outlined that law as it relates to direct interests below.
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:
- vote for,
- let out,
- overlook, or
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.
A direct interest is a contract between the city 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.
2. Indirect Interests.
There are two important kinds of indirect interests:
- A contract in which the municipal official is interested, but not directly so.
A contract in which the municipal official is directly interested, but where he or she is the sole supplier of the goods or services in question in the municipality.
Generally, municipal officials covered by the Conflicts of Interest Law cannot have a direct interest; that is, they cannot provide goods and services to the municipality. That is true even if they provide the goods and services at considerably less cost than the municipality could have gotten them elsewhere. It also appears to be true even if the municipal official in question is obtaining goods and services from the municipality.
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. Another exception for certain municipal employees who are municipal officials is covered below.
Most questions about direct interests involve situations where the public official in question has a contract to provide to the city goods or services of some kind. But if the facts cited at the beginning of this opinion are correct, the alderman in question functions in a capacity identical or similar to a promoter, and in that capacity has a contract with the city to rent its community center to put on his show. Still, under Tennessee's Conflicts of Interest Law, the alderman has the duty to vote for, let out, overlook, and superintend the contract in question. That relationship gives him a direct interest in the contract.
It is easy to misread the Conflicts of Interest Law, and conclude that direct interest can be handled by acknowledging them. But that is not the case. The Tennessee Attorney General in OAG 04-016, has opined (correctly, in my opinion) that indirect interests cannot be circumvented by the acknowledgment of the direct interest.
Analysis of Question 2
Whether the alderman in question pays, or does not pay, rent for the building in which he holds his show, he still has a contract with the city, and in his capacity as an alderman, he still has the duty to vote for, overlook let out, and supervise the contract. Moreover, even if he makes no profit on the show because he gives the profits to the city, he still has a financial interest in the outcome of the contract.Cases interpreting the Conflicts of Interest Law declare that the motives of a person who violates the Conflicts of Interest Law are generally irrelevant. Even public officers whose intention in contracting with their own government was to give it materials or services as better or superior to the materials and services offered by other businesses have been found guilty of violating that Law. [See Madison County v. Alexander, 94 S.W. 694 (1906); Crass v. Walls, 259 S.W.2d 670 (1953); Town of Smyrna v. Ridley, 730 S.W.2d 318 (Tenn. 1987).] Those cases ought to make the members of any municipal governing body ultra cautious about entering into "no profit contracts"with their cities.
It can also be argued that if the alderman in question receives what amounts to a sweetheart deal with the city in the form of free rent of its building, for which it receives the profits, the city no longer has an arms length relationship with the alderman's enterprise. The lack of an arms length relationship between the city and the alderman's enterprise may create a common law conflict on the part of the alderman, and perhaps the other aldermen.
Analysis of Questions 1 and 2 as Common Law Conflicts of Interest
Even if it were possible to argue, particularly with respect to Question 2, that the statutory Common Law Conflicts of Interest Law found at Tennessee Code Annotated, '12-4- 101 et seq., does not apply to the alderman in question, Tennessee also recognizes common law conflicts 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.
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. 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."
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 doctrine is alive in Tennessee.
At the time Ramsey was handed down, Tennessee's Conflicts of Interest Law entirely prohibited both direct and indirect conflicts of interestBvery strict law. Indeed, it was so strict, the law 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 it still appears that under Ramsey, the common law conflict of interest doctrine includes indirect interests, even in matters in which the public official in question simply has the ability to influence the outcome to his financial advantage, or to the advantage of a person or group in which he has an interest in his or its financial success. It appears doubtful that the alderman in question could successfully argue that he does not have the requisite financial interest his contract with the city because the profits of his enterprise go to the city. Even where the profits go to the city, balance sheets are subject to considerable maneuver room. In addition, the alderman is at least indirectly interested in the financial success of his performing group, and that interest compromises his duty to the city. It may be that judgment of the alderman of the city in dealing with the alderman's group or groups could be compromised because the city receives the profits from their performances.
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 interests 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 above OAG opinions indicate, the common law conflict of interest 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.
Ramsey involved a low-ranking employee; it does not tell us how the common law conflict of interest doctrine applies to, say, members of a planning commissions or members of other public bodies who have a financial interest in the matters in which they have a voice and a vote. But there are a significant number of common law conflict of interest cases where it is alleged that the public official in question voted or otherwise took some other action, on a matter in which he had a financial interest, but where that interest did not involve a municipal contract. A number of such cases involve votes on zoning issues. [See Griswold v. City of Homer, 925 P.2d 1015 (Alaska 1996) (zoning); Raynes v. City of Leavenworth, 821 P.2d 1024 (Wash. 1992) (zoning); Helmke v. Board of Adjustment, City of Ruthven, 418 N.W.2d 346 (Iowa 1988) (zoning); Care of Tenafly, Inc. v. Tenafly Zoning Board of Appeal, 704 A.2d 1032 (N.J. 1998) (zoning); Hanig v. City of Winner, 692 N.W.2d (S.D. 2005); Friends Retirement Concepts v. Board of Education of the Borough of Somerville, 811 A.2d 962 (N.J. 2002).]