September 19, 1977
Mr. Thomas C. Todd, State Superintendent
Division of Elementary and Secondary Education
State Capitol
Pierre, South Dakota 57501
Official Opinion No. 77-80
“Interest” of local government official in public contract
Dear Mr. Todd:
You have requested an opinion from this office based on the following facts:
FACTS:
Mr. “X” is an ordained minister of the United Methodist Churches. At the 1977 South Dakota Annual Conference of the Methodist Churches, the area Bishop assigned Mr. “X” to be executive Director of Camps and Conferences for the Methodist Churches in South Dakota.
Mr. “X's” job description reads as follows:
A. The executive Director of Camps and Conferences shall be a full-time salaried employee directly responsible to the Conference Committee on Camps and Conferences.
B. Specific responsibilities:
1. Annually develop a proposed unified budget, both operating and capital to be submitted to the Conference Committee on Camps and Conferences for their consideration.
2. Select and provide sufficient and appropriate training opportunities for the Resident Director/Managers and/or Resident Hosts within the plans for staffing and services and the budgets approved by the Conference Committee on Camps and Conferences.
3. Direct the Resident Director/Managers and/or Resident Hosts so that the objectives and goals of the Conference program of camps and conferences developed by the Conference Committee on Camps and Conferences will be met.
4. Submit annually, or upon request, to the conference Committee on Camps and Conferences a report of accomplishments, expenditures, problems and needs relative to the operation and development of all sites and facilities.
5. Have fiscal responsibility for all sites.
a. Provide for central accounting both operational and capital.
6. After consultation with the Resident Director/Managers and/or Resident Hosts, shall act as purchasing agent for all sites.
7. Maintain current master inventories of equipment and supplies at all sites and provide for optimum use of all available equipment and supplies.
8. Cooperate with appropriate Conference boards and agencies and with the Conference Committee on Camps and Conferences in providing sufficient and appropriate training opportunities for those with leadership responsibilities in the Conference program of camps and conferences.
One of the camps included in the Methodist camp known as Storm Mountain located near Rockerville, South Dakota. For the past three years the Rapid City school district has entered into an agreement with the Methodist Churches whereby this facility is used for sixth-grade students of the school district for an outdoor environmental class. Actual costs for the use of these facilities and staff are paid by the Rapid City School District to the Storm Mountain Camp. In June, 1977, Mr. “X” was elected to the Rapid City School District Board and started performing his function as a board member in July, 1977.
The specific question you have asked is:
QUESTION:
Does Mr. “X's” position as Executive Director of Camps and Conferences for the Methodist Churches in South Dakota create any problem for the Rapid City School District to continue their arrangement with the Storm Mountain Camp for their outdoor environmental classes?
The “conflict of interest” question which you impliedly raise is addressed in several provisions of the law. SDCL 6-1-1 provides:
It shall be unlawful for any officer of a county, municipality, township or school district, who has been elected or appointed, to be interested, either by himself or agent, in any contract entered into by said county, municipality, township or school district, either for labor or services to be rendered, or for the purchase of commodities, materials, supplies, or equipment of any kind, the expense, price or consideration of which is paid from public funds or from any assessment levied by said county, municipality, township or school district, or in the purchase of any real or personal property belonging to the county, municipality, township or school district or which shall be sold for taxes or assessments or by virtue of legal process at the suit of such county, municipality, township or school district. Such contract shall be null and void from the beginning. (Emphasis added.)
SDCL 3-16-7 further imposes the following criminal sanction:
Every public officer, being authorized to sell or lease any property, or make any contract in his official capacity, who voluntarily becomes interested individually in such sale, lease or contract, directly or indirectly, is guilty of a misdemeanor. (Emphasis added.)
Prior to 1975, a similar prohibition and criminal penalty specifically directed to school board members was found in SDCL 13-20-2. However, the 1975 Legislature repealed this statute as being repetitious of the above-cited general statutes.
Also of relevance is SDCL 6-1-2 which provides certain exceptions to the “conflict of interest” rule:
6-1-2. The provisions of § 6-1-1 shall not be applicable when the contract is made pursuant to any one of the conditions set forth in the following subdivisions hereof, without fraud or deceit; but, such contract shall nevertheless be voidable if the provisions of the applicable subdivision were not fully satisfied or present at the time such contract was entered into:
(1) Any contract involving one hundred dollars or less regardless of whether other sources of supply or services are available within the county, municipality, township or school district, provided that the consideration therefor is reasonable and just;
(2) Any contract involving more than one hundred dollars but less than the amount for which competitive bidding is required, and there is no other source of supply or services available within the county, municipality, township or school district provided that the consideration therefor is reasonable and just and further provided that the accumulated total of such contracts paid during any given fiscal year shall not exceed five thousand dollars;
(3) Any contract with any firm, association, corporation, or co-operative association for which competitive bidding is not required and where other sources of supply and services are available within the county, municipality, township or school district, and the consideration therefor is reasonable and just, unless the majority of the governing body are members or stockholders who collectively have controlling interest, or any one of them is an officer or manager of any such firm, association, corporation, or co-operative association then any such contract shall be null and void;
(4) Any contract with any firm, association, corporation, or co- operative association for which competitive bidding is required by law, and where more than one such competitive bid is submitted.
Within the framework of the above statutes, the factual situation in each case must be fully analyzed to determine if the public officer in question has a direct or indirect interest in a contract. Since the ultimate determination is factual, the court and not this office is the proper forum for that determination.
That proposition is well stated in the North Dakota Supreme Court decision of State v. Robinson, 2 N.W.2d 183:
An interest “directly or indirectly” in a contract may include an interest the fruition of which is postponed or implicit as well as one which is immediate and in stated terms. This seems to be the intent fairly expressed in the statute.
All of this, I think, presents an issue of fact which must be tried and cannot be determined adequately upon the affidavits presented.
From a careful study of the foregoing authority we have reached the conclusion that the mere fact that B. E. Robinson was, at all times in question, a stockholder and secretary of the Washburn Motor Company, does not make him interested individually, directly or indirectly in the contracts of that corporation within the meaning of section 9829. The interest contemplated by that section cannot be determined as a legal proposition upon the relationship to the corporation of stockholder and secretary. Question No. 1 involves a question of fact that must be determined by a jury under proper instructions.
However, since you have raised a question which is not unique to local governmental units in South Dakota, I feel obligated to elaborate on the status of the law regarding conflicts of interest.
The rationale for the rule or statute, as is the case in South Dakota, that an interest, direct or indirect, creates a conflict is explained as follows:
The personal interest of an officer in a contract made by him in his official capacity may be indirect only, still such interest would be sufficient to taint the contract with illegality. If his interest in the contract is such as would tend in any degree to influence him in making the contract then the instrument is void because contrary to public policy, the policy of the law being that a public officer in the discharge of his duties as such should be absolutely free from any influence other than that which may directly grow out of the obligations that he owes to the public at large. Antieau's LOCAL GOVERNMENT LAW, Volume 1A, § 10.22 citing Stockton Plumbing and Supply Co. v. Wheeler, 229 P. 1020 (Cal. 1924).
For a school trustee to have an “interest” in a contract, he is not required to share directly in the profits to be realized. He has an interest the moment he places himself in a situation where his personal interest will conflict with the faithful performance of his duties as trustee. People v. Darby, 250 P.2d 743 (Cal. 1952).
Based then, on the public policy that public officials, in their decision making process, must be free from outside influences, courts have analyzed, sorted, and distinguished specific factual situations in an attempt to identify conflicts of interest.
There is virtually no dispute with the proposition that a public officer is prohibited from being involved in a contract or purchase from which he derives a direct financial benefit. McQuillin, MUNICIPAL LAW, Vol. 10 § 29.98; Antieau's LOCAL GOVERNMENT LAW, 1A, § 10.22. My predecessors have consistently so interpreted the hereinbefore-cited South Dakota statutes. 1965-66 AGR 125, 1955-56 AGR 186. Quite recently, I have affirmed that position as it concerns legislators and state contracts in an official interpretation of article III, § 12 of the South Dakota Constitution. (Official Opinion No. 77-65.) The recent South Dakota Supreme Court decision of Ayres v. Junek, 247 N.W.2d 488, would also appear to support that proposition.
The real issue is what constitutes an indirect interest by a local government official in a contract. The following factual situations, although not an exhaustive listing, exemplify the nature of interests not deemed to be indirect, and thus, not in violation of common law or statute:
A. X was a municipal treasurer and also an employee of a public service corporation furnishing energy to the municipality. X is a salaried employee and receives no commission based on receipts or earnings. Based on these facts the Supreme Court of Washington held:
To come within the statutory prohibition, it must appear that Downing directly or indirectly profited from the relation between his employer and the town of which he is an officer. The facts found utterly fail to show any such situation. It cannot be presumed, without any proof on the subject, that Downing owes his employment to the fact that he is the mayor or that, if the town should cease to deal with his employer, he would lose his position or receive less compensation for his services. This situation, coupled with the finding: “That said Downing exercises no judgment, discretion, power or option in furnishing said electric power to said town, nor the rates charged or paid therefor,” makes very plain the fact that the evils which the statute is designed to prevent are not here shown to be present.
With the facts as here established, it seems unnecessary to review and discuss in detail our previous holdings in the cases already cited. In no case where the statute has been held to apply were the facts at all similar. Mumma v. Town of Brewster, 24 P.2d 438 (Wash. 1933).
The legal effect of the distinction between employee and officer is also discussed at 1953-54 AGR 379:
The fact alone that such member is an employee only of the business maintained and owned by his father does not come within the purview of the above statute nor does the status of an employee of his father's place him on the prohibited class. It is only when such member is interested, directly or indirectly, in the contract or the result thereof that the statute applies. Absent any such interest the claim would be legal.
B. X was a township supervisor who advanced monies to the township to cover the cost of certain building materials purchased by the township until the sale of bonds for the project was completed.
The North Dakota Supreme Court concluded:
In the instant case it is clear that in making emergency advances to their township to pay for materials and transportation charges, the defendants. Finneman and Bares, had no interest which was adverse to that of the township and no hope or expectation of pecuniary profit. Their only motive was to save the township money and to expedite the building of the township hall. Certainly there were present in the transaction none of the evils or evil tendencies which are proscribed by the statute. Thompson v. Lone Tree Township, 52 N.W.2d 840 (N.D. 1952).
C. The mere fact that alderman X, against whom a bank owned a deficiency judgment, voted for lease of the bank property, in absence of facts showing bad faith, does not invalidate lease. Voelcker v. Schnell, 166 N.Y.S. 420.
D. In Spadanuta v. Incorporated Village of Rockville Centre, 230 N.Y.S.2d 69, the Court ruled that an urban renewal project and contract incident thereto were not invalidated because the mayor owned property contiguous to the project area or because he might benefit from improvement which might also benefit to greater or lesser degree every landowner in the village. The interest at the time of execution of the contract was found to be too remote to constitute a conflict.
The above case law examples, although from different jurisdictions and interpreting different statutory provisions, are all exceptions to the “public policy” rationale requiring public officers to be “absolutely free from any influence.” This line of cases seems to take the more pragmatic approach to the problem of separating personal interests from the obligation owed to the public. At least implicitly, these decisions recognize that a prohibitive interest in a contract may denote something more than just being in favor of its approval or being more familiar with its terms than the other officers.
Again addressing your specific factual situation, I am of the opinion that Mr. “X’s” employment could be found to constitute neither a direct nor an indirect interest under the statutes.
As I have earlier indicated, SDCL 6-1-2 provides statutory exceptions of or modifications to the conflict of interest provision of SDCL 6-1-1. It appears to me that subdivision (3) of SDCL 6-1-2 sets forth conditions which may be found to be applicable to the factual situation herein presented.
The intent of SDCL 6-1-1 is to prohibit contracts involving public officials only if there is a direct or indirect interest. I do not believe the Legislature intended SDCL 6-1-2 to be an exclusive list of exceptions to that general rule. Such a narrow interpretation could produce unreasonable results and automatically disenfranchise willing and capable persons from holding public office without a review of the facts. I am in no way advocating a relaxation of the statutes prohibiting conflicts of interest. I am merely recognizing the fact that in most areas of South Dakota the likelihood of a local public officer having some degree of “interest,” in a contract using that term in its most literal sense, is great. If the facts logically lead to the conclusion that the interest of an officer in a contract will influence his actions, there is a legal conflict of interest. However, should the opposite conclusion be reached, there should be no legal prohibition to his continuing in office.
I again recognize that there are two distinct lines of case law on the subject of what constitutes a conflict of interest. However, in the absence of definitive court decisions on the subject in South Dakota I can only interpret the law in a manner which I feel complies with legislative intent and provides for its most reasonable application to specific factual situations. In conclusion, it is my opinion that the facts herein presented do not conclusively create a situation in which Mr. “X” would be “interested, either by himself or agent, directly or indirectly,” in the contract.
Respectfully submitted,
William J. Janklow
Attorney General
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