Conflict of Interest; Officials of Nonprofit Corporation

Reply to:

Ann Reed

Administrative Division

(919) 716-6800 (fax)919-716-6755

September 1, 1999

A. Dumay Gorham, Jr.
Marshall, Williams & Gorham, L.L.P.
Attorneys at Law

P.O. Drawer 2088
Wilmington, North Carolina 28402-2088

RE: Advisory Opinion; Conflict of Interest; Officials of Nonprofit Corporation;

N.C.G.S. §14-324; N.C.G.S. §55A-8-31

Dear Mr. Gorham:

You request our opinion concerning whether New Hanover Regional Medical Center (NHRMC) may make a grant to a nonprofit corporation if one member of the Board of Trustees of NHRMC is a member of the Board of Directors of the nonprofit corporation and another is Executive Director of the nonprofit corporation.

NHRMC is a nonprofit corporation organized under the North Carolina Nonprofit Corporation Act. It operates and administers New Hanover Regional Medical Center, a public hospital within the definition of N.C.G.S. §159-39(a)(2) and (3), which is owned by New Hanover County. NHRMC trustees are appointed by the New Hanover County Board of Commissioners. In May 1996, the trustees approved the creation of the Community Health Improvement Program (CHIP), a multi-faceted program whose primary purpose is to fund projects and programs that improve the health of citizens living in the area served by the hospital. Revenues for CHIP are generated by the operation and administration of the Medical Center, and the trustees ultimately determine which projects and programs receive grants from CHIP. The Partners Program is one of the CHIP programs through which grants are awarded.

During a review of applications for CHIP grants, it was discovered that a member of the Board of Trustees of NHRMC is also a member of the board of directors of a nonprofit corporation which has applied to the Partners Program for a CHIP grant. Another trustee is Executive Director of the nonprofit corporation. Your question is whether these two trustees

violate N.C.G.S. §14-234 if they remain on both boards. If so, the violation would have the A. Dumay Gorham, Jr. March 16, 2001 Pg 2

further effect of invalidating a CHIP grant to the nonprofit corporation.

Attached to your letter is an opinion dated December 6, 1982, in which this office concluded that NHRMC is subject to the provisions of N.C.G.S. §14-234. That statute provides, in pertinent part:

(a) If any person appointed . . . a . . . director to discharge any trust wherein . . . any county. . . may be in any manner interested shall . . . make any contract for his own benefit under such authority, or be in any manner concerned or interested in making such contract, or in the profits thereof . . . he shall be guilty of a misdemeanor.

(c1) The fact that a person . . . is an employee of said corporation . . . does not

make the person “in any manner interested” or “concerned or interested in making

such contract, or in the profits thereof,” . . . as such phrase is used in subsection

(a) of this section. . .provided that in order for the exception provided by this subsection to apply, such undertaking or contracting must be authorized by the governing board by specific resolution on which such public official shall not vote.

The key element of a violation of this statute is a contract which financially benefits a public official. As you point out in your letter, it is ordinarily applied where a public body is considering entering into a contractual relationship with a for-profit organization and a public official is a member of both groups. Although our courts have never addressed the situation where the contractual relationship is between a public body and a nonprofit organization, this Office concluded in a 1980 opinion that no conflict of interest arose where a county director of social services also served as a director of a nonprofit corporation that administered federal funds, even though the agency was a potential recipient of federal funds from the corporation. This conclusion was based on the fact that the county director would not realize any personal financial benefit as a result of the contractual relationship between the agency and the corporation. See opinion of the Attorney General to Robert H. Ward, 49 N.C.A.G. 102 (1980).

In your letter you quote from a discussion of this question by Fleming Bell in Ethics, Conflicts, and Offices: A Guide For Local Officials, The Institute of Government, The University of North Carolina at Chapel Hill (1997). Mr. Bell also observes that if the benefit from a contractual relationship between a public body and a nonprofit organization flows to the nonprofit organization and not to individuals affiliated with the organization, the statute is not

triggered. On the other hand, if there is some personal financial benefit to an individual affiliated with both groups, the statute may well apply.

A. Dumay Gorham, Jr. March 16, 2001 Pg 3

We believe you correctly conclude that these questions must be answered on a case by case basis. It appears from our discussions with you that neither of the trustees who are the subject of your inquiry will benefit financially as a result of the CHIP grant to the nonprofit corporation with which they are affiliated. The grant money will be used to address community health issues, and there is no indication that either trustee will receive any of these funds either directly or indirectly. We assume the trustee who is Executive Director of the nonprofit corporation receives a salary from the corporation, but pursuant to the exception to N.C.G.S. §14-234(a) set out in N.C.G.S. §14-234(c1), that fact alone does not trigger the application of the statute, provided the board authorizes the CHIP grant to the corporation by a specific resolution on which this trustee does not vote.

Ultimately, however, while we can provide you with our interpretation of the statute and its application to particular facts, we cannot investigate to determine if there are other facts which may be relevant to this inquiry. Your board should investigate both situations and determine whether there will be any personal financial benefit to any individual who is affiliated with both NHRMC and the nonprofit corporation as a result of a CHIP grant to the corporation.

Aside from the application of the criminal conflict of interest statute, in our opinion the conflict of interest provisions applicable to nonprofit corporations do apply in this situation.

A.: Dumay Gorham, Jr. March 16, 2001 Pg 4

(2) Another entity of which he is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation.

See also subsections (c) and (d), with regard to how a conflict of interest transaction can be authorized, approved or ratified. We assume from your letter that the amount of money available for CHIP grants under the Partners Program is limited and that organizations applying for grants must compete for funding. This being the case, we believe that the conflict transaction is the entire Partners Program grant process, and not just the grant to the nonprofit corporation with which these two trustees are affiliated.

In conclusion, the provisions of N.C.G.S. §14-234 address conflicts that arise between an individual’s official duties and his personal financial interests. If neither of the two NHRMC trustees will personally benefit, either directly or indirectly, from the grant to the nonprofit corporation with which they are affiliated, then in our opinion there is no violation of the statute. The grant award process is, however, subject to the conflict of interest provisions contained in

N.C.G.S. §55A-8-31. We believe this conflict encompasses the entire process of awarding CHIP grants under the Partners Program, and not just the grant to the nonprofit corporation with which the trustees are affiliated.

We trust that we have responded fully to your questions. If you have additional questions or if we can be of further assistance, please do not hesitate to call on us.

Sincerely,

Ann Reed Senior Deputy Attorney General