                                     TO BE PUBLISHED IN THE OFFICIAL REPORTS

                                          OFFICE OF THE ATTORNEY GENERAL
                                                    State of California

                                                  DANIEL E. LUNGREN
                                                     Attorney General
                                         ______________________________________

                                     OPINION               :
                                                           :        No. 98-401
                                     of                    :
                                                           :        May 29, 1998
                           DANIEL E. LUNGREN               :
                              Attorney General             :
                                                           :
                          ANTHONY M. SUMMERS               :
                           Deputy Attorney General         :
                                                           :
                    ______________________________________________________________________

                     THE HONORABLE VALERIE BROWN, MEMBER OF THE CALIFORNIA
         ASSEMBLY, has requested an opinion on the following question:

                         May a city council execute a contract with a corporation for the purchase of equipment if
         one of the council members and her spouse own less than 3 percent of the stock of the corporation, the spouse
         has been employed by the corporation for more than 3 years, and the spouse's salary from the corporation
         exceeds 5 percent of the total annual income of the member and spouse?

                                                         CONCLUSION

                          A city council may not execute a contract with a corporation for the purchase of equipment
         if one of the council members and her spouse owns less than 3 percent of the stock of the corporation, the
         spouse has been employed by the corporation for more than 3 years, and the spouse's salary from the
         corporation exceeds 5 percent of the total annual income of the member and the spouse.

                                                           ANALYSIS

                          Government Code section 1090 Footnote No. 1 provides:

                          "Members of the Legislature, state, county, district, judicial district, and city officers
               or employees shall not be financially interested in any contract made by them in their official
               capacity, or by any body or board of which they are members. . . ."

         We are asked to determine whether the prohibition contained in section 1090 would prevent execution of a
         contract between a city council and a corporation for the purchase of equipment under the following
         circumstances: one of the council members and her spouse own less than 3 percent of the stock of the
         corporation, the spouse has been employed by the corporation, which has more than 10 other employees, for
         more than 3 years; and the dividends on the stock together with the spouse's salary from the corporation
         amount to more than 5 percent of the annual combined income of the council member and spouse. We
         conclude that the contract may not be executed under the described circumstances.

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                          In 66 Ops.Cal.Atty.Gen. 152, 156-157 (1983) we observed:

                           "Section 1090 of the Government Code codifies the common law prohibition and the
               general policy of this state against public officials having a personal interest in contracts they
               make in their official capacities. (Terry v. Bender (1956) 143 Cal.App.2d 198, 206; Schaefer v.
               Berinstein (1956) 140 Cal.App.2d 278, 289; Stockton P. & S. Co. v. Wheeler (1924) 68 Cal.App.
               592, 597; cf. Oakland v. California Construction Co. (1940) 15 Cal.2d 573, 576.) Mindful of the
               ancient adage, that 'no man can serve two masters' (Matthew 6:24; cf. People v. Darby (1952)
               114 Cal.App.2d 412, 426), 'a self-evident truth, as trite and impregnable as the law of gravity'
               (Stockton P. & S. Co. v. Wheeler, supra, at 601), the section was enacted to insure that public
               officials 'making' official contracts not be distracted by personal financial gain from exercising
               absolute loyalty and undivided allegiance to the best interest of the entity which they serve, and
               at least with respect to those contracts, it does so by removing or limiting the possibility of their
               being able to bring any direct or indirect personal influence to bear on an official decision
               regarding them. (Stigall v. City of Taft (1962) 58 Cal.2d 565, 569; City Council v. McKinley
               (1978) 80 Cal.App.3d 204, 212; Fraser-Yamor Agency, Inc. v. County of Del Norte (1977) 68
               Cal.App.3d 201, 215.) The mechanism of the section is one of prohibiting public officials from
               being personally financially interested as private individuals in any such contract. . . ."

         More recently in 76 Ops.Cal.Atty.Gen. 118, 119 (1993) we additionally stated:

                           ". . . Section 1090 is concerned with financial interests, other than remote or minimal
               interests, which would prevent officials from exercising absolute loyalty and undivided
               allegiance in furthering the best interests of their public agencies. (See Stigall v. City of Taft
               (1962) 58 Cal.2d 565, 569.) Moreover, when section 1090 is applicable to one member of the
               governing body of a public entity, the proscription cannot be avoided by having the interested
               member abstain; the entire governing body is precluded from entering into the contract.
               (Thomson v. Call (1985) 38 Cal.3d 633, 647-649; Stigall v. City of Taft, supra, 58 Cal.2d at 569;
               City of Imperial Beach v. Bailey (1980) 103 Cal.App.3d 191, 197; 70 Ops.Cal.Atty.Gen. 45, 48
               (1987); 69 Ops.Cal.Atty.Gen. 102, 104 (1986).) A contract which violates section 1090 is void.
               (Thomson v. Call, supra, 38 Cal.3d at p. 646.)" (Fn. omitted.)

         The Supreme Court has declared that the purpose of section 1090's prohibition "is to remove or limit the
         possibility of any personal influence, either directly or indirectly, which might bear on an official's decision,
         as well as to void contracts which are actually obtained through fraud or dishonest conduct. . . ." (Stigall v.
         City of Taft (1962) 58 Cal.2d 565, 569.) The statutory goal is "not only to strike at actual impropriety, but
         also to strike at the appearance of impropriety." (City of Imperial Beach v. Bailey (1980) 103 Cal.App.3d
         191, 197.) Section 1090's prohibition applies regardless of whether the contract is found to be fair and
         equitable (Thomson v. Call (1985) 38 Cal.3d 633, 646-649) or whether the official would agree to abstain
         from all participation in the decision-making process (Fraser-Yamor Agency, Inc. v. County of Del Norte
         (1977) 68 Cal.App.3d 201, 211-212).

                          In Thomson v. Call, supra, 38 Cal.3d at 645, the Supreme Court observed:

                           "Section 1090 forbids city officers . . . from being 'financially interested in any
               contract made by them in their official capacity, or by any body or board of which they are
               members.' The proscribed interest certainly includes any direct interest, such as that involved
               when an officer enters directly into a contract with the body of which he is a member.
               [Citations.] California courts have also consistently voided such contracts where the public
               officer was found to have an indirect interest therein. In Moody v. Shuffleton (1928) 203 Cal. 100
               for example, a county supervisor sold his printing business to his son and took a promissory note
                      db      h l                 h b i                    h b i       h l d               h   l

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               secured by a chattel mortgage on the business. Because the business helped to secure the value
               of the official's mortgage, we held that a conflict existed when printing contracts were awarded
               to the son. It is also clear that where the public officer is a stockholder in a corporation making
               such a contract, the contract will be adjudged void under the conflict of interest statutes."
               (Italics added, fn. omitted.)

                          Here, the council member has a financial interest in the spouse's stock ownership and salary
         from the corporation. Even though the stock certificates are in the name of the spouse alone, the council
         member must also be considered as having a personal financial interest in the stock as well as the salary. (See
         Reece v. Alcoholic Bev. etc. Appeals Bd. (1976) 64 Cal.App.3d 675, 683; Nielsen v. Richards (1925) 75
         Cal.App. 680, 685-687; 78 Ops.Cal.Atty.Gen. 230, 236-237 (1995); 73 Ops.Cal.Atty. Gen. 191, 194-195
         (1990); 69 Ops.Cal.Atty.Gen. 102, 106 (1986).) Standing alone, therefore, section 1090 clearly prohibits the
         contract between the city council and the corporation under the described circumstances. (See Thomson v.
         Call, supra, 38 Cal.3d at 645; Fraser-Yamor Agency, Inc. v. County of Del Norte, supra, 68 Cal.App.3d at
         212; People v. Sobel (1974) 40 Cal.App.3d 1046, 1052.)

                            However, the prohibition of section 1090 does not stand alone. In two instances, the
         Legislature has attempted to ameliorate the harsh consequences of its application. In section 1091, the
         Legislature has described various "remote interests," which if applicable, allow the making of the contract if
         the officer with the proscribed financial interest (1) discloses such interest to the public agency, (2) such
         interest is noted in the official records of the body, and (3) the officer abstains from participating in the
         making of the contract. (78 Ops.Cal.Atty.Gen., supra, 237; 67 Ops.Cal.Atty.Gen. 369, 377, fn. 8 (1984); 65
         Ops.Cal.Atty.Gen. 305, 307 (1982).) The other situation is found in section 1091.5, which describes
         "noninterests," where if applicable, the contract may be executed because the Legislature has determined that
         the interest is insufficient to merit application of the prohibition. In noninterest situations, the interest does
         not require the officer's abstention and generally does not require disclosure.

                          Looking first at noninterests, we find that section 1091.5 states in relevant part:

                           "(a) An officer or employee shall not be deemed to be interested in a contract if his or
               her interest is any of the following:

                          "(1) The ownership of less than 3 percent of the shares of a corporation for profit,
               provided the total annual income to him or her from dividends, including the value of stock
               dividends, from the corporation does not exceed 5 percent of his or her total annual income, and
               any other payments made to him or her by the corporation do not exceed 5 percent of his or her
               total annual income.

                           ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ." Footnote No. 2

         The facts presented here are that the city council member and spouse own stock in the corporation where the
         spouse is employed. Their ownership is less than 3 percent of the corporation's shares, and the stock
         dividends are less than 5 percent of their total income. However, "other payments" by the corporation in the
         form of the spouse's salary exceed 5 percent of the total annual income of the council member and spouse.
         Thus, the spouse's salary prevents the stock ownership from qualifying as a noninterest under subdivision
         (a)(1) of section 1091.5. No other provision of section 1091.5 would prevent the application of section 1090
         in the described circumstances.

                          Turning to remote interests, we find that section 1091 states in relevant part:

                           "(a) An officer shall not be deemed to be interested in a contract entered into by a
               body or board of which the officer is a member within the meaning of this article if the officer
               has only a remote interest in the contract and if the fact of that interest is disclosed to the body of

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               the board of which the officer is a member and noted in its official records, and thereafter the
               body or board authorizes, approves, or ratifies the contract in good faith by a vote of its
               membership sufficient for the purpose without counting the vote or votes of the officer or
               member with the remote interest.

                          "(b) As used in this article, 'remote interest' means any of the following:

                          ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

                            "(2) That of an employee or agent of the contracting party, if the contracting party has
               10 or more other employees and if the officer was an employee or agent of that contracting party
               for at least three years prior to the officer initially accepting his or her office.

                          ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

                          "(3) That of an employee or agent of the contracting party, if all of the following
               conditions are met:

                         "(A) The agency of which the person is an officer is a local public agency located in a
               county with a population of less than 4,000,000.

                          "(B) The contract is competitively bid and is not for personal services.

                            "(C) The employee or agent is not in a primary management capacity with the
               contracting party, is not an officer or director of the contracting party, and holds no ownership
               interest in the contracting party.

                          "(D) The contracting party has 10 or more other employees.

                          "(E) The employee or agent did not directly participate in formulating the bid of the
               contracting party.

                          "(F) The contracting party is the lowest responsible bidder.

                          ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ." (Italics added.)

         Here, the council member's interest would not qualify under subdivision (b)(3) of section 1091 due to her
         stock ownership interest and the stock ownership interest of her spouse. Subdivision (b)(2) of section 1091
         also has no application here, since it only applies to the financial interest of an employee, not that of an
         owner as in the present situation. We recognize that subdivision (b)(3) of section 1091 appears to be a more
         limited exception than subdivision (b)(2) and has the additional requirement of "no ownership interest"
         (§ 1091, subd. (b)(3)(C)). Although the latter requirement is not expressly contained in subdivision (b)(2), it
         must be so construed. Otherwise, a corporation could contract with a city even where a council member is the
         president of the corporation and owns all of the corporation's stock. Such construction of section 1091 would
         defeat the manifest purpose of section 1090 to avoid any appearance of impropriety. (Stigall v. City of Taft,
         supra, 58 Cal.2d at 569; City of Imperial Beach v. Bailey, supra, 103 Cal.App.3d at 197.) We have also
         examined the legislative histories of subdivision (b)(2) (see Stats. 1957, ch. 1499, § 1) and subdivision (b)(3)
         (see Stats. 1987, ch. 847, § 1) and have found that such construction would violate the Legislature's intent in
         enacting these provisions as well as the rule of strictly construing any exceptions to the general prohibition.
         When stock ownership is the financial interest in question, the Legislature has been precise and detailed in
         limiting the level of the ownership interest. (See § 1091, subds. (b)(6), (b)(10).) Any additional exceptions
         for stock ownership would require careful consideration by the Legislature, not an opinion of the Attorney
         General or the courts.

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                          No other remote interest exception appears relevant to the present circumstances. Without
         one of the noninterest or remote interest exceptions applicable here, the prohibition contained in section 1090
         precludes execution of the instant contract. Footnote No. 3 In so concluding, we emphasize the purposes of the
         statutory prohibition as explained by the Supreme Court in Thomson v. Call, supra, 38 Cal.3d at 647-649:

                            "In San Diego v. S .D. & L. A. R. R. Co., supra, 44 Cal. 106, we recognized the
               conflict-of-interest statutes' origins in the general principle that 'no man can faithfully serve two
               masters whose interests are or may be in conflict': 'The law, therefore, will not permit one who
               acts in a fiduciary capacity to deal with himself in his individual capacity. . . . For even if the
               honesty of the agency is unquestioned . . . yet the principal has in fact bargained for the exercise
               of all the skill, ability and industry of the agent, and he is entitled to demand the exertion of all
               this in his own favor.' (44 Cal. at p.113.) We reiterated this rationale more recently in Stigall v.
               City of Taft, supra, 58 Cal.2d 565: 'The instant statutes [§ 1090 et seq.] are concerned with any
               interest, other than perhaps a remote or minimal interest, which would prevent the officials from
               exercising absolute loyalty and undivided allegiance to the best interests of the city.' (58 Cal.2d
               at p. 569. See, also, City of Imperial Beach v. Bailey (1980) 103 Cal.App.3d 191, 196; City
               Council v. McKinley (1978) 80 Cal.App.3d 204, 212; People v. Darby (1952) 114 Cal.App.2d
               412, 426; Miller, supra, 28 Cal.App.2d at p. 366; Hobbs, Wall & Co., supra, 109 Cal.App.2d at
               p. 319.)

                           "In Stigall we relied in part on the reasoning of the United States Supreme Court on a
               federal penal statute under which a contract was declared to be unenforceable because of a
               conflict of interest: '"The statute is thus directed not only at dishonor, but also at conduct that
               tempts dishonor. This broad proscription embodies a recognition of the fact that an impairment
               of impartial judgment can occur in even the most well-meaning men when their personal
               economic interests are affected by the business they transact on behalf of the Government. To
               this extent, therefore, the statute is more concerned with what might have happened in a given
               situation than with what actually happened. It attempts to prevent honest government agents
               from succumbing to temptation by making it illegal for them to enter into relationships which are
               fraught with temptation."' (Stigall, supra, 58 Cal.2d at p. 570, quoting United States v.
               Mississippi Valley Generating Co. (1961) 364 U.S. 520 [5 L.Ed.2d 268, 91 S.Ct. 294].) Implicit
               in this reasoning is the assumption that the purpose of such statutes is 'not only to strike at actual
               impropriety, but also to strike at the appearance of impropriety.' (City of Imperial Beach, supra,
               103 Cal.App.3d at p. 197 [construing § 1090].)

                           "It follows from the goals of eliminating temptation, avoiding the appearance of
               impropriety, and assuring the city of the officer's undivided and uncompromised allegiance that
               the violation of section 1090 cannot turn on the question of whether actual fraud or dishonesty
               was involved. Nor is an actual loss to the city or public agency necessary for a section 1090
               violation. In Stigall, for example, a city councilman had a financial interest in a plumbing
               company which submitted the lowest bids for a municipal contract. Taxpayers sued to have the
               contracts declared void. They did not allege 'actual improprieties,' nor did they contend that the
               contract was unfair, unjust, or not beneficial to the city. (58 Cal.2d at p. 568.) On these facts, we
               nonetheless concluded that the contract violated section 1090, reasoning that the 'object of these
               enactments is to remove or limit the possibility of any personal influence, either directly or
               indirectly which might bear on an official's decision, as well as to void contracts which are
               actually obtained through fraud or dishonest conduct.' (Id. at p. 569. See, also, San Diego v. S. D.
               & L. A. R. R. Co., supra, 44 Cal. at p. 13; City of Imperial Beach, supra, 103 Cal.App.3d at p.
               197; Fraser-Yamor Agency, Inc., supra, 68 Cal.App.3d at p. 215; Schaefer v. Berinstein (1956)
               140 Cal.App.2d 278, 290.) And in Shuffleton, supra, we observed that 'it matters not how fair
               upon the face of it the contract may be, the law will not suffer [the official] to occupy a position

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                so equivocal and so fraught with temptation.' (203 Cal. at p. 105.)

                           "In short, if the interest of a public officer is shown, the contract cannot be sustained
                by showing that it is fair, just and equitable as to the public entity. Nor does the fact that the
                forbidden contract would be more advantageous to the public entity than others might be have
                any bearing upon the question of its validity. (Capron v. Hitchcock (1893) 98 Cal. 427.)" (Fns.
                omitted.)

                           We conclude that a city council may not execute a contract with a corporation for the
         purchase of equipment if one of the council members and her spouse own less than 3 percent of the stock of
         the corporation, the spouse has been employed by the corporation for more than 3 years, and the spouse's
         salary from the corporation exceeds 5 percent of the total annual income of the member and spouse.


                                                                   *****

         Footnote No. 1
         All section references hereafter are to the Government Code unless otherwise indicated.
         Footnote No. 2
         While the definitions of noninterests and remote interests appear to exempt from the operation of section 1090 only the
         interest of the officer, we have previously concluded that an exception for a noninterest or remote interest that would be
         available to the officer is also applicable to an interest held by the officer's spouse. (78 Ops.Cal.Atty.Gen., supra, at 237,
         fn.4.)
         Footnote No. 3
         A "rule of necessity" allows execution of a contract in narrowly defined circumstances. (See Eldridge v. Sierra View Local
         Hospital Dist. (1990) 224 Cal.App.3d 311, 321; 80 Ops.Cal.Atty.Gen. 335, 338-339 (1997); 65 Ops.Cal.Atty.Gen., supra,
         310; 59 Ops.Cal.Atty.Gen. 458, 463-465 (1974).) The application of this rule is beyond the scope of this opinion.




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