                                The Attorney          General of Texas
                                                   tune 10, 1982
MARK WHITE
Attorney General

                               Honorable Reynaldo S. Cantu. Jr.       Opinion No. kB+477
Supreme Court Building         Criminal,Dlstrict Attorney
P. 0. BOX 12548                Cameron County                         Re: Whether a city official
Austin. TX. 78711- 2548
51214752501
                               Hall of Justice                        may participate in Federal
Telex 9101874.1367             974 E. Harrison Street                 Urban    Development  Action
Telecopier 512/475-0266        Brownsville, Texas   78520             Grant in private capacity as
                                                                      merchant
1607 Main St.. Suile 1400
Dallas. TX. 75201-4703
                               Dear Hr. Cantu:
2141742-8944
                                    You have asked the attorney general whether a conflict of
                               interest arises as a result of the following situation. The city of
4824 Alberta Ave.. Suite 160
                               San Benito has applied for an Urban Development Action Grant
E, Paso. TX. 799052793
91515333464
                               [hereinafter DDAG] pursuant to 42 U.S.C. sections 5318-5320 and 24
                               C.F.R. sections 570.450 - 570.464. The federal money would be used to
                               subsidize interest on loans between banks and .participatlngbusinesses
1220 Dallas Ave., Suite 202    and to pay for street improvement in full. The mayor and two city
HOUS,O~, TX. 770026986
                               commissioners own businesses eligible to participate in the grant.
7131650-0666

                                    The Secretary of the Department of Housing and Urban Development
606 Broadway. Suite 312        has the authority to waive any conflict of interest which is not a
Lubbock. TX. 794013479         violation of state or local law or charter provision. However, before
8061747-5236
                               he will issue a written waiver, the Secretary has requested that the
                               city obtain an Attorney General Opinion as to whether a conflict
4309 N. Tenth. Suite B         exists that violates state or local laws. Thus we address only Texas
McAllen. TX. 78501-1665        requirements relating to conflicts of interest.
5124682.4547
                                    You have informed us that San Benito is a "home rule" city and
200 Main Plaza. Suite 400      have sent a copy of article 3, section 4 of the city charter, which
San Antonio,. TX. 762052797    states:
512/225.4191
                                        No officer, agent or employee of the City of San
 An Equal OpportunityI
                                        Benito or appointee of the City Commission or
 Affirmative Action Employer            a,ppointee of any officer of said City. shall be
                                        pecuniarily interested, directly or indirectly In
                                        any contract let by the City Commission or for and
                                        in behalf of said City. Nor shall any officer,
                                        agent or employee of said City be pecuniarily
                                        interested directly or indirectly in any public
                                        work or Improvement let, supervised or commenced




                                                          p.   1679
Honorable Reynaldo S. Cantu, Jr. - Page 2   (m-4.77)




          by said City or which shall be paid for wholly ot
          in part by said City....

     You have also stated that a committee consisting of members of
the Board of City Development (a branch of the San Benito Chamber of
Commerce) was appointed by the president of the Chamber of Commerce to
oversee the distribution of the interest subsidy. 'The portlon of the
grant used for city improvement will be overseen by the city. San
Benito is not required to provide any matching funds.

     You have also informed us that an engineer was hired to study the.
c&y and to independently determine which area of the city would
qualify ,for and benefit from a grant,   following the standards set
forth in 42 U.S.C. sections 5318(b)(l) and (2).             The final
determination of the area to be improved was made by the Secretary.'
All businesses in the designated area'were eligible for interest
subsidies from the Department of Housing and Urban Development
[hereinafter HUD] by request, and upon meeting requirements as
"participating businesses."

     There are two contracts which must be ekamined for conflicts:
one between the city and HUD; the other, representative of several,
between the city and participating businesses.

     The city [Recipient] warranted, in its contract with         the
Secretary, that no member, officer, or employee would have        any
interest, direct or indirect, in any contract.

    Section 5.01(8) of the contract states:

            NO member,    officer, or employee of the
         Recipient, or its designees, or agents; no
         consultant, no member of the governing body of the
         Recipient or the locality in which the program is
         situated, and no other public official of the
         Recipient or such locality or localities, who
         exercises or has exercised any functions or
         resnonsibilities with resnect to the Proiect
         during his or her tenure, shall have any inter&t,
         direct   or   indirect,. in    any   contract   or
         subcontract, or the proceeds thereof, for work to
         be performed in connection with the Project or in
         any activity, or benefit therefrom, which is part
         of this Project.

            (However. upon    written   request  of   the
         Recipient, the Secretary may agree in writing to
         waive a conflict otherwise prohibited by this
         provision whenever there has been full public




                               ,p. 1680       '.?::
Honorable Reynaldo S. Cantu. Jr. - Page 3   (~~~477)




         disclosure of the conflict of interest, and the
         Secretary determines that undue hardship will
         result either to the Recipient or the person
         affected by applying the prohibition and that the
         granting of a waiver is in the public interest.
         No such request for a waiver shall be made by
         Recipient which would, in any way. permit a
         violation of State or local law or any charter
         provision of the Recipient.) (Emphasis added).

This contract wa,s signed in November 1980. The mayor. upon city
cowmission approval, signed on behalf of the city. At the time the
contract was    signed, the mayor and one cowmissioner owned
participating businesses. A second commissioner elected to become a
participating business at a later date. A conflict of interest
existed at this point under Texas common law and article 3, section 4
of the San Benito City Charter.

     The common law rule, followed in Texas and codified as article 3.
section 4 of the-San Benito City Charter, is that municipal officers
and agents cannot be pecuniarily "interested in" contracts of any
character with the municipality. Such an interest voids the contract.
See, e.g., Delta Electric Construction Company, Inc. v. City of San
Antonio, 437 S.W.2d 602 (Tex.~Civ. App. - San Antonio 1969, writ ref'd
n.r.e.); City of Edinburg v. Ellis, 59 S.W.2d 99 (Tex. Coma'n App.
1933); 10 E. McQuillin, The Law of Municipal Corporations 029.97 (3rd
ed. 1978); 63 C.J.S. Municipal Corporations $0988 et seq.; 40 Tex.
Jur. 2d Municipal Corporations 1430; Attorney General Opinions MW-342
(1981); MW-155, MW-124 (1980); H-1309 (1978); H-916 (1976); H-695,
H-624 (1975); H-354 (1974); M-34!, (1969).

     The rule was discussed in Meyers v. Walker, 276 S.W. 305. 307
(Tex. Civ. App. - Eastland 1925, no writ):

         If a public official directly or indirectly has a
         pecuniary interest in a contract, no matter how
         honest he may be. and although he may not be
         influenced by the interest, such a contract so
         made is violative of the spirit and letter of our
         law, and is against public policy.

See also Penal Code 039.01. The benefit to be received by each
official is the payment of interest on each official's loan; it is
thus direct, personal, and pecuniary.

     Although city officials attempted to deal with this conflict by
appointing a committee to oversee the interest subsidy payments, the
contract is between the city and HDD. Section 4.01 of the contract
states:




                              p. 1681
Honorable Reynaldo S. Cantu. Jr. - Page 4    (Mw-477)




            By its execution of this Grant Agreement, the
         Recipient represents and warrants that it has the
         legal.capacity to assume the responsibilities for
         compliance with all applicable Federal rules and
         agrees and undertakes to assume and carry out all
         such responsibilities in accordance with all the
         requirements which are or may be established
         pursuant thereto.

In addition. the contract commits the city to keep and maintain books,
records and otherdocuments for grant funds, and to keep them open for
inspection by the Secretary. Sec. 6.01(a), (b). Even though the city
tried to delegate the responsibility for distribution and accounting
to another group, the city has contractually obligated itself to be
responsible. Attorney General Opinions H-1212 (1978); M-887 (1971).

     Pursuant to section 10.01 of the contract and 24 C.F.R. section
570.458(c)(7). the city agreed that it would present evidence of
legally binding commitments between the participating businesses and
itself. A legally binding commitment is a legally enforceable written
obligation by a participating party to complete ~a specified activity
approved as part of the action grant. Sec. 570.451(k). The agreement
is between the city and the participating party. Sec. 570.458(c)(7).
Each official had a pecuniary interest in agreements signed by the
mayor .(on behalf of      the city) and individual officials as
participeting businesses.

     The legally binding 'commitment itself contains a conflict of
interest section in which the partitiipatingbusiness must warrant:

         that it is not a member, officer, or employee of
         the Recipient, or its designees. or agents, a
         consultant, member of Recinient's noverninn body.
         or the governing body of the localiiy in which the
         Program is situated, and that it has not and will
         not exercise any functions or responsibilities
         with respect to the project during his or her
         tenure, shall have no interest, direct or
         indirect, in any contract or subcontract, or in
         the proceeds thereof, for work to be performed in
         connection with the Project or in any activity, or
         benefit therefrom, which is part of this Project.

            In the event Participating Business, is in
         conflict with any of the provisions contained in
         the paragraph above, he or she has or will, before
         accepting any funds resulting from the Grant,
         obtain a waiver from the Secretary as to any such
         conflict. (Emphasis added).




                                   p. 1682
Honorable Reynaldo S. Cantu. Jr. - Page 5   &J-477)




This section would be violated in at least four of the contracts
between the city and the participating businesses. In addition, this
office has stated that dual agency creates a conflict similar to that
of officials with pecuniary interests. Attorney General Opinion
H-1309 (1978) states:

             Closely related to the policy against public
          contracts in which one of the contracting
          officials has a pecuniary interest is the policy
          ageinst~ dual agency. An agent may not represent
          the opposing party in a transaction without the
          full knowledge and consent of his principle.
          (Citations omitted).    Although this rule has
          developed in the context of private transactions,
          we believe it is relevant to the conduct of
          persons acting as agents of the state. Like the
          policy against conflict of interest in public
          contracts, it guards against competing interests
          of a public official which would 'prevent him from
          exercising    absolute   loyalty   and   undivided
          allegiance   to   the  best    interest' of    the
          governmental entity he serves.... In view of the
          courts' concern about the disinterestedness of
          public officials as expressed in cases like Meyers
          v. Walker, supra. we believe they would be
          reluctant to find the state's consent to its
          agent's representation of the opposite party in a
          transaction.

We believe that the issue of dual agency creates a conflict of
interest in the second set of contracts, at least so far as the
interested officials are concerned.

      It has been pointed out that exceptions to the void contract rule
have been created in .other jurisdictions. InBlankenship V. City of
Richmond, 49 S.E.2d 321 (Va. 1948). a court decided that there was no
conflict of interest where the officers voted on a legislative matter
rather than a judicial one. In Downs v. Mayor and Common Council of
the City of South Amboy, 185 A. 15 (N.J. 1936). a.court    decided that
an ordinance which forbids 'an interest in municipal~improvements made
at municipal expense does not extend to improvements paid by another.
Finally, in Preston v. Gillam. 184 A.2d 462 (N.H. .1962), the court
found no conflict of interest where the interest is remote from or
identical with the public interest. However, the courts of Texas have,
recognized only one exception to the void contract rule: the interest
of. a city official charged with making or ratifying assessment for
improvements arising from ownership of property does not create a
disqualification. Seymour v. Security Trust Cimpany.     55 S.W.2d 853
(Tex. Civ. App. - Galveston 1932, writ dism'd); Farley v. Uvalde




                               p. 1683
    Honorable Reynaldo S. Cantu. Jr. - Page 6     (Mu-4771
.




    Paving Company, 74 S.W.2d 288 (Tex. Civ. App. - El Paso 1934. no
    writ).  The contracts presented here do not fall into the above
    exception.

                                  SUMMARY

                Pursuant to article 3, section 4 of the San
             Benito City Charter, a conflict of interest exists
             when city officials contract for an Urban
             Development Action Grant and are among the
             merchants who would benefit from the grant by
             receiving an interest subsidy.




                                            MARK      WHITE
                                            Attorney General of Texas

    JOHN W. FAINTER. JR.
    First Assistant Attorney General

    RICHAND E. GRAY III
    Executive Assistant Attorney General

    Prepared by Patricia Hinojosa
    Assistant Attorney %eneral

    APPROVED:
    OPINION COMMITTEE

    Susan L. Garrison, Chairman
    Jon Bible
    Roxanne Caperton
    Rick Gilpin
    Patricia Hinojosa
    Jim Moellinger




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