Public Officer Contracting with Corporation which he is Stockholder/Officer

Subject:

Requested By: John F. Kime Town Manager Liberty N.C.

Question: Does a conflict of interest, prohibited by G.S. 14-234, exist if a member of the City Council is a minority stockholder or an officer of public or private corporation and the City Council enters into a contract with that corporation?

Conclusion: Yes. The general rule is that a public officer who is either a stockholder or officer of a corporation which enters into a contractual relation with the office or the public body of which he is a member, violates a statute which prohibits such public officer from having a direct or indirect interest in any such contract, and is also against public policy as declared by the common law.

Many cases are cited in 140 C.L.R. 344 to support the above general rule. The North Carolina Supreme Court has held that the prohibition of G.S. 14-234 extends to an officer of a corporation in making contracts between the corporation and the city or county governing body of which he is a member. State v. Williams, 153 NC 595; Lexington Insulation Co. v. Davidson County, 243 NC 252.

"No man ought to be heard in any court of justice who seeks to reap the benefits of a transaction which is founded on or arises out of criminal misconduct and which is in direct contravention of the public policy of the State. Fashion Co. v. Grant, 165 NC 453, 81 S.E. 606; Marshall v. Dicks, 175 NC 38, 94 S.E. 514; Lamm v. Crumpler, 233 NC 717, 65 S.E. 2d 336; Waggoner v. Publishing Co., 190 NC 829, 130 S.E. 609.

"Public Office is a public trust and this Court will not countenance the subversion thereof for private gain. Not only will it declare void and unenforceable any contract between a public official, or a board of which he is a member, and himself, of a company in which he is financially interested, whereby he stands to gain by the transaction, but it will also deny recovery on a quantum meruit basis. In entering into such contract, a public official acts at his own peril and must suffer the loss incident upon his breach of his public duty. He may look in vain to the courts to aid him in his efforts to recoup his losses, due to the invalidity of the contract, on the grounds the public agency which he serves has been enriched by his misconduct.

"In other words, this Court will not recognize or permit any recovery bottomed on the criminal conduct of a public official. To put it simply, the doors of the courts are closed to any individual, or firm in which he is financially interested, who engaged in a transaction which comes within the language of the statute. Snipes v. Winston, supra; Davidson v. Guilford, supra; King v. Guilford, 152 NC 438; S. v. Williams, supra, Annos. 84 A.L.R. 969, 110 A.L.R. 164, 154 A.L.R. 375; 12 A.J. 498." Insulation Co. v. Davidson County, supra, at p. 255.

Although we find no North Carolina cases involving a public official who was a mere stockholder in the corporation, the courts in many other jurisdictions apply the general rule stated above. Most of the statutes involved contained language similar to G.S. 14-234, "be in any manner interested", "make any contract for his own benefit", "be in any manner concerned or interested in making such contract . . ., "either privately or openly, singly or jointly with another".

In Hardy v. Mayor of Gainsville, 48 SE 921, the statute contained the language "or have any interest in such contract either by himself or by another, directly or indirectly". The Council member held stock in a corporation which entered into a contract with the city. HELD: a stockholder in a private corporation clearly has an interest in the contracts of the corporation and the contract with the city was illegal and void.

There are many cases collected in 140 A.L.R. 344 which apply the general rule stated above. The amount of stock held appears to be immaterial since even one share of stock constitutes the "interest" which brings the person within the prohibition of the law.

Apparently the cases do not draw a line between stock held in either a private or public corporation. The amount of stock held, or whether there was any actual knowledge of or participation in the contract between the governing board and the corporation.

As stated in State v. Williams, supra, the application of the rule may in some instances appear to bear hard upon individuals who have committed no moral wrong; but it is essential to the keeping of all parties filling a fiduciary character to their duty, to preserve the rule in its integrity and to apply it to every case which justly falls within its principle.

In an opinion dated March 13, 1970, 40 N.C.A.G. 565, this Office held that a school board is prohibited from contracting with a wholly owned subsidiary company of a parent company in which a school board member has stock.

Any administrative official of a local unit of government, having knowledge that a board member has a prohibited interest in a corporation or business, who contracts with or purchases supplies from the firm or corporation may be in violation of G.S. 14-230, and in any event the contract would be void and the funds could be recovered as being an unlawful expenditure of public funds.

Rufus L. Edmisten Attorney General

James F. Bullock Senior Deputy Attorney General