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 

February 6, 1986 

Gary E. Miller. N.D. 

cotmnissioner 

Qpiaion No. m-414 

Texas Department elf Mental Health 

and Mental Rctrrdation 

P. 0. Box 12668 

Austin, Texas 7E711 

Re: Scope of article 988b. 

V.T.C.S., with respect to mamhers of the Board of Trustees 

of a Mental Realth/Mental Retardation Conmuaity Center 

Dear Dr. Miller: 

You ask several questions about article 988b, V.T.C.S., which 

relates to confl:tct of interest by local public officials. The 

statute provides In part: 

sec. 3'. (a) Except as provided by Section 5 

of this Act, a local public official commits an 

offenae if he kmwingly: 

(1) participates in a vote or decision on a 

matter imvolving a business entity in vhich the 

local ptiblic official has a substantial interest 

if it in reasonably foreseeable that an action on 

the matter would confer an ceonomic benefit to the 

business ,entity involved. . . . 

. . . . 

(b) ha offense under this section is a Class A 

misdemeamr. 

You first ask whexher the term "business entity" as used in article 

988b includes a nonprofit corporation. We conclude that the term does 

include a nonprofit corporation. 

Article 988b, :aection l(2), defines "business mtlty" as 

a sole proprietorship, partnership, firm, corpora- 

*, holding company, joint-stock company, receivershtp, trust, or any other entity recognized 

la law. l@phasis added). 

p. 1939 
Dr. 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 compensation for services rendered. See Taxas 

Non-Profit Corporation Act, 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. Compare V.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 second question whether article 988b applies to a 

member of the board of truwees of a conwnity mental health or mental 

retardation ceater who received a salary in excess of ten percent of 

his gross income for the ~~revious year as an employee of a nonprofit 

corporation. We believe that a member of such a board is a "local 

public official" within tht! definition found in article 988b: 

'Local public official' means a member of the 

governing body 01: another officer, whether elected 

or appointed, paid or unpaid, of any district 

(including a sc'hool district), 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 advisor1 la nature. 

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

Conaaunity ceaters have 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 other hand. 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 governing bodies 

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

Attorney General Opiaion Mo.l.266 (1972). Cf. Attorney General Opinions 

JM-38 (1983); B-850 (1976). In our opinion. a community center is a 

local governmental entity within article 98813, V.T.C.S., and its 

trustees are local public officials within that statute. See V.T.C.S. 

art. 5547-203, 053.05. 3.Oti. 

- 

.< 

p. 1940 
Dr. 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 subject to scrutiny under article 988b, 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 policy made in Meyers v. Walker, 276 S.W. 

305, 307 (Tex. Civ. App. - Eastland 1925, 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 spirit and letter of our 

law, aad is against public policy.. 

The court declared the coatract made in violation of this policy to be 

illegal sad void. Id. The comma law doctrine expressed in Meyers v. 

Walker has repeatedFbean :celicd upon to invalidate contracts made by 

public officials with a pwuniary interest therein. 

of Edinburg v. 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 General Opinion d~!tcmiaed that aa employee's interest la his 

company was sufficient tl) create a conflicting interest with his 

duties as a public officer. Attorney General Opinion R-916 (1976). 

Attorney General Opir~ion H-1309 (1978) concluded that a governmental body could not coatract with a private, noaprofit corporation 

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 represent both sides in a 

contract unless the pr~v:ipal coasents. The state's agent may 

therefore aot represent the opposite side in a transaction la the 

absence of legislative conwnt. see generally V.T.C.S. art. 2529c. 

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

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

conflict of interest. For example, section 2(c) imputes to the local 

public official the pecunimy interests of his relatives: 

Au interest of 8. person related in the first or 

second degree by (either affinity or consanguinity 

to the local public official is a 'substantial 

interest.' 

V.T.C.S. art. 988b. 52(c). The comon law doctrine did not extend to 

pecuniary interests of the 'officer's relatives. See Attorney General 

Opinion E-354 (1974) (coun,ty commissioners courtly contract with 

corporation owned by 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 business interest." defined as follows: 

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

interest in a bur&ness if: 

(1) the interest is ownership of 10 percent or 

more of the vothg stock or shares of the business 

entity or owner&p, of.$2,500 or more of the fair 

market value of i:h.e business entity: or 

(2) funds received by the person from the 

business entity 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 

legal ownership Hth a fair market value 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 office has. however, held that a negligible ownership interest in 

a business constitutes a pecuniary interest. See Attorney General 

Opinion H-624 (1975) (comissiouers court may notpurchase supplies 

from a farmer's cooperative in which a commissioner owns a small 

share). But see V.T.C.S. ,P:ct. 988a (legislative overruling of result 

in Attorney General Opiniorl N-624). 

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

remedies: 

I 

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

Sec. 4. If a local public official . . . has a 

substaatial InWrest in a business entity that 

would be peculiarly affected by any official 

action taken by the governing body, the local 

public official, 'before a vote or decision oa the 

matter, shall fib an affidavit stating the nature 

and extent of the interest and shall abstain from 

further particiE<tion in the matter. The affidavit must 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 remedies of 

tort, contract, or equity, including a 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 interest would not 

have passed the governing body without the 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 Electric Construction 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 article 588b urovides that 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 history documents 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 statute directing it to 

study laws on the conduct. of public servants and to report to the 

legislature Its recommendations for ravising them. Acts 1981, 67th 

Leg., ch. 151, 09 at 371. The statute expressly stated that "[tlhe 

legislature shall consider the committee's recommendations." Id. 

59(b). 

- 

p. 1943 
Dr. 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 

recommended solutions bass,d on a form of financial disclosure with 

abstention from participation. Background Report on Local Officers' 

Conflict of Interest Probltmls, published in Final Report of the Public 

Servant Standards of ConduzrAdvisory Committee, at 17 (August 1983). 

Its ret ommendations for legislation were primarily based on the work 

of its Conflict of Interest Subcommittee. The subcommittee sought to 

establish a degree of personal financial interest in a transaction 

above which a conflict occurred. Relying in part on Attorney General 

Opinion M-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 percent or $2,500 would cover most 

potentially conflicting tnterests. See generally V.T.C.S. art. 

6252-Vb, 52(12) (defining ;L state officer's "substantial interest" in 

a business entity). The subcommittee also developed procedures for 

preventing the interested public official from participating in the 

governmental body's actlot,. The Advisory Committee recommended the 

proposed legislation which eventually became article VSSb, V.T.C.S. 

The bill analysis to I,e,nate Bill No. 1044 stated as follows: 

The only current: statutes covering conflicts of 

interest for loct,l officials do not cover all such 

officers and do 'lot provide guidelines for determining when a conflict exists or procedures for 

handling such situations. 

Bill Analysis to S.B. NC. 1044, prepared for Rouse Committee on 

Judicial Affairs, filed ir Bill File to S.B. No. 1044, 68th Leg., 

Legislative Reference Library. Testimony at a public hearing on the 

bill reflects the understanding that it would supplant the common law 

for officers it covered. One witness stated that current law 

prohibited a governmental body from contracting with a business 

controlled by a member oi: the governmental body, but article 988b 

would allow such a contract to 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 purpose of 

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 

abstains from 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 official disclo:res his interests and recuses himself. See 

also V.T.C.S. art. 6252-Vb, 86 (concerning certain officials of state 

boards and commissions with private interests in official matters). 

I 

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

Our conclusion that ,the legislature intended article 988b to 

change the common law is mt inconsistent with the judicial approach 

to conflict of interest questions. The judicial decisions rest in 

part on statutes vhich codlCied the comon law doctrine. For example, 

forstar article 988, V.T.C.S., prohibited city officers from being 

interested in 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 statutes as expressing the public policy of the 

state, and implemented it by holding that contracts made in violation 

of it were void. City OE Edinburg v. 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 Authority v. 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 lottery winninas is contrarv to 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 declare the contract invalid). 

With one exception, the judicial decisions have not considered 

legislation which diverged from the common law. In Wooldridge v. 

Folsom, 564 S.W.2d 471 (Tex. Civ. App. - Dallas 1978, no writ), 

residents of Dallas sued thle mayor to nullify certain contracts on the 

ground of conflict of intc:rest. The court held that the now-repealed 

article 988 did not apply tie home rule cities such 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 public official has less than a 

substantial interest are 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 legally enter into it if the statutory 

procedures are followed. Ihe contract or transaction will not in that 

case be void on account 'of that official's conflict of interest. 

Finally, the contract is voidable under the conditions set out in 

article vaab. The statutory procedures for disclosure and recusal 

replace the absolute common law prohibitions against transactions in 

which a member of the governmental body is pecuniarily interested. In 

answer to your third question , article 988b has changed the'coaunon law 

upon which numerous judic:lal decisions and attorney general opinions 

were based. 

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

Your third question also inquires whether the principles of 

conflict of interest and dual agency would prevent public officials 

from contracting on behalf of the political subdivision with a private 

entity which 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 

conflicts of interest. Cf. V.T.C.S. art. 988b. 12(a)(l) (ownership 

interest cannot exceed 73,500); 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 authorized under 

article vaab. Thus, this policy does not prohibit a local board from 

contracting with a nonprofit corporation that 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 eust be consistent with the requirements of 

other civil and criminal c,tatutes. See, e.g., Penal Code art. 39.01 

(official misconduct). 

Our answer to your thfed question makes~it unnecessary to answer 

your fourth question. 

You finally ask whether the Texas Department of Mental Health and 

Mental Retardation has auth'ority under article 5547-204, V.T.C.S., to 

enact a rule which renders a community center ineligible for a grantin-aid if one or more mambe,rs of its board of trustees also serve on 

the board of a nonprofit organization with which the center conducts 

financial transactions. 

The Sixty-ninth Legislature enacted 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. Section 4.03, which :formerly concerned eligibility for grants, 

has been amended, and now concerns eligibility of community centers 

and other providers for community based services contracts. The 

changes in your statute heve mooted your last question. If you wish 

to reframe and resubmit your question in the context of the amended 

provisions, we will address it at that time. 

SUMMARY 

A trustee of 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. 1946 
Dr. Gary E. Miller - Page !I (JM-424) 

modifies the common law conceruing the pecuniary 

interest of a lcscal public official in contracts 

entered into by the governmental body they serve. 

A governmental body 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 articlr VSSb, V.T.C.S. The contract is 

voidable under th's conditions set out in article 

vaab, V.T.C.S. 

J I M MATTOX 

Attorney General of Texas 

JACK HIGHTOWER 

First Assistant Attorney Goneral 

MARY KELLER 

Executive Assistant Attornq General 

ROBERT GRAY 

Special Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Susan L. Garrison 

Assistant Attorney General 

p. 1947