|Advisory Opinion No. 96-3:||Application of Public Officers Law §74 to a prospective State employee continuing to engage in an outside business in which he is President and fifty percent owner.|
The following advisory opinion is issued in response to an inquiry from [a senior agency official] with the New York State Housing Finance Agency ("HFA"), who asks whether there would be a conflict of interest under the Public Officers Law should an attorney who is President and fifty percent owner of a title abstract company join the staff of HFA.(1)
Pursuant to the authority vested in the New York State Ethics Commission ("Commission") by Executive Law §94(15), the Commission hereby renders its opinion that the attorney may, without violation of Public Officers Law §74, work in the legal department at HFA and simultaneously retain his position with and ownership interest in the title abstract company, provided he recuses himself at HFA with regard to the selection of title insurers and agrees that the abstract company will decline as clients those who have had or have business with HFA.
HFA's legal staff, in addition to providing for its agency's in-house legal needs, provides legal services to the New York State Affordable Housing Corporation, the New York State Project Finance Agency and the State of New York Municipal Bond Bank Agency. It also has cross-staffing arrangements with the State of New York Mortgage Agency ("SONYMA"). Formerly, by contract, it provided such services to the Medical Care Facilities Finance Agency, which was recently consolidated with the Dormitory Authority. During the period of transition, HFA's legal staff provides some services to the Dormitory Authority.
Functionally, HFA's legal staff operates as a single unit in the agency's offices in New York City. Although it includes two attorneys who are on SONYMA's payroll, any attorney is available to work on any matter concerning HFA or one of its affiliated agencies on an as-needed basis.
The principal responsibility of HFA's legal department is housing finance, which entails the issuance of bonds and the making of real estate mortgage loans with the proceeds of those bonds. HFA's bond resolutions or bond related documents typically include title insurance as one of the principal conditions of any real estate loan. HFA's legal department is responsible for guaranteeing that all of the agency's real estate loans are covered by appropriate and acceptable title insurance. The attorneys are responsible for evaluating the work performed by title companies; selecting title companies; deciding whether to switch to a new title company when a project is refinanced; deciding whether to divide the risk among several title companies where the size of the risk in a large project may require that it be shared; and reviewing and evaluating measures under consideration to minimize title company fees.
According to HFA, title companies are not selected through public notice and competitive bidding. Price is generally not a consideration, as the rates charged are set by the New York State Insurance Department. In a refinancing arrangement, HFA may retain the same title company as was used for the original financing, especially if there are time constraints, or it may select a different company to guarantee a second review of the title.
An attorney who is seeking employment with HFA currently is the President of a title abstract company, of which he is fifty percent owner. He and his partner founded the company in 1986, and he has been its President since its inception. He does not intend to give up either his position as President or his fifty percent ownership should he obtain employment with HFA.
As company President, this individual supervises a staff of ten lawyers, paralegals and clerical staff in connection with the performance of title searches and the preparation of reports. He is required to be available to supervise the staff and consult with them on an "as needed" basis. However, in practice, he is never needed on an emergency basis. He customarily spends about six hours each week on the company's business, with five related to the making of legal determinations and one related to administration or personnel matters. New clients are recruited by the abstract company's marketing department, which consists of fifteen individuals who work on commission.
The abstract company has been in business for nine years and provides most of its services in New York City and Long Island, although it is qualified to do business anywhere in the State and accepts work in any county. Its typical client is a small law firm, and its typical transaction is in connection with a residential sale or refinancing. It has, however, provided an entire range of title services with respect to developments, subdivisions, and large commercial properties. The company has not done business with New York State, HFA or any of its affiliated agencies. It has, in a "handful" of transactions, provided services where a conventional lender was participating in a SONYMA first time buyer program.
Historically, the abstract company has placed policies with the First American Title Insurance Company of New York, for which it is a Statewide agent. Under a rate structure established by the New York State Department of Insurance, fees are split, with 80% going to the abstract company and 20% to the title insurance company. Currently, there are 14 title companies doing business in the State, of which First American has 17% of the market share. HFA and its affiliated agencies do business with all of these companies.
The subject individual earns in excess of $4,000 annually by virtue of his stock ownership in the abstract company. He receives monthly draws in pre-established amounts of $1500, which is calculated to reflect 50% of one-twelfth of the projected annual share of the profits. Additional profits and any other remaining balances are distributed annually at the end of each calendar year based solely on the number of shares owned by the stockholders. He receives no additional compensation for serving as President.
The individual intends to work full-time for HFA. He would not be permitted to do work connected with the abstract company or take or make telephone calls related to his outside business during the normal course of his HFA workday. He would be assigned by HFA and its affiliated agencies to handle real estate and bond issuance work, but he and HFA propose to take steps to avoid ethical difficulties. While HFA intends to use his expertise regarding the law of title insurance, the agency will require him to recuse himself on matters related to the selection of title insurers.
The attorney has offered to provide to HFA a list of all of the abstract company's present and past clients, including attorneys, firms and lenders, and to update this list periodically. This, he says, will allow for informed decisions as to recusal by him. He has also offered to have the abstract company decline orders from anyone who has had or currently has dealings with HFA. This presents no problem for the abstract company as it has not and does not depend upon such business. He has represented that his partner in the business has agreed to abide by any reasonable limitations on the company that the Commission may impose.
Public Officers Law §74 sets forth the Code of Ethics for State officers and employees. Section 74(2) contains the rule with respect to conflicts of interest:
No officer or employee of a state agency . . . should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.
Following the rule with respect to conflicts of interest, Public Officers Law §74(3) provides standards of conduct which address not only actual but apparent conflicts of interest. Of relevance to this inquiry are the following:
(a) No officer or employee of a state agency . . . should accept other employment which will impair his independence of judgment in the exercise of his official duties.
(b) No officer or employee of a state agency . . . should accept employment or engage in any business or professional activity which will require him to disclose confidential information which he has gained by reason of his official position or authority.
(c) No officer or employee of a state agency . . . should disclose confidential information acquired by him in the course of his official duties nor use such information to further his personal interests.
(d) No officer or employee of a state agency . . . should use or attempt to use his official position to secure unwarranted privileges or exemptions for himself or others.
. . .
(f) An officer or employee of a state agency . . . should not by his conduct give reasonable basis for the impression that any person can improperly influence him or unduly enjoy his favor in the performance of his official duties, or that he is affected by the kinship, rank, position or influence of any party or person.
. . .
(h) An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to be engaged in acts that are in violation of his trust.
. . .
Section 74 addresses not only actual conflicts of interests but also conduct that gives rise to the appearance of a conflict. The law is intended to restore the public's trust and confidence in government through the prevention of favoritism, undue influence, corruption and abuses of official position. The issue presented to the Commission in this case is whether the attorney's continued service as President of and his fifty percent ownership interest in an abstract company while he is employed in HFA's legal department would violate any of the standards cited above.
For analysis under this section, the Commission views the individual as though he were a State employee engaged in an outside activity. In assessing whether a State officer or employee may engage in such an activity in conformity with Public Officers Law §74, the Commission considers several factors: the employee's duties on behalf of the State, the relationship of the agency and the employee to the outside activity, whether the employee would be in a position to use his or her position to secure unwarranted privileges, and whether the outside activity would impair the employee's independence of judgment in the exercise of official duties [see Public Officers Law §74(3)(a), (b), (c), (d), (f), and (h)].
In an attempt to meet the strictures of these provisions, HFA and the attorney propose safeguards to avoid any ethical violation. The Commission must decide whether such safeguards are sufficient.
In Advisory Opinion No. 92-19, the Commission held that the provisions of Public Officers Law §74 prohibited an auditor with the Buffalo office of the Office of the State Comptroller ("OSC") from serving as a member of the City of Buffalo Water Board as an outside activity. Although OSC did not have statutory authority to audit the Water Board, it did have oversight authority over the Board, and the Board's contracts with other agencies were subject to OSC's review. While the auditor offered to recuse himself from conducting any review of the Water Board or its contracts, the Commission held that recusal was not sufficient to avoid the appearance of a conflict of interest under Public Officers Law §74 because he was in the very office of OSC that was responsible for the oversight and auditing of the contracts. If such an audit came to pass, it would be conducted by his fellow employees.
The individual who requested the opinion brought an Article 78 proceeding challenging the Commission's determination. In Speers v. New York State Ethics Commission, 209 AD 2d 919 (1994), the Appellate Division, Third Department, upheld the Commission, supporting its position as follows:
In view of the relationship between the Water Board, the Authority, the City of Buffalo and OSC's regional office, there can be no question that the [Commission's] determination is rational. Contrary to petitioner's assertion, the facts of this case support the [Commission's] finding that petitioner's service on the Water Board would create the appearance of a conflict on interest in violation of Public Officers Law §74(3)(f). Unlike the petitioner in our recent decision in Matter of Hancox v. Bress (____AD2d____[Oct. 14, 1994]), petitioner here is employed by the very division of OSC that is responsible for auditing the City of Buffalo and the Authority. Indeed, petitioner conceded at oral argument that if such an audit came to pass, it would be conducted by his fellow employees, and it is for this very reason that petitioner's offer to recuse himself is insufficient to guard against, much less remove, the appearance of a conflict of interest.
In Speers, recusal was insufficient because the conflict was between the entities of which Speers was a member -- the Comptroller's office and the Board -- and Speers' recusal could not eliminate this institutional conflict. Here, unlike Speers, a conflict would arise only if HFA and the abstract company had the potential of doing business with the same private parties. The attorney has eliminated this possibility by his agreement that the abstract company would not accept as clients those who have business or have had business with HFA. If the attorney recuses himself at HFA on all matters related to the selection of title insurers and declines clients as he has proposed, he cannot use his public position for private benefit, nor can he be perceived as so using his position. His commitment to provide HFA with a list, updated on a periodic basis, of the past and present clients of the company will assure that the required conditions are met. In addition, HFA should obtain a letter from the attorney's partner in the company that he agrees to abide by these conditions. A copy should be supplied to the Commission. If all these conditions are met, there would be no violation of §74.
This conclusion is consistent with prior opinions of the Commission. For example, in Advisory Opinion No. 92-11, the Commission held that a public authority may retain a firm where one of the authority's members is a partner, provided the member makes full disclosure of that relationship to the authority's board, takes no part in the authority's decisions involving the selection of the firm or the firm's work performed for the authority and does not share in the "net revenues" generated from the firm's work for the authority.
In Advisory Opinion No. 92-16, the Commission held that a leasing agent for a State agency could not continue his State employment and serve as a member of the city council of a municipality in the geographical area to which he was assigned because of the conflict between his responsibilities for the State and his obligations to the constituents of the city. However, it authorized him to serve as a member of a school board in the same geographical area because his agency conducted little or no business with the school district.
In the instant case, the attorney's lack of involvement in the selection of title insurance companies and his declination as clients of those doing or who have done business with HFA, implemented in the manner described above, would similarly avoid the conflicts that would otherwise exist.
The Commission concludes that an attorney may, without violation of Public Officers Law §74, work in the legal department at HFA and simultaneously retain his position with and ownership interest in a title abstract company, provided he recuses himself at HFA with regard to the selection of title insurers and agrees that the abstract company will decline as clients those who have had or have business with HFA.
This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the requesting individual who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion.
Joseph M. Bress, Chair
Angelo A. Costanza,
Robert E. Eggenschiller,
Donald A. Odell, Members
Dated: March 11, 1996
1. The attorney in question has also written to the Commission with regard to this request.