Does an Arkansas alderman have a prohibited interest in a city contract if his or her spouse runs the company or owns a controlling share?

Plain-English summary

Representative Andrea Lea asked the AG two related questions: under A.C.A. § 14-42-107(b)(1), does an alderman, council member, official, or municipal employee have a prohibited indirect interest in a city contract when (1) the contractor or (2) a subcontractor is a company in which the official's spouse holds an executive or managerial role or a controlling stake?

The statute reads in two parts. Subsection (b)(1) generally prohibits any official from being "interested, directly or indirectly," in the profits of a contract furnishing supplies, equipment, or services to the municipality. Subsection (b)(2) carves out an exception: the prohibition does not apply to corporate contractors in which no alderman, council member, official, or municipal employee holds an executive or managerial office, or in which a controlling interest is held by stockholders who are not aldermen or council members.

AG Dustin McDaniel's analysis split into two pieces.

Does the official have an "interest"? Marriage alone does not automatically create an interest. The AG and his predecessors have consistently treated this as a fact question. But in most marriages, spouses pool income, assets, and liabilities and operate as a single economic unit, which strongly suggests an interest. So in most cases a court informed of the facts would probably find at least an indirect interest in a contract that clearly benefits the spouse. That said, every case turns on its own facts.

Does the exception save the contract? The exception is the key practical move. By its plain language, the exception applies as long as officials themselves (not their spouses) do not control the corporate contractor. The exception does not condition its availability on the spouse's lack of control. So as long as the contractor is a corporation, and no alderman, official, or municipal employee personally controls it, the contract is permitted regardless of any spousal interest the official might have.

There may be a legitimate question whether the legislature meant for the exception to apply this broadly. The exception was drafted in corporate-control terms, and it does not address spouses or other family members. But the AG was constrained by the unambiguous statutory text and could not read in a spousal-interest disqualifier.

The corporate-form requirement matters. The exception uses the words "corporation" and "stockholders." If the contractor is structured as a partnership, LLC, or sole proprietorship, the exception does not apply, and the spousal interest creates a § 14-42-107(b)(1) violation. So the answer depends critically on the entity type.

The AG ended with a separate warning about A.C.A. § 21-8-304(a), the public-servant ethics statute. That law prohibits any public servant from using or attempting to use his or her official position to secure special privileges or exemptions for the servant, the servant's spouse, child, parents, or others in close relationships. Even if the § 14-42-107 corporate exception saves the contract, the official needs to be careful not to trip § 21-8-304 by using the office to steer business to the spouse's company.

The same analysis applied to the subcontract scenario in Question 2.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Why does the form of the contractor matter so much?
Because the § 14-42-107(b)(2) exception was drafted exclusively in terms of corporate structure. It uses the words "corporation" and "stockholders." Partnerships, LLCs, and sole proprietorships do not have stockholders, so the exception does not apply to them. The general prohibition in (b)(1) controls.

Does marriage automatically create an indirect interest?
No, but in practice, often yes. The AG and his predecessors have consistently treated this as a fact question. Spouses who commingle finances and operate as a single economic unit will probably be found to share an interest. Spouses with truly separate finances (rare in practice) might not.

What if the alderman's adult child runs the contractor?
The opinion does not directly address that, but the same logic would apply. The general (b)(1) prohibition would catch indirect interests, but the corporate exception in (b)(2) saves the contract if the official does not personally control the contractor. The child's interest does not by itself disqualify the corporate contractor.

What about A.C.A. § 21-8-304?
That statute prohibits a public servant from using his or her official position to secure special privileges for the servant, the spouse, child, parents, or others in close relationship. It applies independently of § 14-42-107. So an alderman whose spouse owns the city's preferred contractor needs to avoid voting on, advocating for, or otherwise leveraging the office in connection with that contract, even if § 14-42-107(b)(2) permits the contract itself.

Does a city ordinance change the analysis?
The statute (subsection (b)(1)) lets a governing body enact an ordinance specifically permitting officials to conduct business with the city and prescribing the extent of that authority. So a city can authorize what would otherwise be prohibited, within the ordinance's terms.

Background and statutory framework

A.C.A. § 14-42-107(b) governs conflicts of interest in municipal contracting. Subsection (b)(1) generally prohibits any alderman, council member, official, or municipal employee from having a direct or indirect interest in the profits of any contract furnishing supplies, equipment, or services to the municipality.

Subsection (b)(2) creates the corporate exception: the prohibition does not apply to contracts performed by a corporation in which no alderman, council member, official, or municipal employee holds an executive or managerial office, or in which a controlling interest is held by stockholders who are not aldermen or council members. The exception uses corporate-form terminology and does not extend to partnerships, LLCs, or sole proprietorships.

A.C.A. § 21-8-304(a) is a separate ethics statute applicable to all public servants. It bars using or attempting to use official position to secure special privileges or exemptions for the servant, the servant's spouse, child, parents, or other persons standing in the first degree of relationship, or those with whom the servant has a substantial financial relationship.

A.C.A. § 14-14-1202(c)(1) is the parallel provision for county officials, briefly noted in a footnote (Op. Att'y Gen. 2013-134 treats it similarly: family relationship does not by itself establish a violation, but can be relevant to the factual question of "interest").

Statutory construction follows Simpson v. Cavalry SPV I, LLC, 2014 Ark. 363: where the statutory language is plain and unambiguous, the court gives effect to the ordinary meaning, without resort to rules of interpretation. The AG could not read into the corporate exception a spousal-interest disqualifier that the legislature did not write.

Citations

• A.C.A. § 14-42-107(b)(1) (general prohibition)
• A.C.A. § 14-42-107(b)(2) (corporate exception)
• A.C.A. § 14-14-1202(c)(1) (parallel county provision)
• A.C.A. § 21-8-304(a) (public servant ethics)
• Simpson v. Cavalry SPV I, LLC, 2014 Ark. 363, 440 S.W.3d 335 (plain-meaning canon)
• Op. Att'y Gen. 87-429, 85-171, 76-162 (marriage alone does not create interest)
• Op. Att'y Gen. 2013-134 (county-official analogue)
• Op. Att'y Gen. 94-283 (§ 21-8-304 applicable to city officials)
• Op. Att'y Gen. 2009-136 (official controlling subcontractor)
• Tenn. Op. Att'y Gen. 05-017, 00-152 (commingled-assets analysis)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Official summary

Pursuant to the state law concerning interest in offices or contracts prohibited, A.C.A. 14-42-107(b)(1), would an alderman, council member, official or municipal employee be considered to be interested indirectly in the profits of any municipal contract for services, equipment, or supplies with a company, business or corporation when the spouse of either an alderman, council member, official or municipal employee holds either an executive or managerial office or holds a controlling interest in the company, business or corporation contracted to provide services, equipment or supplies to the municipality?

RESPONSE: The mere fact of marriage does not necessarily mean that the official has a prohibited interest in the municipal contract, although I expect in most cases the spouses' financial affairs will in all likelihood be such that a court apprised of all relevant facts would conclude that such an interest exists. Ultimately, however, the question is one that will require determination of the facts of each case and whose answer will depend on those facts. If the contractor or subcontractor is not a corporation, the statute prohibits such an interest. If, however, the contractor (with respect to your first question) or the subcontractor (with respect to your second question) is a corporation, the law's exception applies and the contract is not prohibited regardless of any interest therein the official might have.

Original opinion text

STATE OF ARKANSAS

THE ATTORNEY GENERAL
Dustin McDaniel

Opinion No. 2014-104

December 29, 2014

The Honorable Andrea Lea
State Representative
Post Office Box 1342
Russellville, Arkansas 72811

Dear Representative Lea:

This is my opinion on your questions about a law regulating city officials' interests in municipal contracts:

Question 1: Pursuant to the state law concerning interest in offices or contracts prohibited, A.C.A. § 14-42-107(b)(1), would an alderman, council member, official or municipal employee be considered to be interested indirectly in the profits of any municipal contract for services, equipment, or supplies with a company, business or corporation when the spouse of either an alderman, council member, official or municipal employee holds either an executive or managerial office or holds a controlling interest in the company, business or corporation contracted to provide services, equipment or supplies to the municipality?

Question 2: Pursuant to provisions of A.C.A. § 14-42-107(b)(1), would an alderman, council member, official or municipal employee be considered to be interested indirectly in the profits of any contract if the spouse of either an alderman, council member, official or municipal employee holds either an executive or managerial office, or holds a controlling interest in a company, business or corporation which subcontracts to fulfill a portion of a contract with a company, business or corporation which has contracted with the municipality to furnish supplies, equipment or services?

The law you cite provides in relevant part:

(1) No alderman, council member, official, or municipal employee shall be interested, directly or indirectly, in the profits of any contract for furnishing supplies, equipment, or services to the municipality unless the governing body of the city has enacted an ordinance specifically permitting aldermen, council members, officials, or municipal employees to conduct business with the city and prescribing the extent of this authority.

(2) The prohibition prescribed in this subsection shall not apply to contracts for furnishing supplies, equipment, or services to be performed for a municipality by a corporation in which no alderman, council member, official, or municipal employee holds any executive or managerial office or by a corporation in which a controlling interest is held by stockholders who are not aldermen or council members.

In this opinion, I use the word "control" to refer to the status of being an executive or manager of, or holding a controlling interest in, a business contracting or subcontracting with a municipality; and I use the word "official" to refer to an alderman, council member, municipal official, or municipal employee. I assume for purposes of this opinion that, while an official's spouse controls the contractor or subcontractor, no official or group of officials controls the contractor or subcontractor. I assume for purposes of your second question that the prime contractor is a corporation not controlled by an official or group of officials. Finally, I assume the municipality has not enacted an ordinance of the kind described in (1) above.

RESPONSE

In my opinion, the mere fact of marriage does not necessarily mean that an official has an interest in a municipal contract with an entity controlled by his spouse or with an entity subcontracting with an entity controlled by his spouse. I expect, however, that in most cases the spouses' financial affairs will in all likelihood be such that a court apprised of all relevant facts would conclude that such an interest exists. But ultimately the question is one that will require determination of the facts of each case and whose answer will depend on those facts. If the contractor or subcontractor is not a corporation, the statute prohibits such an interest. If, however, the contractor (with respect to your first question) or the subcontractor (with respect to your second question) is a corporation, the law's exception applies and the contract is not prohibited regardless of any interest therein the official might have.

DISCUSSION

Question 1: Predecessors in this office have opined that the mere fact of marriage does not necessarily mean that a public official has an interest in a government contract in which his spouse is clearly interested. My predecessors and I have instead said consistently that the question whether an interest exists in such a case is one of fact.

While it is thus impossible to say that an interest does or does not invariably exist, I believe it is true that most married couples pool their incomes, assets, and liabilities, and operate as a single economic unit, facts that strongly suggest an interest's presence. Accordingly, I believe it is reasonable to surmise that a court apprised of all relevant facts would conclude in most cases that an official has at least an indirect interest in a municipal contract in which his spouse is clearly and directly interested. I emphasize, however, that a factual determination will be required in each case and that I do not opine here that an interest will be present in every case.

But the law at issue contains an exception, quoted above, that permits the interest if no official or group of officials controls the corporate contractor. The exception does not condition its availability on the absence of a spouse's control. Given the statute's overall thrust and its general prohibition on indirect interests, there may be some question whether the General Assembly actually intended to provide an exception in circumstances like these, and the General Assembly may wish to revisit the issue. But I am constrained to interpret the statute just as it reads. The exception's clear and unambiguous language indicates that it applies unless officials themselves, not their spouses, control the corporate contractor.

On the facts given and assumed here, no official or group of officials controls the contractor. I thus conclude that the exception applies notwithstanding any interest the official has in the contract, provided the contractor is a corporation.

You ask about a "company, business or corporation" as contractor. In my view, the law's exception discussed above applies only if the contractor is organized as a corporation and will not apply if the contractor is, for example, a partnership, limited liability company, or sole proprietorship. Again it appears possible that the exception may not reflect the General Assembly's actual intent but, by using in the exception the words "corporation" and "stockholders," the legislature unambiguously made the exception available only if the contractor is a corporation.

An official facing this situation should be mindful of another law:

No public servant shall use or attempt to use his or her official position to secure special privileges or exemptions for himself or herself or his or her spouse, child, parents, or other persons standing in the first degree of relationship, or for those with whom he or she has a substantial financial relationship that are not available to others except as may be otherwise provided by law.

This provision applies to city officials and, under certain facts, could be contravened by an official facing this situation. Whether the provision applies in a given case is a fact-intensive inquiry I cannot undertake.

Question 2: I earlier opined that an official who controls a corporation acting as a subcontractor in connection with a municipal contract has an interest in the contract. Given that conclusion, and by the reasoning stated above, I am of the view that, while each case must be decided on its own facts, an official whose spouse controls a subcontractor in connection with a municipal contract would in all probability be found by a court to have at least an indirect interest in the contract.

Under the facts given and assumed, however, the statutory exception applies and the contract is not prohibited if the subcontractor is organized as a corporation, regardless of any interest the official may have. Once again, there may be some question whether the statute accurately reflects the General Assembly's actual intent, but the statute as it currently exists clearly provides an exception.

An official facing this situation also should be mindful of the law, quoted above, prohibiting the use of office to secure special privileges for his spouse.

Assistant Attorney General J.M. Barker prepared this opinion, which I approve.

Sincerely,

DUSTIN McDANIEL
Attorney General

DM/JMB:cyh