CEO 86-2 -- January 9, 1986

CONFLICT OF INTEREST

CITY COUNCIL MEMBER OWNING INTEREST IN OR CONTRACTING WITH PARTNERSHIP SEEKING INDUSTRIAL REVENUE BOND FINANCING FROM CITY

To: (Name withheld at the person's request.)

SUMMARY:

A prohibited conflict of interest would be created were a city council member to be a general partner in a partnership which is seeking industrial revenue bond financing from the city to renovate a hotel owned by the partnership. Section 112.313(7), Florida Statutes, prohibits a city council member from having any employment or contractual relationship with a business entity, such as the partnership here, which is doing business with the city. However, this provision would not prohibit the council member from holding a promissory note given by the general partner of the partnership on which the partnership would not be liable. Nor would Section 112.313(7) prohibit the council member's management company from contracting with the partnership to manage the hotel. CEO's 79-1, 79-13, 81-47, and 81-58 are referenced in this regard.

QUESTION 1:

Would a prohibited conflict of interest be created were a city council member to be a general partner in a partnership which is seeking industrial revenue bond financing from the city to renovate a hotel owned by the partnership?

This question is answered in the affirmative.

In your letter of inquiry you advise that .... serves as a member of the St. Petersburg City Council. The Council member is considering becoming a general partner with an ownership interest of between 10 and 15 percent in a partnership which is contemplating applying to the City for industrial revenue bond financing to renovate a hotel owned by the partnership.

In this transaction the City would issue revenue bonds which would be purchased by a financial institution. The City would enter into a memorandum of agreement with the partnership whereby the City would agree to pursue the issuance of the bonds and the partnership would agree to hold the City harmless and to provide such agreements as may be required by the City. The memorandum of agreement would not commit the City to issue the bonds.

If the City did issue the bonds, the City and the partnership would enter into a financing agreement governing the disbursement of bond proceeds and the security for repayment. The City will have absolutely no liability or obligation under the bonds, as it is merely a conduit in a transaction that is between the partnership and the lending institution.

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

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 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 private interests and the performance of his public duties or that would impede the full and faithful discharge of his public duties. [Section 112.313(7)(a), Florida Statutes (1985).]

This provision prohibits a city council member from having any employment or contractual relationship with a business entity which is doing business with the City. As a general partner, the subject Council member clearly would have an employment or contractual relationship with the partnership. Therefore, the question we must decide is whether the partnership would be "doing business with" the City were the City to agree to issue industrial revenue bonds in behalf of the partnership's project.

The City clearly is authorized by the Florida Industrial Development Financing Act (Chapter 159, Part II, Florida Statutes) to enhance economic opportunities by facilitating the financing of projects such as this through the issuance of revenue bonds. It is our view that in doing so, the City would be doing business with the partnership and the partnership would be doing business with the City.

We generally have advised that a business entity is doing business with an agency where the parties have entered into a lease, contract, or other type of legal arrangement under which one party would have a cause of action against the other in the event of a default or breach. See, for example, CEO 77-36, CEO 80-87, and CEO 82-50.

Here, it appears that under the financing agreement which would be entered into by the City and the partnership, the City would be authorized to enforce the agreement in the event of any default by the partnership. Similarly, although the partnership would agree to hold the City harmless against any claims arising out of the transaction, the "hold harmless" provisions themselves may be subject to enforcement by the City. Under a trust indenture between the City and a trustee bank, the City assigns all its rights and interests to the trustee, but retains certain rights under the financing agreement, including the City's rights to indemnity, reimbursement, and any other rights specifically reserved to the City in the agreement. Therefore, although as a practical matter the trustee stands in the place of the City, the City retains certain continuing contractual rights vis-a-vis the partnership. In summary, that the City and the partnership would be "doing business" with each other would be evidenced by the contractual relationship between them and the potential for a cause of action arising from a breach of that contract.

Accordingly, we find that a prohibited conflict of interest would be created were the subject City Council member to be a general partner in a partnership seeking industrial revenue bond financing from the City.

QUESTION 2:

Would a prohibited conflict of interest be created were a city council member to hold a promissory note given by an individual who is the general partner in a partnership which is seeking industrial revenue bond financing from the city to renovate a hotel owned by the partnership?

This question is answered in the negative.

In a telephone conversation with our staff, the attorney for the partnership advised that when the subject city council member learned that his interest in the partnership might create a prohibited conflict of interest, he divested himself of that interest by selling his interest in the subject property to the other general partner in the partnership. In exchange, the other general partner gave an unsecured promissory note for which he is personally liable, which is not contingent on the issuance of bonds by the City, and which would not be paid from the proceeds of the bonds. This individual will be the only general partner in the partnership which is seeking the issuance of the bonds by the City.

Section 112.313(7), Florida Statutes, is the relevant provision of the Code of Ethics for this question also. The subject Council member has a contractual relationship, as evidenced by the promissory note, with the individual who is the general partner in the partnership which is applying for industrial revenue bonds from the City. Although the partnership will be doing business with the City, as we found in our response to your first question, the Council member no longer will have a contractual relationship with that business entity. Similarly, in CEO 81-45, Question 4, we found that a county commissioner was not prohibited by Section 112.313(7) from being jointly liable on a promissory note with an individual who was the president of a corporation which was doing business with the county.

Accordingly, we find that no prohibited conflict of interest would be created were the subject Council member to hold a promissory note given by an individual who is the general partner in a partnership which is seeking industrial revenue bond financing from the City.

QUESTION 3:

Would a prohibited conflict of interest be created were a management company owned by a city council member to contract for the management of a hotel with a partnership which has renovated the hotel with industrial revenue bond financing from the city?

This question is answered in the negative.

In your letter of inquiry you raise a further question involving the relationship of the subject Council member's management company to the hotel which would be renovated with industrial revenue bond financing from the City. You question whether the Council member's management company may contract with the partnership for the management of the hotel.

In several opinions we have concluded that although Section 112.313(7)(a) prohibits a public officer from having any employment with a business entity which is doing business with his agency, it does not prohibit a public officer from employment with a business entity doing business with a second business entity, which in turn is doing business with his agency. See CEO 79-1, CEO 79-13, CEO 81-47, and CEO 81-58. In CEO 80-25 we disregarded the corporate form where a county commissioner was an officer and shareholder of a holding company which held only the stock of a wholly owned subsidiary corporation that was doing business with the county. However, here the management company apparently would not be formed in order to allow the subject Council member to have an ownership interest in the partnership which is renovating the hotel.

Accordingly, we find that no prohibited conflict of interest would be created were the City Council member's management company to contract for the management of a hotel with a partnership which has renovated the hotel with industrial revenue bond financing from the City.