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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.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 -- Legal Services (contract with city attorney's profit corporation law firm)
GENERAL MUNICIPAL LAW, §§800(3), 801, 802(1)(b), 802(2)(a): A city attorney who is an officer, employee, director or shareholder of a law firm which is a profit corporation and which represents the city in a lawsuit would have a prohibited interest in the contract between the firm and the city if the city attorney has the power or duty to negotiate, prepare, authorize or approve the contract, or to appoint someone with those powers, unless exceptions in General Municipal Law, §802 are applicable.
You ask whether your law firm may represent a city in complex litigation under the following circumstances.
You state that you are the city attorney. You further state that the city has been represented in the lawsuit by another firm but that the principal lawyer representing the city has recently left that firm and joined your firm. You state that your firm is a professional corporation in which you have an ownership interest. The matter is in the latter stages of discovery, and you point out that it would be very costly, as well as time consuming, to the city for a new lawyer from the prior firm to become expert in the case. You further point out that your ownership interest in your law firm is less than five per cent. You ask whether a conflict of interest would exist if the city retains your law firm to represent the city in the lawsuit.
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, regardless of whether an officer or employee receives a direct or indirect pecuniary benefit from a contract, an officer or employee is deemed to have an interest in any contract of a corporation of which he is an officer, director, employee, or stockholder (General Municipal Law, §800[c],[d]). That interest is prohibited if the officer or employee, individually or as a member of a board, 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 in which there is a prohibited interest is null, void and unenforceable (General Municipal Law, §804) and any officer or employee who willfully or knowingly violates the provisions of Article 18 may be guilty of a misdemeanor (General Municipal Law, §805).
Based on the foregoing, it is clear that you, as city attorney, are deemed to have an interest in a contract between the city and your professional corporation because you are a shareholder (General Municipal Law, §800[d]). If you are also an employee, officer or director of the corporation, you also would be deemed to have an interest in the contract under General Municipal Law, §800(3)(c) by virtue of your status as employee, officer or director. Your interest in the contract would be prohibited if you have the power or duty to negotiate, prepare, authorize or approve the contract, or to appoint someone with those powers. We are unable to determine whether you have such powers or duties, since that determination, in part, depends upon what powers and duties are prescribed for the city attorney in the city charter. However, we note that, since the listed functions are commonly within the scope of powers and duties of a municipal attorney, we will assume, for purposes of this inquiry, that you possess such powers or duties.
There are two exceptions contained in section 802 which are pertinent in the instant situation. 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. Also, subdivision 2(a) of section 802 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 subdivision (1)(b) 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).
Therefore, your interest in the contract which derives from being a shareholder is not prohibited because your ownership interest in the corporation is less than five per cent. If you also derive an interest from being an employee or officer of such corporation, that interest would not be prohibited if your remuneration resulting from such employment is not directly affected as the result of the contract and your duties of employment with the law firm do not directly involve procuring, preparing or performing any part of the contract (General Municipal Law, §802[b]).
We note, however, that even if the exceptions in both subdivisions (1)(b) and (2)(a) apply, you still would have an interest if you are a director of the corporation or stand to receive a "direct or indirect pecuniary or material benefit" resulting from the proposed contract between the city and your firm. The latter determination would depend, in part, upon the manner in which you are compensated by your firm (see, e.g., Opns St Comp, 1980, No. 80-172, unreported). We do not have sufficient information to make such determination.
Finally, we note that recent court cases have required municipal officials to disqualify themselves from voting in certain situations which, while not technically constituting violations of Article 18, suggest self-interest, partiality or economic impropriety (see, e.g., Zagoreos v Conklin, 107 AD2d 281, 491 NYS2d 358; Conrad v Hinman, 122 Misc 2d 531, 471 NYS2d 521). Therefore, since the courts look with disfavor on transactions which suggest that municipal officials may benefit from municipal actions which they are in a position to influence, a court might find the contract with your firm contrary to public policy. This concern becomes particularly notable when it is observed that if your law firm were organized as a partnership, rather than a corporation, neither of the above discussed exceptions could apply and a prohibited conflict of interest would exist. Accordingly, even if you have no prohibited conflict of interest in the contract by virtue of the exceptions in section 802, you may wish to consider the possible consequences of a judicial review of the contract. In addition, the city's code of ethics should be examined to determine if any provisions thereof are applicable (see General Municipal Law, §806).
July 1, 1988
John M. Hart, Esq., City Attorney
City of Olean