Can a public hospital trustee also serve on a nonprofit's board if the public hospital is considering making a grant to that nonprofit?
Plain-English summary
New Hanover Regional Medical Center is a county-owned public hospital operated by NHRMC, a nonprofit corporation whose trustees are appointed by the New Hanover County Commissioners. In 1996 NHRMC created the Community Health Improvement Program (CHIP), a grant program for community health projects funded by hospital revenues. One of the CHIP sub-programs, the Partners Program, was reviewing grant applications when a problem appeared: a member of NHRMC's Board of Trustees was also on the Board of Directors of a nonprofit that had applied for a CHIP grant. Another trustee was the Executive Director of that same nonprofit.
NHRMC's counsel asked the AG whether the trustees violated N.C.G.S. § 14-234, the criminal public-official conflict-of-interest statute, by remaining on both boards, and whether such a violation would invalidate the grant.
Senior Deputy AG Ann Reed concluded that § 14-234 was not triggered merely by overlapping board service. The statute's core element is a contract that "financially benefits a public official." The grant money in this case was going to a nonprofit and being used for community health projects, not to either trustee personally. As long as the trustee who was Executive Director continued receiving only his regular salary (and that salary did not depend on the grant), the § 14-234(c1) employee exception applied — provided the NHRMC board authorized the CHIP grant by specific resolution on which the conflicted trustee did not vote.
The opinion also reached the parallel provision in the Nonprofit Corporation Act, N.C.G.S. § 55A-8-31, which treats a transaction as a "conflict of interest transaction" if a director has a direct or indirect interest. Indirect interest includes being a director or officer of another entity that is party to the transaction. The opinion concluded that the entire Partners Program grant process (not just one grant) was a § 55A-8-31 conflict transaction because two NHRMC trustees were affiliated with one of the competing applicants, and the standard subsection (c)/(d) authorization procedures applied.
The bottom-line guidance: investigate whether anyone is actually personally benefiting. If yes, § 14-234 is in play and the grant is at risk. If no, dual service is permissible with the standard recusal/specific-resolution procedure under both § 14-234(c1) and § 55A-8-31.
Currency note
This opinion was issued in 2001. 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.
N.C.G.S. § 14-234 has been amended substantially since 2001. The legislature reorganized the personal-benefit and recusal procedures and added or clarified exceptions. Anyone applying § 14-234 today must read the current text rather than rely on the version analyzed here. The Nonprofit Corporation Act conflict-transaction provisions in § 55A-8-31 are largely the same. The analytical framework (look for personal benefit; recuse and authorize by specific resolution) remains durable, but the specifics of how the statutory exceptions are worded have shifted.
Common questions
Q: What is the "key element" of a § 14-234 violation?
A: "A contract which financially benefits a public official." Mere overlap of board service is not the trigger. Personal financial benefit, direct or indirect, is.
Q: What is the § 14-234(c1) exception?
A: For employees (and, in a 1999 amendment, owners of 10% or less of a corporation), the statute provides that being an employee does not by itself make the person "interested" for purposes of subsection (a), so long as the public board authorizes the contract or undertaking by specific resolution on which the conflicted official does not vote.
Q: Why does § 55A-8-31 also apply?
A: NHRMC is a nonprofit corporation, so the Nonprofit Corporation Act conflict-transaction rules apply on top of the criminal conflict statute. § 55A-8-31 treats a director's interest in a counterparty as triggering a conflict transaction, with three permissible cure paths: full disclosure plus board ratification, full disclosure plus member ratification, or fairness to the corporation.
Q: What did the opinion mean by "the entire Partners Program is the conflict transaction"?
A: The Partners Program had a fixed pool of grant money. Each grant funded from the pool reduced the pool available to other applicants. So a trustee's interest in one applicant indirectly affected the outcomes of all other applicants. The opinion treats the whole grant-award process as the conflict transaction, not just the single grant to the conflicted nonprofit.
Q: Was there a problem with the trustee being the Executive Director of the nonprofit?
A: Not by itself. The trustee's salary as Executive Director did not depend on the CHIP grant. § 14-234(c1) covered employee status. The trustee still had to comply with the specific-resolution / non-voting procedure to be safely covered.
Q: Does the opinion give a clean bill of health?
A: No. The opinion is careful to stop short of factual findings, saying NHRMC's board must investigate both situations and determine whether anyone receives personal financial benefit. The AG provides the legal framework; NHRMC has to apply it to the facts.
Background and statutory framework
NHRMC was organized under the NC Nonprofit Corporation Act to operate the county hospital. Although nonprofit in form, the hospital is a "public hospital" within the meaning of N.C.G.S. § 159-39(a)(2) and (3), which means its trustees are "public officials" for purposes of the conflict-of-interest statutes.
N.C.G.S. § 14-234 is the workhorse public-official conflict statute. Subsection (a) criminalizes a public official making a contract with the public body for the official's own benefit. Subsection (c1), as it existed in 2001, created safe-harbor language for employees of contracting corporations and stockholders holding 10% or less.
N.C.G.S. § 55A-8-31, in the Nonprofit Corporation Act, addresses board-level conflict transactions. It defines "indirect interest" to include being a director, officer, or trustee of another party to the transaction. A conflict transaction is not voidable solely on the basis of the conflict if the material facts were disclosed and the transaction was authorized by the board, by members, or was fair to the corporation.
The 1980 opinion to Robert H. Ward (49 N.C.A.G. 102) had previously held that no § 14-234 violation arose where a county DSS director also served as a director of a nonprofit corporation that distributed federal funds, even where the agency was a potential fund recipient, because the DSS director would not personally benefit. This 2001 opinion cited that 1980 decision and Fleming Bell's 1997 Institute of Government treatise (Ethics, Conflicts, and Offices) for the rule that benefits flowing to an organization (and not to individuals affiliated with the organization) do not trigger § 14-234.
The 2001 opinion's contribution is the layered analysis: § 14-234 for criminal exposure, § 55A-8-31 for civil/corporate validity, and the practical reminder that NHRMC's own board (with its counsel) has to do the factual digging, because the AG cannot investigate facts in an advisory-opinion posture.
Citations
- N.C. Gen. Stat. § 14-234(a) (criminal conflict of interest)
- N.C. Gen. Stat. § 14-234(c1) (employee / minority-shareholder exception; specific-resolution requirement)
- N.C. Gen. Stat. § 14-324 (also referenced in the opinion's RE line; misdemeanors of public officials)
- N.C. Gen. Stat. § 55A-8-31 (nonprofit corporation conflict-of-interest transactions)
- N.C. Gen. Stat. § 159-39(a)(2), (3) (definition of "public hospital")
- Op. Att'y Gen. to Robert H. Ward, 49 N.C.A.G. 102 (1980) (cited for proposition that organizational-only benefits do not trigger § 14-234)
- Fleming Bell, Ethics, Conflicts, and Offices: A Guide For Local Officials (Inst. of Gov't, UNC Chapel Hill, 1997)
Source
Original opinion text
RE: Advisory Opinion; Conflict of Interest; Officials of Nonprofit Corporation; N.C.G.S. § 14-324; N.C.G.S. § 55A-8-31
Dear Mr. Gorham:
You request our opinion concerning whether New Hanover Regional Medical Center (NHRMC) may make a grant to a nonprofit corporation if one member of the Board of Trustees of NHRMC is a member of the Board of Directors of the nonprofit corporation and another is Executive Director of the nonprofit corporation.
NHRMC is a nonprofit corporation organized under the North Carolina Nonprofit Corporation Act. It operates and administers New Hanover Regional Medical Center, a public hospital within the definition of N.C.G.S. § 159-39(a)(2) and (3), which is owned by New Hanover County. NHRMC trustees are appointed by the New Hanover County Board of Commissioners. In May 1996, the trustees approved the creation of the Community Health Improvement Program (CHIP), a multi-faceted program whose primary purpose is to fund projects and programs that improve the health of citizens living in the area served by the hospital. Revenues for CHIP are generated by the operation and administration of the Medical Center, and the trustees ultimately determine which projects and programs receive grants from CHIP. The Partners Program is one of the CHIP programs through which grants are awarded.
During a review of applications for CHIP grants, it was discovered that a member of the Board of Trustees of NHRMC is also a member of the board of directors of a nonprofit corporation which has applied to the Partners Program for a CHIP grant. Another trustee is Executive Director of the nonprofit corporation. Your question is whether these two trustees violate N.C.G.S. § 14-234 if they remain on both boards. If so, the violation would have the further effect of invalidating a CHIP grant to the nonprofit corporation.
Attached to your letter is an opinion dated December 6, 1982, in which this office concluded that NHRMC is subject to the provisions of N.C.G.S. § 14-234. That statute provides, in pertinent part:
(a) If any person appointed . . . a . . . director to discharge any trust wherein . . . any county . . . may be in any manner interested shall . . . make any contract for his own benefit under such authority, or be in any manner concerned or interested in making such contract, or in the profits thereof . . . he shall be guilty of a misdemeanor.
(c1) The fact that a person . . . is an employee of said corporation . . . does not make the person "in any manner interested" or "concerned or interested in making such contract, or in the profits thereof," . . . as such phrase is used in subsection (a) of this section. . . provided that in order for the exception provided by this subsection to apply, such undertaking or contracting must be authorized by the governing board by specific resolution on which such public official shall not vote.
The key element of a violation of this statute is a contract which financially benefits a public official. As you point out in your letter, it is ordinarily applied where a public body is considering entering into a contractual relationship with a for-profit organization and a public official is a member of both groups. Although our courts have never addressed the situation where the contractual relationship is between a public body and a nonprofit organization, this Office concluded in a 1980 opinion that no conflict of interest arose where a county director of social services also served as a director of a nonprofit corporation that administered federal funds, even though the agency was a potential recipient of federal funds from the corporation. This conclusion was based on the fact that the county director would not realize any personal financial benefit as a result of the contractual relationship between the agency and the corporation. See opinion of the Attorney General to Robert H. Ward, 49 N.C.A.G. 102 (1980).
In your letter you quote from a discussion of this question by Fleming Bell in Ethics, Conflicts, and Offices: A Guide For Local Officials, The Institute of Government, The University of North Carolina at Chapel Hill (1997). Mr. Bell also observes that if the benefit from a contractual relationship between a public body and a nonprofit organization flows to the nonprofit organization and not to individuals affiliated with the organization, the statute is not triggered. On the other hand, if there is some personal financial benefit to an individual affiliated with both groups, the statute may well apply.
We believe you correctly conclude that these questions must be answered on a case by case basis. It appears from our discussions with you that neither of the trustees who are the subject of your inquiry will benefit financially as a result of the CHIP grant to the nonprofit corporation with which they are affiliated. The grant money will be used to address community health issues, and there is no indication that either trustee will receive any of these funds either directly or indirectly. We assume the trustee who is Executive Director of the nonprofit corporation receives a salary from the corporation, but pursuant to the exception to N.C.G.S. § 14-234(a) set out in N.C.G.S. § 14-234(c1), that fact alone does not trigger the application of the statute, provided the board authorizes the CHIP grant to the corporation by a specific resolution on which this trustee does not vote.
Ultimately, however, while we can provide you with our interpretation of the statute and its application to particular facts, we cannot investigate to determine if there are other facts which may be relevant to this inquiry. Your board should investigate both situations and determine whether there will be any personal financial benefit to any individual who is affiliated with both NHRMC and the nonprofit corporation as a result of a CHIP grant to the corporation.
Aside from the application of the criminal conflict of interest statute, in our opinion the conflict of interest provisions applicable to nonprofit corporations do apply in this situation.
- N.C.G.S. § 55A-8-31 provides:
(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true:
(1) The material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee of the board and the board or committee authorized, approved, or ratified the transaction;
(2) The material facts of the transaction and the director's interest were disclosed or known to the members entitled to vote and they authorized, approved, or ratified the transaction; or
(3) The transaction was fair to the corporation.
(b) For purposes of this section, a director of the corporation has an indirect interest in a transaction if: . . .
(2) Another entity of which he is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation.
See also subsections (c) and (d), with regard to how a conflict of interest transaction can be authorized, approved or ratified. We assume from your letter that the amount of money available for CHIP grants under the Partners Program is limited and that organizations applying for grants must compete for funding. This being the case, we believe that the conflict transaction is the entire Partners Program grant process, and not just the grant to the nonprofit corporation with which these two trustees are affiliated.
In conclusion, the provisions of N.C.G.S. § 14-234 address conflicts that arise between an individual's official duties and his personal financial interests. If neither of the two NHRMC trustees will personally benefit, either directly or indirectly, from the grant to the nonprofit corporation with which they are affiliated, then in our opinion there is no violation of the statute. The grant award process is, however, subject to the conflict of interest provisions contained in N.C.G.S. § 55A-8-31. We believe this conflict encompasses the entire process of awarding CHIP grants under the Partners Program, and not just the grant to the nonprofit corporation with which the trustees are affiliated.
We trust that we have responded fully to your questions. If you have additional questions or if we can be of further assistance, please do not hesitate to call on us.
Sincerely,
Ann Reed
Senior Deputy Attorney General
AR