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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
CONFLICTS OF INTEREST -- Insurance Transactions (village mayor as vice-president and stockholder of insurance company)
GENERAL MUNICIPAL LAW, §801(1) - Village mayor who is also an officer and stockholder of more than 5% of the outstanding stock of an insurance agency would have a prohibited conflict of interest if the agency sells insurance to the village.
You state that the village mayor is the vice-president and holder of 19.7% of the voting stock of an insurance company which provides insurance coverage to the village. The village's current insurance policy was issued prior to the election of the mayor, and will expire during the mayor's term of office. You inquire whether the mayor would have a prohibited conflict of interest under General Municipal Law, §801 if the policy should be renewed by the village.
Article 18 of the General Municipal Law (§§800 et seq.) contains provisions of law which relate to conflicts of interest of municipal officers and employees. Pursuant to General Municipal Law, §800(3), a municipal officer or employee has an interest in any contract with his municipality if he receives a direct or indirect pecuniary or material benefit as a result of that contract. In addition, an officer or employee is deemed to have an interest in a contract of a corporation of which he or she is an officer, director, employee, or stockholder (General Municipal Law, §800[c],[d]). That interest is prohibited if the officer or employee has the power or duty to: (a) negotiate, prepare, authorize or approve the contract 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, and none of the exceptions contained in Article 18 are applicable (General Municipal Law, §§801, 802). Any contract entered into in which there is a prohibited interest is null, void and unenforceable (General Municipal Law, §804). Further, any officer or employee who willfully and knowingly violates the conflict of interest provisions may be guilty of a misdemeanor (General Municipal Law, §805).
In the instant situation, the mayor is deemed to have an interest in any contract between the village and the insurance agency both because he is the vice-president and because he is a stockholder of the corporation. Therefore, unless exceptions contained in section 802 are applicable, that interest would be prohibited because he, in his capacity as a mayor, will have the power or duty to negotiate, prepare, authorize or approve the contracts with the company, to audit claims and approve payments made under the contracts, or to appoint an officer or employee to perform those functions (General Municipal Law, §801; Village Law, §§4-400, 5-524).
General Municipal Law, §802 contains several exceptions for contracts which would otherwise be prohibited by section 801 which warrant consideration here. Section 802(1)(h) excepts any contract entered into prior to the time the officer or employee was elected or appointed, but does not except any renewals thereof. Subdivision 1(b) of section 802 provides an exception in those instances where an interest is prohibited solely by reason of employment as an officer or employee of a corporation if (1) the remuneration of such employment will not be directly affected as a result of such contract and (2) the duties of such employment do not directly involve the procurement, preparation or performance of any part of such contract. Finally, subdivision 2(a) provides an exception for interests arising as a result of stock ownership or control if less than 5% of the outstanding stock of the corporation is owned or controlled directly or indirectly by the municipal officer or employee. Pursuant to General Municipal Law, §803(1), written disclosure of an interest excepted under either subdivisions (1)(b) or (1)(h) of section 802 is required. However, subdivision two of section 803 provides that disclosure shall not required in the case of an interest in a contract described in General Municipal Law, §802(2).
While the exception in subdivision (1)(h) applies to the contract entered into before the mayor's election, it will not be applicable to any contract renewal entered into after his election to office. Accordingly, unless the exceptions in both subdivisions (1)(b) and (2)(a) of General Municipal Law, §802 apply, the mayor would have a prohibited conflict of interest in any contract renewal entered into after his election by reason of his being an officer and stockholder of the corporation. We do not have sufficient facts to determine whether the exception in subdivision (1)(b) is applicable. However, even if that exception applies or the mayor resigns his position as vice-president, he would be deemed to have an interest in the renewal contract by virtue of his stock ownership since you have indicated that the mayor owns over 5% of the outstanding stock of the company. Therefore, the exception in subdivision (2)(a) is not applicable and the renewal contract will give rise to a prohibited conflict of interest.
We note that even if the exception in subdivision (1)(b) applies or the mayor resigned his position with the corporation, and divested himself of direct or indirect ownership and control of all but less than 5% of the stock, there still may be other circumstances under which he would have a prohibited conflict of interest in contracts of the agency. For example, he would be deemed to have an interest in contracts of the agency if he were a director of the corporation or remained an employee of the corporation in a capacity other than vice-president. Further, he would have an interest in any contract between the agency and the village if he were to receive an actual direct or indirect pecuniary or material benefit as a result of the contract. Therefore, consideration must given to these factors as well in determining whether the mayor would have a prohibited conflict of interest under Article 18 of the General Municipal Law if he resigned as vice-president and divested himself of his stock ownership and control. The village code of ethics should also be consulted to determine whether it has any application under those circumstances.
It should also be noted that the courts of this State have held public officials to a high standard of conduct and, on occasion, have negated certain actions which, although not violating the literal provisions of Article 18 of the General Municipal Law, violate the spirit and intent of the statute, are inconsistent with public policy, or suggest self-interest, partiality or economic impropriety (see, e.g., Zagoreous v Conklin, 109 AD2d 281, 491 NYS2d 358; Matter of Tuxedo Conservation v Town Board of the Town of Tuxedo, 69 AD2d 320, 418 NYS2d 638; Conrad v Hinman, 122 Misc 2d 531, 471 NYS2d 521). Thus, even if the mayor had no prohibited interest in the renewal contract under a literal reading of Article 18, consideration should be given to the possible consequences of such a judicial review of the contract.
Finally, you suggest that the mayor would be willing to refrain from participating in any board business relating to the contracts with the corporation. Under Article 18 of the General Municipal Law, however, it is the existence of the statutory powers or duties of an officer or employee to perform section 801 functions which gives rise to the conflict of interest under that section, without regard to whether those functions are actually performed (1987 Opns St Comp No. 87-75, p____; Dykeman v Symonds, 85 Misc 2d 567, 380 NYS2d 567, affd 54 AD2d 159, 388 NYS2d 422; 1983 Opns St Comp No. 83-180, p 226). Therefore, abstention by the mayor will not enable the village to enter into a contract which is otherwise prohibited by Article 18 of the General Municipal Law.
March 11, 1988
James F. Taylor, Esq., Village Attorney
Village of Sherburne