CONFLICT OF INTEREST
COUNTY COMMISSIONER OWNING LIMITED LIABILITY COMPANIES SERVING DEVELOPERS,
AND BEING MEMBER OF TRADE ASSOCIATION
To: Leonard Berger, (Senior Assistant County Attorney, Palm Beach County)
No prohibited conflict of interest would be created under Section 112.313(7)(a), Florida Statutes, were a County Commission member to have an ownership interest in, and serve as president of, limited liability companies providing marketing, sales, and title services to developers in the County. The Commissioner would be required to abstain from voting on issues which would inure to the special private gain or loss of developers or landowners contracting with his companies.
A conflict would be presented by the Commissioner's service as an officer or director of a trade association, but mere membership in or service on a committee of such association would not create a prohibited conflict under the statute.
Would a prohibited conflict of interest exist were a member of the Palm Beach County Commission to have an ownership interest in, and serve as president of, limited liability companies providing marketing, sales, and title services to developers operating in Palm Beach County?
Your question is answered in the negative, under the circumstances presented.
You write on behalf of Robert J. Kanjian, a member of the Palm Beach County Commission, to request guidance as to the application of Section 112.313(7), Florida Statutes, with respect to his private business interests. You have provided information to our staff through telephone conversations with you and correspondence from yourself and the Commissioner.
You state that the member is president and sole owner of a limited liability company (Company) which provides various services to developers in Florida, primarily consisting of marketing, sales, and title services. "[I]n layman's terms," you write, the Company is "the real estate broker of finished homes at new home developments." You advise that the developers served by the Company are generally small to mid-sized, creating communities of 11-150 residential units. The marketing agreements are written agreements between the owner of title to the land (which is typically a single asset entity created by the developer to produce homes in a given community, but in the case of a very small developer may be the development company itself) and the Company. The Commissioner has a title insurance license and a real estate brokers license, and serves as broker of record for the Company. This, he advises, creates a fiduciary duty to the developers. The Commissioner is also an attorney, but states that he does not represent any of the developers or landowners as clients.
The title services are provided through a separate limited liability company (Title Company) in which the Commissioner has a 50% ownership interest and which he also serves as president. You write that the Title Company is a title insurance agency which "handles business from anyone on a spot basis and also handles many of the closings with the consumers that purchase homes in the developments served by [the Company]." The Title Company does not contract with any developer, you state. Rather, the Company's contract with the developer gives it the right to select a title company for its closings, and it usually selects the Title Company.
You advise that neither company does business with the County. The Company serves clients throughout Florida, and currently is serving developments in some incorporated municipalities in the County. The Company is not currently contracting with any developments located in the unincorporated areas of Palm Beach County, although it has done so in the past and may do so in the future. The Title Company, you write, "serves customers from anywhere."
You advise that there are a number of ways in which the County may exercise jurisdiction over the developers the Company serves. The County's land use and zoning authority is, you write, generally limited to the unincorporated areas. You advise that a developer in the unincorporated area of the County must obtain a Development Order from the County Commission, and may later seek amendments to that Development Order which would also have to be approved by the County Commission. In addition, the County has "administrative procedures for projects seeking certain types of development order amendment, relief from certain regulations through variance processes, and appeal from administrative decisions." You advise that with the exception of Class B conditional use approvals (a narrow class of requests heard by the Zoning Commission and appealable to the County Commission), none of these administrative decisions are subject to review by the County Commission. Rather, they are final agency action, which may be appealed to the Circuit Court via petition for writ of certiorari.
In the incorporated municipalities, you advise, the County does not issue Development Orders, but does have controlling ordinances in areas such as traffic concurrency, impact fees, and wellfield regulations. You ask whether a conflict would be created for the Commissioner in the event:
a) The developer seeks, from the County Commission, a Development Order for a new project or an amendment to a Development Order for an existing project, in the unincorporated area of the County;
b) The developer must interact with County boards or departments on zoning issues related to projects in the unincorporated areas of the County;
c) The County amends one of the aforementioned ordinances of County-wide applicability; or,
d) The developer must interact with County boards or departments regarding current or future projects in incorporated municipalities.
Section 112.313(7), Florida Statutes, provides:
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 . . . ; 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.
The Commissioner's agency is the County Commission. CEO 00-14. The first part of Section 112.313(7) prohibits him from having a contractual relationship with any business entity regulated by or doing business with the County. As a threshold issue, then, it must be determined with whom he has a contractual relationship.
The term "contractual relationship," is not defined in the statute. In prior opinions we have looked to the substantive law to determine whether a contract exists. In CEO 06-12 and CEO 91-31, we observed, "A 'contract' is defined as a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty, or as an agreement upon a sufficient consideration to do or refrain from doing a particular lawful thing. 11 Fla. Jur. 2d Contracts, Section 1." We find that as a member of each of the limited liability companies, the Commissioner has contractual relationships with the Company and the Title Company.
We arrive at this conclusion by first noting that we have long acknowledged that corporations have separate legal identities from their owners, directors, and parent or subsidiary corporations (see, CEO 99-13, and the opinions cited therein), although we have not had occasion to consider whether this is true with respect to LLC's. Limited liability companies are creatures of Chapter 608, Laws of Florida, and "are a hybrid, providing the shield from personal liability found in corporations and flow-through tax advantages found in partnerships." Ruggio v. Vining, 755 So. 2d 792, 795, fn. 2 (Fla. 2nd DCA 2000), citing Ronald J. Klein, et al., The New Limited Liability Company in Florida, 73 Fla. B.J. 42 (Aug. 1999). The fact that limited liability companies are designed to shield their owners from liability which would otherwise attach and that such companies, "shall have the same powers as an individual to do all things necessary to carry out [their] business and affairs,"1 including, but not limited to the power to sue and be sued in its own name, to purchase and sell property, and enter into contracts, compels the finding that a limited liability company, like a corporation, is a separate legal entity from its members.
We next examine the structure of the limited liability company and its relationship to its members. LLC's are formed by filing articles of organization with the Department of State. Section 608.407, Florida Statutes. Members of an LLC may also enter into an operating agreement "which need not be in writing, to regulate the affairs of the limited liability company and the conduct of its business, establish duties in addition to those set forth in this chapter, and to govern relations among the members, managers, and company." Section 608.423(1), Florida Statutes. When there is no operating agreement, the company is bound by the minimum requirements set forth by state law. Am Jur 2d Limited Liability Companies Section 3. In Florida, these requirements include the right to access to records and information,2 the right to vote in proportion to ownership interest,3 and the right to vote on dissolution or merger.4 At the same time, members of a limited liability company owe duties of loyalty and care to the company. Section 608.4225, Florida Statutes.
"An operating agreement is contractual in nature; thus, it binds the members of the limited liability company as written and is interpreted pursuant to contract law." Am Jur 2d Limited Liability Companies Section 3, see also, Alexander v. Minton, 855 So. 2d 94 (Fla. 2nd DCA 2003) (where the petitioner sought a writ of certiorari to compel arbitration with the respondent "based on a contract, the operating agreement under which they formed a company to develop a feature-length motion picture"). It is also well established that the relationship between a corporation and its shareholders is contractual in nature. Florida Bar v. Town, 174 So. 2d 395, 397 (Fla. 1965). While there are no comparable cases stating that articles of organization in themselves constitute a contract, it seems to us that given the similarities between LLC's and corporations and in light of the enforceable rights and duties accorded to LLC's vis-à-vis their members, even in the absence of an operating agreement the relationship between the Commissioner and the two LLC's in which he owns an interest should be seen as contractual in nature. Accordingly, we are of the view that the Commissioner has a contractual relationship with both the Company and the Title Company.,
If this were the end of our inquiry, it would make no difference under the first part of the statute whether or not the developers with whom the Company contracts are "regulated by" the County Commission,5 because the Commissioner's contractual relationship would not be with the developer, but rather with the intervening limited liability company. However, our inquiry does not end here. We must also look at whether the Commissioner's relationship with the developers as the broker of record for the Company creates a contractual relationship between the Commissioner and the developer.
A real estate broker owes the buyer or seller engaging him certain duties and in the absence of a special contractual provision is entitled to a commission when he is the procuring cause of a sale. 7 Fla. Jur 2d Brokers, Section 77. You have advised that the Commissioner's fiduciary duties to the developer are the same as those of a single agent relationship pursuant to Section 475.278(3), Florida Statutes, which include loyalty, confidentiality, and obedience. In the past we have considered the broker-seller relationship to be contractual in nature. See, CEO 82-50. Further, consistent with case law, we have viewed services under a professional license as creating a contractual relationship. For example, in CEO 95-28, we found that a certified appraiser held a contractual relationship with the clients of the registered appraiser under his supervision, as the review of the certified appraiser was indispensable to the issuance of appraisals by the registered appraiser. There, we analogized the circumstances to those in Patek v. Associated Insurance Underwriters, Inc., 260 So. 2d 721 (Fla. 3rd DCA 1964) in which the court found a contractual cause of action existed against an insurance agent under whose license the client's business was conducted.
Accordingly, as the Commissioner is the broker of record for the Company, we find that he has a contractual relationship with each entity to which the Company provides brokerage services.6 The question then becomes whether any of the developers with whom the Commissioner has a contractual relationship is "regulated" by his agency, the County Commission.
In CEO 92-2, we said no conflict would exist were a county commissioner to purchase property from a phosphate mining company, where the County had an ordinance under which it had authority to grant or suspend permits for the operation of phosphate mines and grant variances or waivers from requirements for mining operations. We found that the County's role did not constitute "regulation" of the phosphate companies, reasoning that the Commission had control over a host of activities and uses on all land in the unincorporated area of the county, and that to find otherwise would be to say that virtually the whole of the unincorporated portion of the County could be said to be "subject to the regulation" of the Board, making it impossible for any County Commissioner to do business with any landowner. See also, CEO 00-14. In accordance with this analysis, it does not seem to us that the fact that developers served by the Company may from time to time come before the County Commission would itself constitute "regulation."
Similarly, we have not in the past viewed the fact that a business may appear before various subordinate boards of a local government entity as constituting "regulation." For example, in CEO 93-30 we dealt with a question from a county commissioner contracting with a professional engineering firm to coordinate development of his property and to be responsible for all contacts with the county's engineering department regarding compliance with the county's development regulations. We said, "While we previously have found that an engineering firm may be regulated by the building or engineering department of a city or county through the review, approval, and permitting of plats and plans, we have not found that a county or city commission regulates business entities involved in construction and development." (Citations omitted.) Further, in In re John Zerweck, 2 FALR 1097-A (Ethics 1980), aff'd. 409 So. 2d 57 (Fla. 4th DCA 1982) we found that a city commissioner's private employer, a corporation engaged in building and leasing warehouse facilities in the city, was not "subject to the regulation" of the city. There we said,
While the City Commission has enacted numerous, detailed ordinances which specify the manner and mode of land development and building construction within the City of Margate, the active enforcement of these ordinances through review of plans, permitting and inspections has been delegated to various boards and departments of the City. These agencies directly regulate construction and development within the City.
Applying this same analysis to the facts of this case leads us to conclude that the County Commission here does not "regulate" the developers, and consequently, that no conflict is created under the first part of Section 112.313(7), Florida Statutes.
We now turn to the second part of Section 112.313(7), which prohibits a public officer from having any contractual relationship which would create a continuing or frequently recurring conflict between his private interests and the performance of his public duties, or which would impede the full and faithful discharge of his public duties. In Zerweck, supra, the Fourth District Court of Appeals said that this provision establishes an objective standard which requires an examination of the nature and extent of the public officer's duties together with a review of his private interests to determine whether the two are compatible, separate and distinct, or whether they coincide to create a situation which "tempts dishonor."
In CEO 81-84, we addressed the question of whether a conflict would be created where a member of a town planning commission was president of a construction and land development company. We said,
As a general rule, we do not believe that every person whose private employment involves real estate sales, land development, or contracting should be prohibited from serving on a planning commission. Local communities should not be deprived of the opportunity either to appoint to their planning commissions persons with substantial knowledge and expertise in the area of land development or to appoint persons reflecting the entire spectrum of opinions regarding development. It is only in situations where the member's private interests are substantial and would be substantially affected by the commission's work, that he should not be permitted to serve on the planning commission.
However, we cautioned that a prohibited conflict could exist where a planning commission member owned large tracts of land, the value of which could be significantly affected by the planning commission, or where a member was employed by a large development corporation specifically to promote zoning changes.
Similarly, in CEO 87-32, we found no conflict would be created were a county planning and zoning commission member to act as a real estate broker in the sale of property which would be developed as a development of regional impact. Further, in CEO 89-27, we said a member of a city-county planning commission could provide consulting services to a state agency regarding a proposed expressway which may eventually require some degree of review by his commission, although we cautioned there that "if the Commissioner constantly provides consulting work for governmental entities on projects which are reviewed by [his board], his consulting work could be determined to create a frequently recurring conflict of interest."
You have indicated that the Commissioner's work on the projects will not call for him to personally appear before either the County Commission or any County boards or departments, that the Company does not serve the dominant developers in the County, and that the Commission's consideration of matters related to the developments is anticipated to constitute only a very small part of its agenda. Under such circumstances, it is our view that no prohibited conflict of interest would be created by the Commissioner's ownership interest in or service as president of, the Company or the Title Company. We advise the Commissioner to be mindful of the voting conflict provisions of Section 112.3143, Florida Statutes, which state, in relevant part:
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 1officer. 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 prohibits a local official from voting whenever the matter under consideration would work to his own special gain or loss or that of a business associate or a principal by whom he is retained. Clearly, the Commissioner will not be able to vote on any project for which the Company is providing services. Due to the nature of the services the Company provides and the fact that the Commissioner is the Company's sole owner, votes inuring to the benefit or detriment of such a project would also directly impact the Commissioner.
Further, we find that the Commissioner would be required to abstain on any votes inuring to the special private gain or loss of any landowner or developer with whom the Company has a marketing agreement.7 Given the agent-principal relationship between real estate broker and seller, the owner of the land upon which the project is being built would be a principal by whom the Commissioner is retained.
Accordingly, under the circumstances described herein, we find no conflict of interest would be created were you to have an ownership interest in, and serve as president of, limited liability companies performing marketing, sales, and title services for developers in the County.
Is a prohibited conflict of interest created by the Commissioner's membership in the Gold Coast Builders Association?
You advise that the Gold Coast Builders Association is a professional trade association chartered by the National Association of Home Builders and affiliated with the Florida Home Builders Association. Its mission, you write, is "to encourage and promote economic growth and community development by protecting the ability of its members to create the American dream of homeownership." You state that representatives of the organization occasionally appear before the County Commission to advocate positions on various issues. The Commissioner is a member of the Association, whose companies pay dues, and serves on several committees of the organization. You advise that he does not currently serve on the organization's board of directors, but has done so in the past, and may in the future.
In CEO 06-12, we found that a prohibited conflict of interest would be created under Section 112.313(7), Florida Statutes, were a member of the Florida House of Representatives to serve as president of the Florida Association of Realtors. There, we noted that the courts have found that, "[t]he constitution and by-laws of a voluntary association, when subscribed or assented to by the members, becomes a contract between each member and the association." (Citation omitted). In addition, we have said in the past that while mere membership in a voluntary association would not create a prohibited conflict, service as an officer could. CEO 90-18.
Consistent with these opinions, it is our view that the Commissioner's service as an officer or director of the Gold Coast Builder's Association would constitute a prohibited conflict under Section 112.313(7), while mere membership in the Association would not. Nor do we believe that service on one of the organizations' committees would give rise to a conflict under the statute. In a number of opinions interpreting Section 112.313(11), Florida Statutes8, we have opined that although State licensing board members are prohibited from serving as officers or directors of state and local professional associations, they may serve on committees of such organizations. See, CEO 90-61 and opinions cited therein. We recognize that Section 112.313(11) differs from Section 112.313(7) in that the former specifies certain positions which licensing board members may not hold. Nevertheless, it seems to us that the underlying purpose of Section 112.313(11)—to prohibit the conflict which arises because the goals of a State licensing board and those of a private professional organization will necessarily be at variance at some points—may be analogized to that of Section 112.313(7), and that a similar conclusion is therefore appropriate.
Accordingly, we find a prohibited conflict of interest would be created were the Commissioner to serve as an officer or director of Gold Coast Builder's Association, but that no such conflict would exist by virtue of his mere membership in, or service on a committee of, the organization.
ORDEREDby the State of Florida Commission on Ethics meeting in public session on April 18, 2008 and RENDERED this 23rd day of April, 2008.
Albert P. Massey, III, Chairman