Request By:
Hon. Thomas H. Hadley
Attorney at Law
P.O. Box 219
Elizabethtown, Kentucky 42701
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Robert L. Chenoweth, Acting Deputy Attorney General
You have asked the Office of the Attorney General to review our advisory position regarding the conflict of interest of a school board member and that member's relationship with a bank doing business with the local board of education. The statute involved in this matter is KRS 160.180. As you noted, this office has been asked many times to consider conflicts of interest under this qualifications to hold the office of local school board member section of our school laws. We have issued a number of opinions on this board member/ bank problem alone. The latest opinion on this matter and the one we feel to be principally dispositive of questions along this line is OAG 77-231. You acknowledged the position taken in that opinion, but indicated general disagreement in its conclusion. In that opinion this office concluded, in part, as follows:
"It is the opinion of this office that if the only transaction between a subject bank and the school board is the demand deposit of funds for the drawing of checks or the deposit of school monies in time deposits on which interest is paid by the bank to the school, there is no violation of KRS 160.180 when an officer, director or stockholder of the subject bank is also a member of the school board. "
We believe support for that part of the opinion may now be seen in the decision of the
Kentucky Court of Appeals in McCloud v. City of Cadiz, Ky. App., 548 S.W.2d 158 (1977). In that case the Court was considering KRS 61.280 which is applicable to city officers in fifth or sixth class cities and not KRS 160.180 which, as stated above, is the statute of importance regarding local school board members. The issue in the McCloud case was the depositing of a city's money in a bank in which city officials served as directors. The Court cited and quoted from the case of
Commonwealth ex rel. Vincent, Atty. Gen. v. Withers, 266 Ky. 29, 98 S.W.2d 24, as follows:
"However, the interest is not sufficient to disqualify the officer if the opportunity for self-benefit is a mere possibility or is so remote or collateral, such as being only a debtor, that it cannot be reasonably calculated to affect his judgment or conduct in the making of the contract or in its performance."
The Court went on to say the case before it fell within that guideline and added:
"Any benefit that the city officers might have received from the lending use of such money is too speculative and remote as to suggest a conflict of interest. " (Emphasis supplied.)
Thus, with regard to the depositing of school money in a bank in which a school board member has an interest or is an officer or employee, we do not believe problems with the mandate of KRS 160.180 exist.
The part of OAG 77-231 to which you object is our stated belief that in "banking transactions with a board of education which causes the school board to expend school funds (for example, the borrowing of money from a bank for which an interest is charged) creates the disqualifying act prohibited under KRS 160.180 for the individual who serves on a local board of education and who also is an officer, director or stock holder of a banking institution with which the school board does business." As background to your disagreement with this office you related a situation had developed where the Elizabethtown Board of Education borrowed money from a local bank. At the time for payment of interest for this loan, four out of the five school board members disqualified themselves from voting on the payment of the checks due to the fact that they were stockholders in the bank. You stated none of the school board members are large stockholders in the bank, each having under 1% of stock interest. Your reason for questioning our conclusion in OAG 77-231 centers on whether the stock interest in the bank by the board members is substantial enough to invoke the provisions of KRS 160.180. You pointed to the language quoted above from the Withers case in support of your position. You stated you believed the school board members' stock interest in the bank was so small as to not affect their judgment in voting upon the banking transaction. You further stated the interest payment by the school system on the loan would be infinitesimal as far as the stockholder's interest in the future payment of dividends by the bank. You question whether a school board member is eligible to vote on the payment of the bill when the stockholders' interest is so small that a reasonable man could not interpret the interest to bias the board member. We most respectfully continue to be of the opinion that even so small of a pecuniary interest in a contract or claim with the board of education for which school funds are expended creates a disqualifying position for continued school board membership. The board member is not merely ineligible to vote on the loan payment to the bank but disqualified from continuing to serve as a bank stockholder and a school board member under these circumstances.
The sum of pecuniary interest at stake by a local school board member in a claim or contract with the board has never been the focal point of any litigation as far as we can ascertain. The Court has, however, found to exist a violation of KRS 160.180 when the interest was indirect and/or small. In the Withers case, supra, which is a key case in considerations along this line, the Court stated:
"It is a salutary doctrine that he who is intrusted with the business of others cannot be allowed to make such business an object of profit to himself. This is based upon principles of reason, of morality, and of public policy. These are principles of the common law and of equity which have been supplemented and made more emphatic by the foregoing and other statutory enactments.
Nunemacher v. City of Louisville, 98 Ky. 334, 32 S.W. 1091, 17 Ky. Law Rep. 933. In their application and operation it is impossible to lay down any definite rules defining the nature of the interest of the officer, or indicating the line between that which is proper and that which is unlawful. In general, the disqualifying interest must be pecuniary or proprietary by which he stands to gain or lose something. Falling within the principle are contracts with firms in which the member of the municipal body is a partner or a corporation of which he is an officer, or sometimes only a stockholder or employee.
Byrne & Speed Coal Co. v. City of Louisville, 189 Ky. 346, 224 S.W. 883;
Douglas v. Pittman, 239 Ky. 548, 39 S.W.(2d) 979. Furthermore, it is not material that the self-interest is only indirect or very small." 98 S.W.2d at 25.
This office has on numerous occasions, citing the Withers case, issued advisory opinions that even a mere employee of a business establishment that has a claim or contract with a local board of education may not be a board member. See, for example, OAG 76-408, copy attached. We have advised that a school board member may not even referee a ball game in his own school district. OAG 66-765, copy attached. Very small sums of money were involved in the school board member ouster actions of
Commonwealth v. Coatney, Ky., 396 S.W.2d 72 (1965), where in issue were purchases totaling
$55.06, and Stringer v. Commonwealth, Ky., 428 S.W.2d 203 (1968), where $64.85 worth of goods had been sold by a board member to the board of education of which he was a member. Thus, we reject your analysis that a small stockholder interest in a bank by a school board member precludes the existence of a disqualifying act when a local board of education does borrowing transactions with that bank. The law does not lend itself to line drawing. Unless the General Assembly takes action to amend KRS 160.180, we believe only the courts can determine whether 1%, 2% or 5% is an infinitesimal interest such as would not create a conflict under KRS 160.180. Cf. KRS 45A.340(2) and (4) which provide that "the holding of less than five percent (5%) of the stock of a corporation is not considered an interest." This provision does not apply to local school board members. See KRS 45A.335(2).
You went on in your letter to say that if we concluded that the situation you presented does comprise a conflict of interest (disqualifying act) for a board member, what would be our position on the situation where a school board votes to either raise or lower the school district's tax. You stated that in such a situation the school board members would have a direct interest in both a tax increase and a tax cut since this is going to be money in their pockets or out of their pockets. We do not see that the situation you have suggested presents any problem under KRS 160.180. Again, as we stressed in OAG 77-231, supra, the key language in KRS 160.180 is "for which school funds are expended. " While local board members considering tax measures have a twofold interest which may not be always compatible, it is the nature of government that public officers serving as a tax levying authority increase or decrease their own tax bills through their official acts. This kind of action fails to create a legal conflict of interest and for sure does not amount to a situation "for which school funds are expended" and funds received by the local board members as is proscribed in KRS 160.180.