I

JIM MATTOX Attorney General

Supreme Court Building P. 0. Box 12548 ~ustln.TX. 79711.2549 512,475.2501 Telex 910/674.1367 Telecopier 51Z475-0266

714 Jackson, Suite 700 Da11mTX. 752024508 214i742-9944

4824 Alberta Ave.. Suite 160 El Paso. TX. 79xX-2793 91515353484

1001 Texas, Suite 700 Houston. TX. 77002.3111 7132235855

606 Broadway, Suite 312 Lubbock, TX. 7WW3479 SOSi747-5238

4309 N. Tenth. Suite S McAllen, TX. 75501-1685 5121882-4547

200 Main Plaza, Suite 400 San Antonio, TX. 782052797 512/2254191

An Equal OpPWtWitYl Attlrmative Action EmPloYOr 

## The Attorney 

# General of Texas

February6, 1986

Gary E. Miller.

N.D. cotmnissioner Qpiaion No. m-414

Texas Department

elf MentalHealth and Mental Rctrrdation P. 0. Box 12668 Austin,

Texas 7E711 Re: Scope of article 988b. V.T.C.S.,

with respectto mamhers of the Board of Trustees of a Mental Realth/MentalRetardation

Conmuaity Center

Dear Dr. Miller:

You ask several questionsabout article 988b, V.T.C.S.,which relates to confl:tct of interest by local public officials. The statute

providesIn part:

sec. 3'. (a) Except as providedby Section 5 of this Act, a local public official commits an offenaeif he kmwingly:
(1) participates

in a vote or decision on a matter imvolvinga business entity in vhich the local ptiblic

officialhas a substantial interest if it in reasonably foreseeable

that an action on the matterwould conferan ceonomic benefit to the business ,entity

involved.

. . .

. . . . (b) ha offense

under this sectionis a ClassA misdemeamr.

You first ask whexher the term "businessentity" as used in article 988b includes

a nonprofit

corporation.

We conclude

that the term does include

a nonprofit

corporation.

Article988b, :aection l(2),defines "business mtlty" as

a sole proprietorship, partnership,

firm, corpora- *, holding company, joint-stockcompany, receivershtp,

trust, or any other entity recognized la law. l@phasis added).

p. 1939Dr. Gary E. Miller - Page :! (~~-424) I

A nonprofit corporation is a corporate antity which does not distribute its income to :its members, directors,or officers. It does, hovever, pay compensationfor services rendered. See Taxas Non-Profit CorporationAct, V.T.C.S. art. 1396-1.01 et r + The legislature

enacted a brord definition of "business

entity vhich is not limited to corporat1cm.s incorporated

under the Texas Business Corporation

Act aad does not exclude those incorporated under the Texas Non-Profit

Corporation

Act. CompareV.T.C.S. art. 988b. §1(2) with V.T.C.S. art. 6252-!Ib, 02(11) (defining "business entity" to mude “any other entity

. . . through which business for profit is conducted").

You ask as your secondquestion whetherarticle988b appliesto a member of the board of truwees of a conwnity mentalhealth or mental retardation

ceaterwho receiveda salary in excess of ten percent of his gross income for the ~~revious year as an employeeof a nonprofit corporation. We believe that a member of such a board is a "local publicofficial"

within tht!

definition

found in article988b:

'Local public official' means a member of the governing

body 01:

anotherofficer,

whetherelected
or appointed,paid or unpaid, of any district (including a sc'hooldistrict), county, city, preciact, centr,n:L appraisal district, transit authority

or dis!xict.

or other local governmental entity who exerc::aes

respoasibiliti~s

beyond those that are advisor1la nature.

V.T.C.S.art. 988b. 51(l).
Conaaunity

ceatershave characteristics of both an agency of the state aad of a local governmental body. V.T.C.S.art. 5547-203; 8ee, a, Attorney General Qlinions JM-12 (1983); H-850 (1976); R-450 (1974); M-1266 (1972);

M-3:.6 (1968). They are supervised and assisted by the Department of Mexal Health and Mental Retardation. See V.T.C.S.arts. 5547-203, §!i3.05,

3.11; 5547-204,

164.01.4.03. -

On the otherhand. camluaity centers

are established

and operated by counties. cities, hosllital districts, school districts, or any combination of those. They are governed by boards of trustees composed of the governing body of a single city, county, hospital district, or school distril:t or designated

by the governingbodies which organized the center. See V.T.C.S. art. 5547-203, 53.02; Attorney

GeneralOpiaion Mo.l.266 (1972). Cf. Attorney GeneralOpinions JM-38 (1983);

B-850 (1976). In our opinion.a communitycenter is a local governmentalentity within article 98813, V.T.C.S., and its trustees

are localpublicofficials within that statute. See V.T.C.S. art. 5547-203, 053.05. 3.Oti. - .<

p. 1940Dr. Gary E. Miller - Page 3 (m-424)

A trustee

who receivw a salary in excess of tea percent of his gross income from the previous year from a nonprofit corporation

would have a substantial interest in that corporation. See V.T.C.S. art. 988b, 02(a)(2). Thus, transactions betveea the aonpzfit corporation which employs the trustee and the community center he serves as trustee

are subjectto scrutiny under article988b,V.T.C.S.

You aext ask whether a.rticle 988b,V.T.C.S.,

overrules

or merely supplements

earlier

Attoracy

General

Opiaioas

oa conflict

of interest, in particular Attorney General Opinions M-340 (1969) and H-1309 (1978).

Attorney General Opinion M-340 (1969) determined that the governing board of a commmity mental health, mental retardation center could not contract with a corporation in which a board member
was interested

as a direc':or

and stockholder. The oalnioa relied oa the declaratioa

of public policymade in Meyers v. Walker, 276 S.W. 305, 307 (Tex.Civ. App. - Eastland1925,no writ):

If a public offj,cial directly

or indirectly

has a pecuniary iatermt in a coatract, no matter how honest he may b#c, sad although he may not be influenced

by the interest, such a coatract so made ~1s

violative

of the spiritand letterof our law, aad is against publicpolicy..

The court declared the coatract

made in violation

of this policy to be illegalsad void. Id. The comma law doctrine expressed

in Meyersv. Walkerhas repeatedFbean :celicd upon to invalidate contracts

made by public officials

with a pwuniary interesttherein. of Edinburgv. Ellis, See, e.g., City 59 S.W.2d 99 (Tax. Comm. App. 1933. holding approved);

Delta Electric '$astructioa Co. v. City of San Antonio,437 S.W.2d 602 (Tex. Civ. API'. - San Antonio 1969, writ ref'd a.r.e.); Bexar Couaty v. Wentvortl!,, 378 S.W.Zd 126 (Tex. Civ. App. - San Antonio 1964, writ ref'd n.r.e.); Attorney General Opinions JM-171 (1984);MU-179 (1980): E.-l.309 (1978): H-916 (1976): M-340 (1969): w-1362 (1962); O-2924 (1942). See -also Wooldridgs- v. Folsd, 5hi S.W.2d 471 (Tex. Civ, Apl~. - Dallas 1978, no writ). A subsequent Attorney

GeneralOpinion

d~!tcmiaed

that aa employee's

interest

la his company was sufficienttl) create a conflictinginterest with his dutiesas a publicofficer. Attorney General

Opinion

R-916 (1976).

Attorney General Opir~ion H-1309 (1978) concludedthat a governmental body could not coatract with a private,noaprofitcorporation which a member of the :Jovernmeatal body served in a management positioa. Such transactims were barred by the cocoa law policy against dual agency: an ;ngeat may not representboth sides in a contract unless the pr~v:ipal coasents. The state's agent may thereforeaot represent the opposite side in a transactionla the absenceof legislative conwnt. see generally V.T.C.S.

art. 2529c.

p. 1941Dr. Gary E. Miller - Page 1. (JM-424)

In our opinion, artic:le 988b changes the common law rules on conflict

of interest. For example,section2(c) imputesto the local public official

the pecunimy interests of his relatives:

Au interestof 8.

person related in the first or second degreeby (either affinity

or consanguinity to the local public official is a 'substantial interest.'

V.T.C.S.art. 988b. 52(c). The comon law doctrinedid not extend to pecuniaryinterests of the 'officer's

relatives. See Attorney General Opinion E-354 (1974) (coun,ty commissioners courtly contractwith corporation

ownedby a comd.ssioner's brother).

Article 988b also dif!iers from the coumon law in that it applies only to transactions in which a local public official has a "substantial

businessinterest." definedas follows:

Sec. 2. (a) A person has a substantial interest

in a bur&nessif:

(1) the interest

is ownership

of 10 percentor more of the vothg stock or sharesof the business entity or owner&p, of.$2,500 or more of the fair marketvalue of i:h.e businessentity:or
(2) funds received by the person from the businessentity r:xceed 10 percent of the person's gross income for the previous year.
(b) A person has a substantial interest in real property if the interest is an equitable or legalownership

Hth a fairmarketvalue of $2,500

or more.
(c) An interazst

of a person related in the first or second degree by either affinity or consanguinity

to the local public official is a 'substantial

Intorest.'
This officehas. however, held that a negligible ownership

interestin
a business constitutes a pecuniary interest. See Attorney General Opinion H-624 (1975) (comissiouers court may notpurchase supplies from a farmer's cooperativein which a commissioner owns a small share). But see V.T.C.S. ,P:ct. 988a (legislative

overruling

of result in Attorney

GeneralOpiniorl

N-624).

Article 988b differs;from the cowon law with respect to remedies: I

p. 1942Dr. Gary E. Miller - Page !i (JM-424)

Sec. 4. If a localpublic official

. . . has a substaatialInWrest in a business entity that would be peculiarly affected by any official action taken by the governingbody, the local public official,'before a vote or decision oa the matter, shall fib an affidavit stating

the nature and extent of the interestand shall abstain from further particiE<tion in the matter. The affidavitmust be fiE,dth the official recordkeeper of the governmeutnl entity.

. . . .
Sec. 6. The ,?enalties and remedies

provided

by this article do not limit common law remediesof tort, contract,or equity, includinga suit for damages.injuncti~>n. or mandamus. The finding by
a court of a violation under this article does not render an actioli

of the governing

body voidable unless the mea&e that was the subject of an action involving;

conflict of interestwould not have passed the governing body withoutthe vote of the person who -r:Lolated this artfcle. (Emphasis added).

V.T.C.S.art. 988b. 664, 6.

Under the common lab,, an officer cannot cure his conflict of interest

by recusing

himself. See Delta ElectricConstruction Co. v. City of San Antonio, up=. Moreover, the common law doctrine declares public contracts in which uublic officers are oecuniarilv interested

to be void, whjle article588b urovidesthat th& are onl; voidable and only ih ljmited circumstances. See Delta*Elect& Coustruction

co. v. City of San Antonio,supra; city of Edinburg v. Ellis, supra, Meyers v. Walker, su ra; JH-171 (1984);MU-179 (IWO); MW-34 -- -+~79p;~ ‘~;;6 7;;;;;. ';E; opinion, article 988b was ,Lntended to repeal and replace the common law doctrine. Legislative historydocuments

this intent.

Article 988b was e~xlcted by Senate Bill No. 1044 of the Sixty-eighth

Legislature.Acts 1983, 68th Leg., ch. 640 at 4079. Its enactment

was recommended

by the Public Servant Standards of Conduct Advisory Committee, a bod:r

established

by a statutedirectingit to study laws on the conduct. of public servantsand to report to the legislature

Its recommendations for ravising them. Acts 1981, 67th Leg., ch. 151, 09 at 371. The statute expresslystated that "[tlhe legislature shall consider the committee's recommendations." Id. 59(b). -

p. 1943Dr. Gary E. Miller - Page f' (JM-424)

The Advisory Comitl:e:e studied conflicts of interest which centered around voting, purchasing and contracts, and eventually recommendedsolutions bass,d on a form of financialdisclosure with abstentionfrom participation. Background Report on Local Officers' Conflict

of Interest

Probltmls,

published

in Final Report of the Public ServantStandards

of ConduzrAdvisoryCommittee, at 17 (August1983). Its ret ommendations

for legislation

were primarily

based on the work of its Conflict

of InterestSubcommittee.The subcommittee sought to establisha degree of personal financial interest in a transaction abovewhich a conflict occurred. Relying in part on AttorneyGeneral OpinionM-1236 (1972), whi.ch held that a 10 percent stock ownership constituted

a substantial

jnterest.

the subcommittee

determined

that a threshold

financial

intere!$t

of 10 percentor $2,500would covermost potentially conflicting tnterests. See generally V.T.C.S. art. 6252-Vb,52(12) (defining ;Lstate officer's"substantial interest"

in
a business entity). The subcommittee also developed

proceduresfor preventingthe interested public official from participating in the governmental

body's actlot,. The Advisory Committeerecommended the proposedlegislation which eventually

became article

VSSb,V.T.C.S.

The bill analysis

to I,e,nate

Bill No. 1044 statedas follows:

The only current:

statutes covering conflicts of interest

for loct,l

officials

do not cover all such officersand do 'lot provide guidelines for determining when a conflict exists or proceduresfor handlingsuch situations.

Bill Analysis to S.B. NC. 1044, prepared for Rouse Committee on JudicialAffairs, filed ir Bill File to S.B. No. 1044, 68th Leg., Legislative

Reference

Library. Testimonyat a public hearing on the bill reflectsthe understanding that it would supplantthe common law for officers it covered. One witness stated that current law prohibited a governmental body from contractingwith a business controlled

by a member oi: the governmental body, but article 988b would allow such a contractto be made. Public Bearing on S.B. No. 1044 before the Senate Committee on Intergovernmental Relations,

68th Leg. (April 7, 1983) (testimony of Dick Brovn, Executive Director of Texas Municipal

League). 'lhe

witness also stated that the purposeof the bill was to inform rho public that a member of the governmental body has a business interest in the proposed contract. Id. Re explained that if the interested officer signs an affidax and abstainsfrom voting, the governmental body can conduct

business

with that company. Id. Unlike the common law, which deals with conflict of interest by~ohib1tir.g contracts altogether,article 988b was anacted to allow the goveeumantal body to make the contract if the interested

officialdisclo:res his interests

and recuses

himself. See also V.T.C.S.art. 6252-Vb,86 (concerning certainofficials

of state boards and commissions with privateinterests in official

matters). I

p. 1944Dr. Gary E. Miller - Page 7 (m-424)

Our conclusionthat ,thelegislatureintended article 988b to change the common law is mt inconsistent with the judicialapproach to conflict of interest questions. The judicial decisionsrest in part on statutes

vhich codlCied

the comon law doctrine. For example, forstar article 988, V.T.C.S., prohibited city officers from being interestedin transactions financed from public funds. Acts 1981, 67th Leg., ch. 527, 02, alt: 2230. An earlier criminal law penalized city or county officers w'io were pecuniarily

interested

in contracts made by their political subdivisions. Acts 1874, 14th Leg., ch. XXXIX, at 47 (former Penal ICode

art. 373 (1925) (repealed 1973)). The courts viewed these statutesas expressing the public policy of the state,and implemented it by holding that contracts made in violation of it were void. City OE Edinburgv. Ellis, w; Delta Electric Construction

Co. v. City of San Antonio, supra; Bexar County v. Wentworth,supra; Meyers ;. Walker, supra. See also Lower Colorado River Authorityv. City ~2:San Marcos, 523 S.W.2d 641 (Tex. 1975) (violation

of open meetiu$;s

law subjects action taken to judicial invalidation);

Cruthfield

1. Rambo, 86 S.W. 950 (Tex.Civ. App. 1905, writ ref'd) (contract to divide lotterywinninas is contrarvto law and public policy and une:lforceable); Annot., 5% A.L.R.2d 481 (1957) (discusses

validity

of contracts

made in violation

of criminal

statute which does not specifically declarethe contractinvalid).

With one exception,the judicial decisions have not considered legislation

which diverged from the common law. In Wooldridgev. Folsom, 564 S.W.2d 471 (Tex. Civ. App. - Dallas 1978, no writ), residents

of Dallas sued thle

mayor to nullifycertaincontracts on the ground of conflict of intc:rest.

The courtheld that the now-repealed article988 did not apply tie home rule citiessuch as Dallas,and that the contracts

were not void. Under the city charter, contracts in which officers

or employees

were financially

interested

were "voidable by the city manager or tlw city council." 564 S.W.2d at 472. The court determined

that a home rule city could adopt its own method of dealing

with conflicts

of interest.

The legislature

intend~ed

to change the common law when it enacted article

vaab. TranSaCtiOns in which a publicofficial has less than a substantial

interestare no longer for that reason contrary to the public policy of Texas. Where the transaction involves the "substantial

interest"of a "local public official" within article 988b. the governmental body may legallyenter into it if the statutory procedures

are followed. Ihe contract or transaction

will not in that
case be void on account 'of that official'sconflict of interest. Finally, the contract is voidable under the conditionsset out in article vaab. The statutory procedures for disclosureand recusal replace the absolutecommon law prohibitions against transactions in which a member of the governmental body is pecuniarily interested. In
answer to your third question , article988b has changedthe'coaunon law upon which numerous judic:lal decisionsand attorneygeneralopinions
were based.

p. 1945Dr. Gary E. Miller - Page ii (m-424)

Your third question also inquires whether the principles of conflictof interestand dual agency would prevent public officials from contracting

on behalf of the political subdivision

with a private entitywhich provides them a salary or other benefit of less than 10 percent of their gross iucome for the previous year. As we have noted, the 10 percent luterest is the threshhold amount for identifying a conflict of interest under section 2(a)(2). The legislature

has determined

that lesser amounts simply do not create conflictsof interest. Cf. V.T.C.S. art. 988b. 12(a)(l) (ownership interest cannot exceed73,500); Attorney General Opinion JR-291 (1984).

The policy against du,al agency, discussed in Attorney General Opinion H-1309 (1978) serras a similar function as the conflict of interest doctrine. We do not believe the legislature intended the policy of dual agency to prohibit the contracts authorizedunder article

## vaab. Thus, this policydoes not prohibita localboard from contracting

with a nonprofit corporationthat employs one of its members in a management position,

whether or not his salary constitutes a "substantial interest" under the statute. We caution, however,that his conduct eustbe consistent with the requirements of other civil and criminalc,tatutes. See, e.g., Penal Code art. 39.01 (official

misconduct).

Our answer to your thfed question makes~itunnecessary to answer your fourthquestion.

You finally

ask whetherthe Texas Department of Mental Health and Mental Retardation has auth'ority

under article5547-204, V.T.C.S.,to enact a rule which rendersa community center ineligible

for a grantin-aid if one or more mambe,rs of its board of trusteesalso serve on the board of a nonprofitorganization with which the center conducts financial

transactions.

The Sixty-ninth

Legislatureenacted Senate Bill No. 633 which replaced

the grant-in-aid

node of financing

for community

centers

with
a method based on contract,8 for connaunity

based services

between the department

and community

providers. Acts 1985, 69th Leg., ch. 496 at 4155. Section4.03,which :formerly concerned

eligibility

for grants, has been amended,and now concerns eligibility of communitycenters and other providers for community based services contracts. The changes in your statuteheve mooted your last question. If you wish to reframe and resubmit your question in the context of the amended provisions,

we will addressit at that time.

SUMMARY

A trusteeof a Mental Health/Mental Retardation Community

Center :Ls

a local public officer within article 9aab, V.T.C.S. Article vaab, v.T.c.s.,

p. 1946Dr. Gary E. Miller - Page !I (JM-424)

modifies the common law conceruing the pecuniary interestof a lcscal public official in contracts entered into by the governmental body they serve. A governmentalbody may now contract with a private entity in which a member of the governmental body is pecuniarily interested If he follows the dis~zlosure and recusal procedure stated in articlrVSSb, V.T.C.S. The contractis voidableunder th's conditions

set out in article vaab,V.T.C.S.

J I M MATTOX Attorney

Generalof Texas

JACK HIGHTOWER FirstAssistant Attorney Goneral

MARY KELLER Executive

Assistant

Attornq General

ROBERTGRAY Special

Assistant

Attorney

General

RICK GILPIN Chairman,

OpinionCommittee
Prepared

by Susan L. Garrison Assistant

Attorney

General

p. 1947