This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
CONFLICT OF INTEREST -- Family Relationships (spouse of town board member as lessor of real property leased to gravel vendor) -- Interest in Contracts (town board member whose spouse leases real property to gravel vendor) -- Leases (by spouse of town board member to gravel vendor) -- Purchase and Sales (purchase of gravel from vendor leasing real property from spouse of board member)
GENERAL MUNICIPAL LAW §800(3): If real property owned by a town board member's spouse is leased to a vendor which supplies gravel from the property to the town, and (1) the lease was entered into in anticipation or as a direct consequence of the vendor's contract with the town, or (2) the rental payment required by the lease varies on the basis of the amount of gravel removed from the premises, then the spouse would receive a pecuniary benefit "as the result of" the vendor's contract with the town. If that benefit serves to enhance the overall finances of the household of the board member and his or her spouse, then the board member would receive at least an indirect pecuniary benefit as a result of the contract between the vendor and the town and, therefore, have an "interest" in the contract prohibited by article 18. If the lease was not entered into in anticipation or as a direct consequence of the vendor's contract with the town, and if the rental payment required by the lease does not vary on the basis of the amount of gravel removed from the premises, then the board member would not have an interest in the vendor's contract with the town "as the result of" the spouse's lease with the vendor. Even if the board member does not have an "interest" in the contract between the town and the vendor, the town's code of ethics should be reviewed to ascertain whether it contains any pertinent provisions. If the contract between the vendor and the town is permissible under article 18 and the code of ethics is silent, the board member should recuse himself or herself from discussions, and abstain from voting, on matters relating to any current or future town contracts with the vendor, at least while the vendor leases property from the board member's spouse, as well as matters relating to any permissible town contract involving indirectly the supply of goods and services by the board member's spouse.
You ask whether a town is prohibited from entering into a contract for the purchase of gravel from a vendor who may obtain at least a portion of the gravel to be supplied to the town from property leased by the vendor from the spouse of a town board member. It appears that the vendor would obtain gravel to fulfill the contract requirements from at least two sources, one of which being property owned by the spouse of a town board member. The vendor leases the property from the spouse for "fair market value," and has the right, but not the obligation, to
remove gravel from the property. You indicated that neither the town board member nor the spouse is an officer, director, employee or shareholder of the vendor, and neither shares in the profits of the vendor.
Article 18 of the General Municipal Law (§800 et seq.) contains the provisions of law that relate to conflicts of interest of municipal officers and employees, including town officers and employees (General Municipal Law §800[4], [5]). Among other things, under certain circumstances, article 18 prohibits municipal officers and employees from having interests in contracts with the municipality that they serve (General Municipal Law §801).
For purposes of article 18, a "contract" includes any express or implied claim, account or demand against or agreement with a municipality (General Municipal Law §800[2]). A municipal officer or employee has an "interest" in a contract with his or her municipality if he or she receives a direct or indirect pecuniary or material benefit as a result of that contract (General Municipal Law §800[3]). In addition, a municipal officer or employee is deemed to have an "interest" in the contracts of his or her spouse (except a contract of employment) as well as in the contracts of a firm, partnership or association of which he or she is a member or employee, and in the contracts of a corporation of which he or she is an officer, director, employee or stockholder (General Municipal Law §800[3][a]-[d]).
Insofar as here relevant, section 801 of the General Municipal Law prohibits a municipal officer or employee from having an interest in a contract with the municipality which he or she serves if the officer or employee has certain powers and duties with respect to the contract, and if none of the exceptions contained in section 802 of the General Municipal Law are applicable (General Municipal Law §801[1]). The powers and duties that may give rise to a prohibited interest in a contract are the power or duty, individually, or as a member of a board, to: (a) negotiate, prepare, authorize or approve the contract or authorize or approve payments thereunder; (b) audit bills or claims under the contract; or (c) appoint an officer or employee who
has any such powers or duties (id.).
The town's contract with the vendor here would be a "contract" within the meaning of article 18 because it is an "agreement" with the town (see General Municipal Law §800[1]). The town board member would have an "interest" in that contract if, as a factual matter, the board member would receive a direct or indirect pecuniary or material benefit as a result of the contract (see General Municipal Law §800[3]). The town board member need not be a signatory to the contract with the town in order to have such an interest in the contract (see, e.g., 1979 Opns St Comp No. 79-387, unreported). Instead, all that is required is that the board member receive a direct or indirect pecuniary or material benefit as a result of the contract with the town (id). If the town board member has an "interest" in a "contract" within the meaning of article 18, that interest would be prohibited because he or she, as a member of the town board, has at least one of the powers and duties referred to in section 801 of the General Municipal Law (see, e.g., Town Law §§20[3][b], appointment of town comptroller, 64[6], contract awards, 118[1] and 119, audit of claims), and none of the exceptions in section 802 of that law appear to be applicable (see General Municipal Law §801[1]). 1
As to whether the board member has an interest in the town's contract with the vendor, we have long expressed the view that when a town awards a contract for public work to a prime contractor, and the prime contractor subcontracts a portion of the work to a municipal officer or employee based on an understanding that the municipal officer or employee would receive the subcontract if the municipal contract were awarded to the prime contractor, the municipal officer or employee would receive at least an indirect pecuniary benefit "as the result of" the municipal contract (see, e.g., 1981 Opns St Comp No. 81-298, p 322; 1979 Opns St Comp No. 79-691, unreported). Moreover, we have concluded that when a vendor obtains stone to sell to a town from a quarry leased by the vendor from a town officer, and the lease between the vendor and the town officer provides for rental payments based on the quantity of stone sold by the vendor, the town officer receives a monetary benefit from the vendor's contract with the town (25 Opns St Comp No. 69-286, p 146; 1967 Opns St Comp No. 67-979, unreported). We have also concluded that when a town board member resides with an individual whose company sells hardware supplies to a town, the town board member would have an interest in contracts between the company and the town if the proceeds from the sales are directly or indirectly used to defray common household expenses (1991 Opns St Comp No. 91-63, p 167).
Based on these precedents, if the lease between the town board member's spouse and the vendor was entered into in anticipation or as a direct consequence of the vendor's contract with the town, or if the rental payment required by the lease varies on the basis of the amount of gravel removed from the premises, than the spouse would receive a pecuniary benefit "as the result of" the vendor's contract with the town (see Opn No. 81-298, supra; Opn No. 79-691, supra; 25 Opns St Comp No. 69-286, supra; Opn No. 67-979, supra). If that benefit serves to enhance the overall finances of the household of the board member and his or her spouse, then the board member would receive at least an indirect pecuniary benefit as a result of the contract between the vendor and the town and, therefore, have an "interest" in that contract.2 That interest, as noted above, would be prohibited by article 18. If the lease was not entered into in anticipation or as a direct consequence of the vendor's contract with the town, and if the rental payment required by the lease does not vary on the basis of the amount of gravel removed from the premises, then the board member would not have an interest in the vendor's contract with the town as a result of the spouse's lease with the vendor. The necessary factual determinations in this regard should be made, in the first instance, at the local level.
Assuming that the town board member does not have an "interest" in the contract between the town and the vendor, the town's code of ethics should be reviewed to ascertain whether it contains any pertinent provisions. General Municipal Law §806 requires towns to adopt codes of ethics setting forth for the guidance of their officers and employees the standards of conduct reasonably expected of them. Codes of ethics must address certain specified subjects, and may regulate or prescribe conduct which is not expressly prohibited by article 18. Codes of ethics also may provide for the prohibition of conduct, but they may not authorize conduct otherwise prohibited by or be inconsistent with the provisions of article 18 (1992 Opns St Comp No. 92-30, p 78). Thus, a code of ethics may not prohibit a contract that is expressly permitted by article 18, or make permissible a contract prohibited under article 18. It could, however, require town board members to recuse themselves and abstain from voting on matters relating to town contracts not prohibited by article 18, but involving indirectly the supply of goods and services by the board members' spouses (see Opns St. Comp No. 98-6, p 14; Opn No. 92-30, supra).
Finally, we note that the courts of this State have held public officials to a high standard of conduct and, on occasion, have negated certain actions that, although not violating the literal provisions of article 18 of the General Municipal Law or a code of ethics, violate the spirit and intent of the statute, are inconsistent with public policy, or suggest self-interest, partiality or economic impropriety (see, e.g., Zagoreos v Conklin, 109 AD2d 281, 491 NYS2d 358; Matter of Tuxedo Conservation and Taxpayers Ass'n v Town Board of the Town of Tuxedo, 69 AD2d 320, 418 NYS2d 638; Conrad v Hinman, 122 Misc 2d 531, 471 NYS2d 521). Based on these principles, we believe that, even if the contract between the vendor and the town is permissible under article 18 and the code of ethics is silent, the board member should recuse himself or herself from discussions, and abstain from voting, on matters relating to any current or future town contracts with the vendor, at least while the vendor leases property from the board member's spouse, as well as matters relating to any permissible town contract involving indirectly the supply of goods and services by the board member's spouse.
In summary, if real property owned by a town board member's spouse is leased to a vendor which supplies gravel from the property to the town, and the lease was entered into in anticipation or as a direct consequence of the vendor's contract with the town, or the rental payment required by the lease varies on the basis of the amount of gravel removed from the premises, then the spouse would receive a pecuniary benefit "as the result of" the vendor's contract with the town. If that benefit serves to enhance the overall finances of the household of the board member and his or her spouse, then the board member would receive at least an indirect pecuniary benefit as a result of the contract between the vendor and the town and, therefore, have an "interest" in the contract that would be prohibited by article 18. If the lease was not entered into in anticipation or as a direct consequence of the vendor's contract with the town, and if the rental payment required by the lease does not vary on the basis of the amount of gravel removed from the premises, then the board member would not have an interest in the vendor's contract with the town "as the result of" the spouse's lease with the vendor.
Even if the board member does not have an "interest" in the contract between the town and the vendor, the town's code of ethics should be reviewed to ascertain whether it contains any pertinent provisions. If the contract between the vendor and the town is permissible under article 18 and the code of ethics is silent, the board member should recuse himself or herself from discussions, and abstain from voting, on matters relating to any current or future town contracts with the vendor, at least while the vendor leases property from the board member's spouse, as well as matters relating to any permissible town contract involving indirectly the supply of goods and services by the board member's spouse.
March 22, 2004
Lois R. Phillips, Attorney at Law
Town of Canaan
1 Note that there is no exception in section 802 for contracts let pursuant to competitive bidding (see, e.g., 1996 Opns St Comp No. 96-3, p 5; compare Public Officers Law §73[4][a]).
2 Depending on the facts and in light of case law broadly construing the term "contract" as used in article 18, the contract between the vendor and the town, although on its face constituting a contract between the vendor and the town, may be susceptible to being regarded as a "contract" between the spouse and the town for purposes of article 18. As noted, with one exception not here applicable, a town board member is "deemed" to have an "interest" in the contracts of his or her spouse, irrespective of whether the board member receives a direct or indirect material or pecuniary benefit from the contract (General Municipal Law §800[3][a]).
In Rose v Eichhorst, 42 NY2d 92, 396 NYS2d 837, a town board member acquired at county tax sale property located in the town in which the board member served. The Appellate Division held that the board member's acquisition of the property did not give rise to an interest in a contract prohibited by article 18 because at all times the board member was dealing with the county, rather than the than the town (see Rose v Eichhorst, 52 AD2d 747 at 748, 382 NYS2d 198 at 199). The Court of Appeals, however, reversed the Appellate Division decision, reasoning that the "contract for sale, although in form concerning only the county, by implication also involves the town, and as such is within the statutory contemplation" of article 18 (Rose v Eichhorst, supra, 42 NY2d at 97, 396 NYS2d at 840).
In reaching its conclusion, the Court noted that, generally, the process of levying and collecting property taxes involves participation by both towns and the counties. The Court rejected the argument that the culmination of the process, county tax sales, are conducted exclusively for the benefit of counties, stating that:
If a town had no connection with the collection of its taxes, the assertion sought to be made might be acceptable. But a court should not make such fine distinctions, least of all where matters involve questions of what is proper conduct for a municipal officer … Of course, the county is not the town and the town is not the county, but our legal inquiry must not end there. In the greater scheme of things, the two municipalities have an overlap, if not identity, of interest.
***
Whether the county is treated as an agent of the town or simply one of two participants in the same collection process, their close affiliation cannot be ignored.
This identity of interest, manifested in the legislative framework, can lead to but one conclusion -- that there is a conflict of interest when a town board member acquires property in his town at a county tax sale. (Rose v Eichhorst, supra, 42 NY2d at 97, 396 NYS2d at 840; emphasis supplied)
Here, depending on the facts, there may be a similar "overlap" or "identity of interest" between the vendor and the town board member's spouse, such as would render the vendor's contract with the town, in effect, a contract between the spouse and the town. For example, if the rental payment required by the lease between the vendor and the spouse varies on the basis of the amount of gravel removed from the premises, then the vendor and the spouse would have essentially the same type of pecuniary interest in sales of gravel from the premises to the town. In that case, the contract between the vendor and the town would be susceptible to being construed, for purposes of article 18, as a contract between the town and the spouse, in which the board member would be deemed to have an interest (General Municipal Law §800[3][a]).