Request By:
Wandel D. Strange, Superintendent
Hart County School System
P. O. Box 68
Munfordville, Kentucky 42765
Opinion
Opinion By: Frederic J. Cowan, Attorney General; Anne E. Keating, Assistant Attorney General
In your letter of December 19, you requested an opinion from this Office on whether a school board member has violated the conflict of interest provisions of KRS 160.180. That statute states, in pertinent part:
(2) No person shall be eligible to membership on a board of education:
. . . (g) Who, at the time of his election, is directly or indirectly interested in the sale to the board of books, stationery, or any other property, materials, supplies, equipment, or services for which school funds are expended . . . .
(3) If, after the election of any member of the board, he becomes interested in any contract with or claims against the board, of the kind mentioned in paragraph (g) in subsection (2) of this section, . . . he shall be subject to removal from office pursuant to KRS 415.050 and 415.060.
You presented the following facts:
There are four banks in Hart County. The Hart County Board of Education has selected two of the four as depositories for school funds. One of the two depository banks, The Pioneer Bank, has been selected by the Hart County Board of Education as the bank to serve as the chief depository of school funds and the board has entered into a contract with this bank to handle Hart County School Systems bond transactions.
The Hart County Board of Education expends funds for this service. The other depository bank, The Horse Cave State Bank, has been selected as a second depository bank where school funds may be invested. One of the owners of Pioneer Bank, who is also a member of the Board of Directors, is Dr. Doug Cox, whose wife, Daphine Cox, is a member of the Hart County Board of Education.
Daphine Cox is completing a four-year term on the Hart County Board of Education and has been reelected for another term on the board which will begin in January, 1991. Since April 1, 1987, The Pioneer Bank has been charging the Hart County Board of Education a fee for the service of handling bond transactions for the Hart County School System.
In addition to the payments for the services described above, the Hart County Board of Education will be making payments to The Pioneer Bank for bond transactions of a bond sale that was held on November 14, 1990, and of a bond sale that will be held in January, 1991.
In determining whether a conflict of interest exists under KRS 160.180(2)(g) and (3), it is well established that the disqualifying interest of the board member must be pecuniary or proprietary. However, it is not material that the self-interest is indirect or very small. Commonwealth ex rel Vincent V. Withers, 266 Ky. 29, 98 S.W.2d 24 (1936). Moreover, the courts have held that where the interest, for example, of selling goods to the school system is in the name of the spouse of the school board member, the school board member still has an indirect interest under KRS 160.180.
Brooks v. Commonwealth ex rel Buckman, 286 S.W.2d 913 (1956).
In 1979 this Office was asked to review its position concerning the question of a conflict of interest of a school board member who was a small stockholder of the bank doing business with the school board. OAG 79-555 reiterated the position taken in OAG 77-231 that if the only transaction between the bank and the school board were the demand deposit of funds for the drawing of checks or deposit of school moneys in time deposit accounts, there would be no violation of KRS 160.180 when an officer, director or stockholder of the bank also served as a member of the school board.
The opinion relied on
McCloud v. City of Cadiz, Ky. App., 548 S.W.2d 158 (1977). In that case the court interpreted a statute applicable to city officers in fifth and sixth class cities when considering the deposit of the city's money in a bank in which city officials served as directors. The court noted that any benefit that city officers might have received from lending money to the bank would be too speculative and remote to suggest a conflict of interest. Based on this reasoning this office concluded that depositing school money in the bank in which a school board member has an interest or is an officer or employee would not constitute a conflict of KRS 160.180.
Under KRS 160.180 the problem arises when school funds are expended for services in which the school board member has a direct or indirect interest. Note that under KRS 287.065 a bank director is required to own unpledged capital stock of that bank with a book value of at least $ 1,000 when he becomes a director. Opinions of this office consistently have maintained the position that banking transactions for which the school board expends school funds, for example, borrowing of money for which interest is charged, would create a disqualifying act prohibited under KRS 160.180 for an individual serving on the local board of education who also served as officer, director or stockholder of the bank in question with which the school board did business. OAG 77-231. In that opinion, based on Commonwealth ex rel Vincent V. Withers, supra, this office could not say that the one percent (1%) stock interest of the school board member in question would be insufficient to constitute a conflict of interest. In fact, very small sums of money have been involved in school board member ouster actions. See, e.g .,
Commonwealth v. Coatney, Ky., 396 S.W.2d 72 (1965), and
Stringer v. Commonwealth, Ky., 428 S.W.2d 203 (1968), which involved $ 55.06 and $ 64.85, respectively.
In 1955 Kentucky's highest court held that a sale to the school board by the spouse of a board member violated KRS 160.180 which prohibits any direct or indirect interest on the part of a school board member in sales to the board.
Brooks v. Commonwealth, Ky., 286 S.W.2d 913 (1956). When the board member admitted that his store had made the sale, but added that the store belonged to his wife, the Court stated, "Nevertheless, it must be noted that KRS 160.180 prohibits any direct or indirect interest in sales to the board. Even if the store belonged to his wife, it is obvious that Brooks was at least indirectly interested in sales made by the store." See, also,
Commonwealth v. Collins, Ky., 379 S.W.2d 436 (1964).
On March 25, 1987, this office issued an informal opinion to Ms. Daphine Cox of Munfordville, Kentucky, in response to her question regarding a possible conflict of interest should she serve on the Hart County Board of Education while her husband remained a member of the Board of Directors of Pioneer Bank. That bank was, then, also, the major depository for the Hart County School System and would be in charge of bonds issued by the Hart County Board of Education. For the service of handling the bonds, the bank would be charging the Board of Education $ 800. While that letter expressed the opinion that no disqualifying conflict of interest would be involved, unfortunately, it appears that the established case law on this question does not back up that position. Accordingly, that letter is overruled to the extent that it is inconsistent with this later opinion.
In conclusion, it would appear that a conflict of interest exists where the Board of Education is expending school funds to The Pioneer Bank for the service of handling of bonds for the school district.
You also ask, if a board member has violated the conflict of interest statute under the facts above described, whether the superintendent of schools has any legal responsibility to see that board members comply with KRS 160.180, and if so, whether there would be any liability for a superintendent who is unable to accomplish that task. For your information on this question I am forwarding a copy of OAG 90-141 which addresses questions on ouster in general. We noted in that opinion that neither a superintendent of schools nor a private citizen may prosecute an action to prevent usurpation of office. KRS 415.030 and 415.050;