CEO 96-31 -- December 3, 1996

CONFLICT OF INTEREST

CITY COUNCIL MEMBER OWNING SUBSTANTIAL INTEREST IN CORPORATION

WHICH IS ASSIGNEE OF LEASEHOLD OF CITY-OWNED PROPERTY

To: Don J. Caton, City Attorney (Pensacola)

SUMMARY:

No prohibited conflict of interest is created by a city=s consenting to the assignment of a leasehold of city-owned property from one corporation to another in which a newly appointed member of the city council owns a substantial interest and where the terms of the lease agreement remain substantially the same as they had been prior to the assignment and the city councilman=s appointment. Because the assignee corporation is leasing the property from the city, rather than to the city, Section 112.313(3), Florida Statutes, does not apply. Although the city councilman would have a contractual relationship with a business entity doing business with his agency, where the terms of the lease agreement between the assignee lessee and the city remain the same, the lease agreement is Agrandfathered-in.@ CEO 85-40 is referenced. However, the city councilman is prohibited by Section 112.3143(3)(a), Florida Statutes, from voting on the city=s giving its written consent to the assignment of the leasehold, as the vote would inure to his special private gain or loss.

In addition, where the Councilman=s business partners and/or co-investors are involved in separate businesses that are doing business with the city and have invested their personal funds in the business venture with the Councilman, no prohibited conflict of interest is created, because the Councilman=s contractual relationship is with his business partners and/or investors individually, rather than with a business entity doing business with his agency. As the councilman=s business partners and/or co-investors are his Abusiness associates,@ Section 112.3143(3)(a), Florida Statutes, prohibits him from voting on transactions between the city and the businesses of his business partners and/or co-investors.

QUESTION 1:

Would a prohibited conflict of interest be created if a corporation in which a newly appointed member of the City Council owns a substantial interest were to become the assignee of the leasehold of city-owned property?

Your question is answered in the negative.

On behalf of Douglas Halford, a newly appointed City Councilman, you write that the City owns a parcel of land which was first leased and developed as a marina in 1985. The 1985 lease, you advise, has a term of thirty (30) years, which is renewable at the option of the lessee for an additional thirty (30) year term. You advise that the lease agreement also provides that the lessee may assign its interest in the leasehold provided that the lessee obtains the prior written consent of the City, which consent shall not be unreasonably withheld. Since the completion of the construction of the marina, the leasehold interest previously has been assigned twice with the City's consent, you advise.

You advise that on May 20, 1996, the current lessee and another company of which a substantial interest is owned by the subject City Councilman entered into an agreement in which the leasehold interest was assigned to the latter corporation, subject to the City's consent. The agreement, you advise, contemplated that the transaction would be closed on July 20, 1996. However, a need to resolve certain environmental issues concerning the leased property resulted in the postponement of the closing date until October 21, 1996. The Councilman was appointed to fill a recently-vacated seat on the City Council on September 19, 1996.

You advise that when the matter of the assignment of the leasehold to the assignee company came before the City Council for its consent in early October, the newly appointed member to the City Council abstained from voting. Notwithstanding his abstention, the City Councilman still is concerned about the possible existence of a prohibited conflict of interest due to his owning a substantial interest in a corporation which has become a lessee of City-owned property.

The Code of Ethics for Public Officers and Employees provides in relevant part:

DOING BUSINESS WITH ONE'S AGENCY.--No employee of an agency acting in his or her official capacity as a purchasing agent, or public officer acting in his or her official capacity, shall either directly or indirectly purchase, rent, or lease any realty, goods, or services for his or her own agency from any business entity of which the officer or employee or the officer=s or employee=s spouse or child is an officer, partner, director, or proprietor or in which such officer or employee or the officer=s or employee=s spouse or child, or any combination of them, has a material interest. Nor shall a public officer or employee, acting in a private capacity, rent, lease, or sell any realty, goods, or services to the officer=s or employee=s own agency, if he or she is a state officer or employee, or to any political subdivision or any agency thereof, if he or she is serving as an officer or employee of that political subdivision. The foregoing shall not apply to district offices maintained by legislators when such offices are located in the legislator's place of business. This subsection shall not affect or be construed to prohibit contracts entered into prior to:

(a) October 1, 1975.

(b) Qualification for elective office.

(d) Beginning public employment.

[Section 112.313(3), Florida Statutes.]

CONFLICTING EMPLOYMENT OR CONTRACTUAL RELATIONSHIP.--No public officer or employee of an agency shall have or hold any employment or contractual relationship with any business entity or any agency which is subject to the regulation of, or is doing business with, an agency of which he or she is an officer or employee, excluding those organizations and their officers who, when acting in their official capacity, enter into or negotiate a collective bargaining contract with the state or any municipality, county, or other political subdivision of the state; nor shall an officer or employee of an agency have or hold any employment or contractual relationship that will create a continuing or frequently recurring conflict between his or her private interests and the performance of his or her public duties or that would impede the full and faithful discharge of his or her public duties. [Section 112.313(7)(a), Florida Statutes.]

VOTING CONFLICTS.--No county, municipal, or other local public officer shall vote in an official capacity upon any measure which inures to his or her special private gain or loss; which he or she knows would inure to the special private gain or loss of any principal by whom the officer is retained or to the parent organization or subsidiary of a corporate principal by which he or she is retained, other than an agency as defined in s. 112.312(3); or which he or she knows would inure to the special private gain or loss of a relative or business associate of the public officer. Such public officer shall, prior to the vote being taken, publicly state to the assembly the nature of the officer=s interest in the matter from which he or she is abstaining from voting and, within 15 days after the vote occurs, disclose the nature of his or her interest as a public record in a memorandum filed with the person responsible for recording the minutes of the meeting, who shall incorporate the memorandum in the minutes. [Section 112.3143(3)(a), Florida Statutes.]

Section 112.313(3), Florida Statutes, prohibits the City Councilman from acting in his official capacity to purchase, rent or lease any goods, realty or services for his agency, the City Council, from a business entity of which he or his spouse or child is an officer, partner, director, or proprietor, or in which he or his spouse or child owns more than a five percent interest, and from selling any services or goods or leasing any realty to the City Council or the City in his private capacity. Because it appears that the assignee company is leasing property from the City, rather than to the City, we are of the opinion that this provision does not apply. See CEO 86-14.

Section 112.313(7)(a), Florida Statutes, prohibits the City Councilman from having any employment or contractual relationship with a business entity which is doing business with or is subject to the regulation of the City Council or which creates a continuing or frequently recurring conflict between his private interests and the performance of his public duties. We have repeatedly opined that part-ownership or stock ownership of a corporation constitutes having a contractual relationship with that corporation. See CEO=s 80-11, 82-65, 83-48, 86-36, 93-35, and 94-47. Thus, we are of the opinion that by virtue of his ownership interest in the assignee company, the City Councilman has a contractual relationship with that company. Furthermore, it is clear that by accepting the assignment of the lease with the City and, thereby, leasing the City=s property, the assignee company is doing business with the City. Consequently, we are of the opinion that the City Councilman has a contractual relationship with a business entity doing business with his agency. Nevertheless, under the circumstances presented, we do not believe that this contractual relationship is prohibited under Section 112.313(7)(a), as long as the terms of the lease agreement remain substantially identical to the terms of the lease agreement that was originally signed by the City.

In CEO 85-40, we found that no prohibited conflict of interest would be created were an officer of a bank doing business with a city as bond trustee and through a banking services agreement to be appointed to serve on the City Council, as the relationship between the banks and the city would be Agrandfathered in.@ In support of our finding, we cited CEO 76-118, CEO 77-30, and CEO 82-10, where we found that the Code of Ethics Agrandfathers in@ agreements entered into before a public official takes office. We also noted in CEO 85-40 that because future extensions of credit were contemplated by the banking services agreement, the city could continue to take advantage of its line of credit with the bank even after the bank officer was appointed to the City Council, although the bank officer would be prohibited by Section 112.3143, Florida Statutes, from voting on the future extensions of credit. We also found that since the two-year banking services agreement contemplated a one-year extension by written consent of the city and the bank, an extension of the agreement also would be Agrandfathered-in,@ although the bank officer would be prohibited from voting on such an extension here as well. However, we opined that expiration or renegotiation of the banking services agreement, where the terms are substantially different than the original agreement, would bring into play the prohibitions of Sections 112.313(3) and 112.313(7)(a), Florida Statutes. See also CEO 76-118 where we observed

As the essential purpose of s. 112.313(7) is to prevent a public officer from using his official position to secure business for his private employer, no conflict of interest is deemed to exist while the contract is in its executory stage, so long as the annual renegotiation of terms remains substantially the same as those in the original contract.

Similarly, here, where the terms of the lease agreement between the assignee lessee and the City remain the same, we are of the opinion that the lease agreement is Agrandfathered-in.@ This is not a situation where the City Councilman is using his official position to secure either business or an advantage or benefit for the assignee company through the use of his public position. Rather, the agreement between the City and the assignee lessee will remain essentially the same.

Although we find that no conflict of interest under Section 112.313(7)(a) is created as a result of the assignment of the lease, we are of the opinion that Section 112.3143(3)(a) prohibits the Councilman from voting on the City=s giving its written consent to the assignment of the leasehold. Section 112.3143(3)(a) prohibits the Councilman from voting on a matter which would inure to his special private gain or loss, to the special private gain or loss of a principal by whom he is retained, or to the special gain or loss of his relative or business associate. It also contains an affirmative duty of disclosure so that interested parties and the public will understand why he is abstaining from voting. Inasmuch as the City=s approval of the lease assignment would appear to inure to the special gain or loss of the assignee company in which the Councilman owns a substantial interest and, therefore, to the special private gain or loss of the Councilman, he would be prohibited from voting on the assignment of the lease. He also should file his memorandum of voting conflict (CE Form 8B) within 15 days after the vote occurs.

Accordingly, we find that no prohibited conflict of interest is created under Section 112.313(7)(a) by the City=s consenting to the assignment of a leasehold of City-owned property to a corporation in which a newly appointed member of the City Council owns a substantial interest where the terms of the lease agreement remain substantially the same as they had been prior to the assignment of the leasehold interest and the Councilman=s recent appointment to the City Council.

QUESTION 2:

Would a prohibited conflict of interest be created under the Code of Ethics were the co-investors or business partners of the City Councilman to do business with the City, where the City Councilman neither holds any interest nor is an investor in the business being transacted with the City?

You advise that the City Councilman also is a commercial real estate broker and a business partner with other persons who may do business with the City. For instance, you advise that one of the City Councilman's co-investors in the assignee company is an individual who is negotiating a different lease transaction with the City. In that transaction, the Councilman's co-investor=s or business partner=s company might become the lessee of another parcel of City-owned property. The Councilman would not be an investor or have any interest in that potential transaction, you advise. However, the Councilman is concerned about whether CEO 94-10 has any application to him such that he would have to consider terminating his business partnerships, you advise.

In CEO 94-10, we found that absent an exemption under Section 112.313(12), Florida Statutes, a prohibited conflict of interest would be created under Section 112.313(7)(a), Florida Statutes, were businesses which are insurance clients of a county commissioner=s insurance agency to contract with the county commission to provide goods or services to the county. We also found that under Section 112.3143(3)(a) the county commissioner/insurance agent would be prohibited from voting on measures that would inure to the special gain of insurance clients or persons with whom the commissioner jointly owns an office building. For purposes of the voting conflicts law, we found that the county commissioner=s insurance clients would constitute Aprincipals by whom he is retained@ and the co-owners of the office building would come under the definition of Abusiness associates.@

In CEO 94-10 we also observed that despite the existence of an ongoing contract between the insured and the insurance company, as long as an insurance policy is in effect, the insurance agency has a continuing duty to service the insured=s account and to keep records. Consequently, we found that the county commissioner remains the agent of the insured throughout the term of the policy. In contrast, once a real estate transaction is completed, the City Councilman=s obligation, in his role as real estate broker, to the buyer or seller terminates. Thus, we find that the Councilman would not have a prohibited conflict of interest under Section 112.313(7)(a) were one of his former real estate clients to do business with the City.

However, with respect to your question concerning the Councilman=s relationship with his business partners or co-investors who may be doing business with the City, we are of the opinion that, despite the Councilman=s having no interest in the business being transacted with the City, he would have a prohibited contractual relationship with a business entity doing business with his agency contrary to the prohibitions of Section 112.313(7)(a) if his business partner or co-investor is a Abusiness entity,@ as that term is defined at Section 112.312(5), Florida Statutes, and the Abusiness entity@ is doing business with the City. The term Abusiness entity@ is defined to mean

any corporation, partnership, limited partnership, proprietorship, firm, enterprise, franchise, association, self-employed individual, or trust, whether fictitiously names or not, doing business in this state.

Under these circumstances, the Councilman would have a contractual relationship with a business entity doing business with his agency. However, if the Councilman=s business partner=s or co-investor=s corporation, for example, was doing business with the City and the business partner or co-investor was acting in his or her individual capacity as an investor, rather than on behalf of the corporation, then the Councilman would not have a contractual relationship with a business entity doing business with his agency and no prohibited conflict of interest under Section 112.313(7)(a) would be created.

In CEO 83-71, we advised that Section 112.313(7) would not prohibit a member of a city housing authority from being engaged in a real estate partnership with an individual who was a partner in the accounting firm which audited the authority=s books. We found that the authority member did not have any employment or contractual relationship with the accounting firm; rather, his contractual relationship was with the individual who was a partner in the firm. Similarly, in CEO 86-37, with respect to a member of a mayor=s law firm who was an equity investor in a development company which proposed to lease and develop property owned by the city, we opined that as the investment by the firm member in the development company was made with the firm member=s own private funds and was not connected with the mayor=s law firm, the mayor=s indirect relationship with the proposed developer would be too attenuated to be prohibited by Section 112.313(7).

Accordingly, we are of the opinion that as long as the City Councilman=s partners or co-investors with whom he has contractual relationships are not personally doing business with the City, no prohibited conflict of interest would be created. However, as Section 112.3143(3)(a), Florida Statutes, prohibits the Councilman from voting on a matter which would inure to the special private gain or loss of a business associate, he would be prohibited from voting on transaction between the City and the business of his business partner or co-investor.

ORDERED by the State of Florida Commission on Ethics meeting in public session on December 3, 1996 and RENDERED this 5th day of December, 1996.

___________________________________

Mary Alice Phelan

Chair