# The Attorney General of Texas

tune 10, 1982 MARK WHITE Attorney General

Supreme Court Building P. 0. BOX 12548 Austin. TX. 78711- 2548 51214752501 Telex 9101874.1367 Telecopier 512/475-0266

1607 Main St.. Suile 1400 Dallas. TX. 75201-4703 2141742-8944

4824 Alberta Ave.. Suite 160 E, Paso. TX. 799052793 91515333464

1220 Dallas Ave., Suite 202 HOUS,O~, TX. 770026986 7131650-0666

606 Broadway. Suite 312 Lubbock. TX. 794013479 8061747-5236

4309 N. Tenth. Suite B McAllen. TX. 78501-1665 5124682.4547

200 Main Plaza. Suite 400 San Antonio,. TX. 762052797 512/225.4191

An Equal OpportunityI Affirmative Action Employer HonorableReynaldo S. Cantu.Jr. Criminal,DlstrictAttorney Cameron County Hall of Justice 974 E. Harrison Street Brownsville,Texas 78520 OpinionNo.kB+477

Re: Whether a city official may participate in Federal Urban Development Action Grant in private capacity as merchant

Dear Hr. Cantu:

You have asked the attorney general whether a conflict of interest arises as a result of the following situation. The city of San Benito has applied for an Urban Development Action Grant [hereinafter DDAG] pursuant to 42 U.S.C. sections 5318-5320 and 24 C.F.R. sections 570.450 - 570.464. The federalmoney would be used to subsidize intereston loansbetweenbanks and .participatlng businesses and to pay for street improvement in full. The mayor and two city commissionersownbusinesses eligible to participate in the grant.

The Secretary of the Department of Housing and Urban Development has the authority to waive any conflict of interest which is not a violation of state or local law or charterprovision. However,before he will issue a written waiver, the Secretary has requested that the city obtain an Attorney General Opinion as to whether a conflict exists thatviolates state or local laws. Thus we address onlyTexas requirementsrelating to conflicts of interest.

You have informed us that San Benito is a "home rule" city and have sent a copy of article 3, section 4 of the city charter,which states:

No officer, agent or employee of the City of San

Benito or appointee of the City Commission or a,ppointeeof any officer of said City. shall be pecuniarily interested,directly or indirectly In any contract letby the City Commissionor for and in behalf of said City. Nor shall any officer, agent or employee of said City be pecuniarily interested directly or indirectly in any public work or Improvement let, supervised or commenced

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by said City or which shall be paid for wholly ot inpart by said City....

You have also stated that a committee consisting of members of the Board of City Development (abranch of the San Benito Chamber of Commerce)was appointedby thepresidentof the Chamberof Commerce to
oversee the distributionof the interest subsidy. 'Theportlon of the grant used for city improvementwill be overseen by the city. San Benito isnot required to provideanymatching funds.

You have also informedus thatan engineerwas hired to study the. c&y and to independently determine which area of the city would qualify ,for and benefit from a grant, following the standards set forth in 42 U.S.C. sections 5318(b)(l) and (2). The final determination of the area to be improvedwas made by the Secretary.' All businesses in the designated area'were eligible for interest subsidies from the Department of Housing and Urban Development [hereinafter HUD] by request, and upon meeting requirements as "participatingbusinesses."

There are two contracts which must be ekamined for conflicts:
one between the city and HUD; the other, representative of several, between the city and participatingbusinesses.

The city [Recipient] warranted, in its contract with the Secretary, that no member, officer, or employee would have any interest,direct or indirect, in any contract.
Section 5.01(8) of the contract states:

NO member, officer, or employee of the Recipient, or its designees, or agents; no consultant,no member of the governingbody of the Recipient or the locality in which the program is situated, and no other public official of the Recipient or such locality or localities, who exercises or has exercised any functions or resnonsibilities with resnect to the Proiect duringhis or her tenure, shallhave any inter&t, direct or indirect,. in any contract or subcontract, or the proceeds thereof, for work to be performed in connectionwith the Project or in any activity, or benefit therefrom,which is part of this Project.
(However. upon written request of the Recipient, the Secretary may agree in writing to waive a conflict otherwise prohibited by this provision whenever there has been full public

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disclosure of the conflict of interest, and the Secretary determines that undue hardship will result either to the Recipient or the person affected by applying the prohibitionand that the granting of a waiver is in the public interest. No such request for a waiver shall be made by Recipient which would, in any way. permit a violation of State or local law or any charter provision of theRecipient.) (Emphasisadded).

This contract 

### wa,ssigned in November 1980. The mayor. upon city cowmission approval, signed on behalf of the city. At the time the contract was signed, the mayor and one cowmissioner owned participatingbusinesses. A second commissioner elected to become a participating business at a later date. A conflict of interest existedat thispoint under Texas common law and article 3, section 4 of the San Benito CityCharter.

The common law rule, followed in Texasand codifiedas article 3. section 4 of the-San Benito City Charter, is thatmunicipal officers and agents cannot be pecuniarily "interested in" contracts of any characterwith themunicipality. Such an interestvoids the contract. See, e.g., Delta Electric Construction Company, Inc. v. City of San Antonio, 437 S.W.2d 602 (Tex.~Civ.App. - SanAntonio 1969,writ ref'd n.r.e.); City of Edinburg v. Ellis, 59 S.W.2d 99 (Tex. Coma'n App. 1933); 10 E. McQuillin, The Law of Municipal Corporations 029.97 (3rd ed. 1978); 63 C.J.S. Municipal Corporations $0988 et seq.; 40 Tex. Jur. 2d Municipal Corporations 1430;Attorney General OpinionsMW-342 (1981); MW-155, MW-124 (1980); H-1309 (1978); H-916 (1976); H-695, H-624 (1975);H-354 (1974);M-34!,(1969).

The rule was discussed in Meyers v. Walker, 276 S.W. 305. 307 (Tex.Civ.App. - Eastland 1925,nowrit):

If a public official directly or indirectlyhas a pecuniary interest in a contract, no matter how honest he may be. and although he may not be influenced by the interest, such a contract so made is violative of the spiritand letter of our law, and is againstpublicpolicy.

See also Penal Code 039.01. The benefit to be received by each official is the payment of interest on each official's loan; it is thus direct,personal, and pecuniary.
Although city officials attempted to deal with this conflict by appointing a committee to oversee the interest subsidy payments, the contract is between the city and HDD. Section 4.01 of the contract states:

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By its execution of this Grant Agreement, the Recipient representsand warrants that it has the legal.capacity to assume the responsibilitiesfor compliance with all applicable Federal rules and agrees and undertakes to assume and carry out all such responsibilities in accordance with all the requirements which are or may be established pursuant thereto.

In addition. the contractcommits the city to keep andmaintainbooks, recordsand otherdocuments for grant funds,and to keep them open for inspectionby the Secretary. Sec. 6.01(a), (b). Even though the city tried to delegate the responsibility for distribution and accounting to another group, the city has contractually obligated itself to be responsible. AttorneyGeneralOpinionsH-1212 (1978);M-887 (1971).

Pursuant to section 10.01 of the contract and 24 C.F.R. section 570.458(c)(7). the city agreed that it would present evidence of legally binding commitmentsbetween the participating businesses and itself. A legallybinding commitmentis a legallyenforceablewritten obligationby a participatingparty to complete~a specified activity approvedas part of the action grant. Sec. 570.451(k). The agreement is between the city and the participatingparty. Sec. 570.458(c)(7). Each official had a pecuniary interest in agreements signed by the mayor .(on behalf of the city) and individual officials as participetingbusinesses.

The legally binding 'commitmentitself contains a conflict of interestsection inwhich thepartitiipating businessmustwarrant:

that it is not a member, officer, or employee of the Recipient, or its designees. or agents, a consultant,member of Recinient's noverninn body.
or the governingbody of the localiiy inwhich the Program is situated,and that it has not and will not exercise any functions or responsibilities with respect to the project during his or her tenure, shall have no interest, direct or indirect, in any contract or subcontract, or in the proceeds thereof, forwork to be performed in connectionwith theProject or in any activity,or benefit therefrom,which is part of this Project.

In the event Participating Business, is in conflict with any of the provisions contained in theparagraphabove,he or shehas orwill, before accepting any funds resulting from the Grant, obtain a waiver from the Secretaryas to any such conflict. (Emphasisadded).

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This section would be violated in at least four of the contracts between the city and the participatingbusinesses. In addition, this officehas stated that dual agency createsa conflict similar to that of officials with pecuniary interests. Attorney General Opinion H-1309 (1978) states:

Closely related to the policy against public contracts in which one of the contracting officials has a pecuniary interest is the policy ageinst~dual agency. An agent may not represent the opposing party in a transaction without the full knowledge and consent of his principle. (Citations omitted). Although this rule has developed in the context of private transactions,
we believe it is relevant to the conduct of persons acting as agents of the state. Like the policy against conflict of interest in public contracts, it guards against competing interests of a public officialwhich would 'preventhim from exercising absolute loyalty and undivided allegiance to the best interest' of the governmental entity he serves.... In view of the courts' concern about the disinterestedness of public officialsas expressed in cases likeMeyers
v. Walker, supra. we believe they would be reluctant to find the state's consent to its agent's representation of the opposite party in a transaction.

We believe that the issue of dual agency creates a conflict of interest in the second set of contracts, at least so far as the interestedofficialsare concerned.

Ithas been pointed out that exceptions to thevoid contract rule have been created in .otherjurisdictions. InBlankenship V. City of Richmond, 49 S.E.2d 321 (Va. 1948). a court decided that therewas no conflictof interestwhere the officersvoted on a legislativematter rather than a judicial one. In Downs v. Mayor and Common Council of the City of South Amboy, 185A. 15 (N.J. 1936). a.court decided that
an ordinancewhich forbids 'aninterest in municipal~improvementsmade at municipal expense does not extend to improvementspaid by another. Finally, in Preston v. Gillam. 184 A.2d 462 (N.H. .1962),the court found no conflict of interest where the interest is remote from or identicalwith thepublic interest. However, the courts of Texas have, recognizedonly one exception to thevoid contract rule: the interest of.a city official charged with making or ratifying assessment for improvements arising from ownership of property does not create a disqualification. Seymour v. Securit (Tex. Civ. App. y Trust Cimpany. 55 S.W.2d 853

- Galveston 1932, writ dism'd); Farley v. Uvalde

p. 1683**.** HonorableReynaldoS. Cantu.Jr. - Page 6 **(Mu-4771**

Paving Company, 74 S.W.2d 288 (Tex. Civ. App. - El Paso 1934. no writ). The contracts presented **here** do not fall into the above exception.

SUMMARY

Pursuant to article 3, section 4 of the San Benito City Charter,a conflictof interestexists when city officials contract for an Urban Development Action Grant and are among the merchants who would benefit from the grant by receivingan interestsubsidy.

MARK WHITE Attorney General of Texas

JOHNW. FAINTER.JR. FirstAssistantAttorney General

RICHAND E. GRAY III ExecutiveAssistantAttorney General
Preparedby PatriciaHinojosa AssistantAttorney %eneral

APPROVED: OPINION COMMITTEE

SusanL. Garrison, Chairman Jon Bible RoxanneCaperton Rick Gilpin PatriciaHinojosa JimMoellinger

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