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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.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 -- Construction Contracts (village trustee an employee, officer and stockholder of construction company) -- Exceptions (no exception for emergency situations)
GENERAL MUNICIPAL LAW, §§801(1)(b), 802(1)(b), 2(a); VILLAGE LAW, §5-524(2): A village trustee who is an officer, employee and stockholder of a construction corporation would have a prohibited interest in any contracts between the corporation and the village unless (a) his or her stock ownership amounts to less than 5% of the outstanding stock and (b) as employee and officer of the corporation, his or her duties do not involve the procurement, preparation or performance of village contracts and his or her remuneration is not affected by such contracts. There is no exception to the conflict of interest provisions of General Municipal Law, article 18 for contracts entered into in emergency situations.
This is in reply to your letter asking whether a newly-elected village trustee, who is an officer, shareholder and employee of a construction corporation, would have a conflict of interest if the village does business with the corporation. You advise that the trustee's duties, as an employee of the corporation, generally involve bookkeeping and are not directly related to the performance or procurement of any of the construction contracts. If the board member has a prohibited conflict of interest, you also ask whether the village may nonetheless contract with the corporation in emergency situations.
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 or her municipality if he or she 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 or employee, or a stockholder (General Municipal Law, §800(3)[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 willfully entered into by or with a municipality in which there is a prohibited interest is null, void and unenforceable (General Municipal Law, §804). Further, section 805 of the General Municipal Law provides that any municipal officer or employee who willfully or knowingly violates the conflict of interest provisions of Article 18 shall be guilty of a misdemeanor.
In the instant situation, the board member is deemed to have an interest in any contract between the village and the corporation because he is an officer, employee and a stockholder of the company. Therefore, unless section 802 contains any applicable exceptions, that interest would be prohibited because he, in his capacity as a board member, will have the power or duty to negotiate, prepare, authorize or approve the contracts with the company and to audit claims and approve payments made under the contracts (General Municipal Law, §801; Village Law, §5-524).
General Municipal Law, §802 contains several exceptions to the prohibition contained in section 801 that may be pertinent 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. Another exception is contained in subdivision 1(b) of section 802 which 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 when an officer or employee has an interest by reason of stockholdings 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 be required in the case of an interest in a contract described in General Municipal Law, §802(2).
As to the applicability of General Municipal Law, §802(1)(h), which pertains to contracts made prior to the officer's or employee's election or appointment, we note that this provision would not apply in this instance, unless a contract was in effect when the board member was elected to office. Therefore, since your letter does not suggest any preexisting agreement, this exception would not appear to be applicable.
With regard to the applicability of the exceptions contained in subdivisions 1(b) and 2(a) of section 802, we note that your letter indicates that the trustee is an officer, employee and shareholder of the corporation. As a result, the board member would have a prohibited conflict of interest in any contract or renewal of a contract entered into after his election unless the exceptions in both subdivisions apply. Under General Municipal Law, §802(1)(b), the trustee would not have a conflict of interest by reason of his status as an officer and employee of the corporation if the trustee's remuneration as both an officer and employee of the corporation is not directly affected as a result of the contracts and his duties with the corporation do not directly involve the procurement, preparation or performance of any aspect of the contracts between the corporation and the village. In this regard, you state that the board member's duties with the corporation do not directly relate to performance or procurement of any construction work. We note, however, that, even though this may be the case, the exception in subdivision (1)(b) would still not be applicable if the trustee's duties with the corporation involve preparation of the contract or if his remuneration would be directly affected as a result of the contract. We are not in a position to make the necessary factual determinations in this regard.
As noted above, even if subdivision (1)(b) of section 802 is found to be applicable, the board member would still have a prohibited interest by virtue of his ownership of stock in the corporation unless the exception in subdivision (2)(a) also applies. Under section 802(2)(a), an interest resulting from stock ownership is not prohibited if the trustee owns or controls directly or indirectly less than 5% of the outstanding stock of the corporation. However, if the trustee's stock ownership exceeds 5%, that exception would not be applicable and the trustee's interest would be prohibited.
Please note that the foregoing analysis assumes that the board member will not receive a direct or indirect pecuniary or material benefit as a result of any contract entered into or renewed after his election and that he is not a director of the corporation (General Municipal Law, §800) If this is not the case, the board member would have a prohibited interest in the contract and it is immaterial whether the exceptions contained in General Municipal Law, §802(1)(b) and (2)(a) apply.
Finally, regarding the authority of the village to make contracts with the corporation in emergency situations, we again emphasize that an interest in a contract is prohibited under section 801 if an officer or employee has the powers and duties listed in section 801 and no exception contained in Article 18 of the General Municipal Law is applicable. Since there is no exception in Article 18 pertaining to emergency contracts, the corporation may not be hired in emergencies if the contract would result in the trustee having a prohibited conflict of interest.
May 18, 1988
Joseph S. Deery, Jr., Esq., Village Attorney
Village of Oriskany