If the treasurer of a South Dakota irrigation district is also (a) the insurance agent who sells the district's insurance and (b) an officer of the bank holding the district's deposits, are either of those arrangements legal? And does SDCL 6-1-1's escape valve for small or competitively-bid contracts help save the deal?
Plain-English summary
In a small South Dakota community, the treasurer of an irrigation district was wearing three hats. He was the elected (or appointed) district treasurer. He was the insurance agent who sold the district its policies. And he was an officer of the bank that held the district's deposits. Auditor General Maurice Christiansen wrote AG Mark Meierhenry to ask whether any of those overlaps was a problem.
The AG's answers carved cleanly between three different statutory frameworks:
Insurance contract: void. SDCL 46A-4-49 was an unusually strong conflict-of-interest statute. It made any direct or indirect officer interest in a contract awarded by an irrigation district board a Class 5 felony. The insurance sales commission gave the treasurer a direct financial interest in the contract he was awarding to his own insurance company. The contract violated SDCL 46A-4-49.
But did the contract simply expose the treasurer to criminal liability, or was the contract itself unenforceable? The AG turned to SDCL 53-9-1, which made any contract "contrary to an express provision of law" unlawful. And the South Dakota Supreme Court's 1913 decision in Norbeck & Nicholson Company v. State had held that "a contract founded on a statute making an act penal is void, although the statute does not pronounce it void or expressly prohibit it." Norbeck applied even when there was no moral turpitude and the state had gotten a good deal. So the insurance contract was void.
Bank deposits: lawful. Here SDCL 46A-4-49's broad sweep ran into SDCL 4-6-2, which specifically authorized banks to serve as official depositories of public moneys "notwithstanding the fact that a public officer, official or employee may have a direct or an indirect interest in said bank either as an officer, director, stockholder, or employee." The AG had to decide which statute controlled when an irrigation district officer was also a bank officer. He concluded that SDCL 4-6-2 was the more specific statute for the depository question and that the legislative purpose (protecting public funds) was served equally well by allowing the depository arrangement with the protections built into bank regulation. So an irrigation district treasurer who was also a bank officer could lawfully have the district deposit its funds in that bank.
SDCL chapter 6-1 escape valves: not available. The treasurer's insurance arrangement might have been salvageable under SDCL 6-1-1 to 6-1-3 if it had been small (under $100), competitively bid, or in a competitive market with no required bidding. But chapter 6-1's terms applied only to officers of "a county, municipality, township or school district." The legislature had carefully expanded the list (originally just cities in 1955, adding townships and school districts in 1957, adding counties in 1959) but had never added irrigation districts. Under the principle from J. Ray McDermott v. Vessel Morning Star, the deliberate exclusion was binding. So the treasurer could not invoke any chapter 6-1 exception.
The opinion encouraged the legislature to consider whether irrigation districts and other local government units should be brought into chapter 6-1 for uniform treatment, but until that happened, irrigation district officers were subject to the harsher SDCL 46A-4-49 regime without the small-contract or competitive-bidding safety valves.
Currency note
This opinion was issued in 1986. 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. The irrigation district statutes in SDCL chapter 46A, the public officer conflict statutes in SDCL chapter 6-1, and the depository statute in SDCL 4-6-2 have all been amended since 1986. The classification of offenses (Class 5 felony) and the dollar threshold in SDCL 6-1-2(1) may have changed. The legislature may also have brought irrigation districts (or other local units) into chapter 6-1 in the intervening years.
What the opinion meant at the time
For irrigation district officers who were also in business locally, the opinion was a clear instruction: stay out of contracts your district awards. The Class 5 felony status of SDCL 46A-4-49 made this a serious matter, not just a civil liability question. The treasurer in the example needed to either stop selling insurance to the district or resign as treasurer.
For irrigation district boards reviewing their existing contracts, the opinion was a prompt for audit. Any contract awarded to a vendor with a board member or officer interest had to be unwound. The district could re-solicit the contract through a vendor with no internal connection.
For bank officers serving as treasurers of small local districts, the news was better. The depository arrangement was lawful under SDCL 4-6-2. But the bank officer still had to be careful about other contracts (loans to the district, banking services beyond pure depository, insurance through related entities, etc.) that might fall outside SDCL 4-6-2 and back into SDCL 46A-4-49's grip.
For state legislators and the auditor general's office, the opinion flagged a statutory gap. Counties, cities, townships, and school districts had a workable conflict-of-interest framework with safety valves. Irrigation districts, water districts, conservation districts, and other special districts often did not. The AG's closing suggestion for legislative attention reflected that gap.
For prosecutors, the opinion clarified that SDCL 46A-4-49 was enforceable as a criminal statute. A treasurer who sold insurance to the district was committing a Class 5 felony, even if there was no evidence of bad faith or excess pricing. The Norbeck principle made the contract civilly void; the felony designation made the conduct itself criminal.
Common questions
Q: Did the treasurer have to know he was breaking the law?
A: The Class 5 felony classification under SDCL 46A-4-49 did not specify a knowledge requirement, and general principles of strict liability for public officer conflicts were often applied. A treasurer who knew he was the insurance agent and knew the district was buying his insurance had the facts that constituted the violation. Whether he knew the law was a different question.
Q: What if the insurance was the lowest-priced option available?
A: Didn't matter. Norbeck specifically said the result followed even when the public got an advantageous contract. The statute was designed to prevent the conflict of interest, not to police the substantive terms.
Q: Could the district just refund the premiums and unwind the deal?
A: The contract being void meant the parties had no enforceable obligations. The district could recover premiums paid, subject to any setoff for coverage actually provided. The treasurer would not be entitled to retain commissions. A careful unwind through litigation or negotiated settlement was typical.
Q: What was SDCL 4-6-2's rationale?
A: South Dakota is a rural state with small communities where the same handful of people serve as bank officers, public officials, and local business owners. A blanket conflict prohibition would have made it impossible to bank locally in some communities. SDCL 4-6-2 acknowledged the practical reality and trusted bank regulation to protect public deposits.
Q: Did the chapter 6-1 escape valves help any irrigation district situations?
A: No. The exclusion was complete. An irrigation district officer with any kind of contract interest violated SDCL 46A-4-49 regardless of contract size, competitive bidding, or market conditions. The only safety was either ending the conflict (resigning or stopping the outside contract) or relying on SDCL 4-6-2's depository-specific exception.
Q: What is an irrigation district?
A: A special-purpose unit of local government formed under SDCL chapter 46A to deliver water for irrigation, typically in arid or semi-arid agricultural areas. South Dakota has several irrigation districts in the western and central parts of the state. Districts have elected boards, taxing authority within their boundaries, and the ability to contract for services.
Background and statutory framework
South Dakota's irrigation district statutes in SDCL chapter 46A were enacted to enable agricultural water delivery in areas where federal Bureau of Reclamation projects or local cooperative efforts created irrigation systems. The conflict-of-interest provision in SDCL 46A-4-49 was unusually strict, reflecting the historical pattern of irrigation districts being captured by insider interests in some western states.
SDCL chapter 6-1 was a more general public officer conflict statute, with a layered structure. The 1955 statute applied only to municipalities. Townships and school districts were added in 1957. Counties were added in 1959. Irrigation districts and other special-purpose districts were never added. The legislature's careful expansion sequence supported the AG's conclusion that the exclusion was intentional.
SDCL 4-6-2 was a depository-specific carve-out, reflecting the practical necessity of allowing local banks to serve local public entities even when officer-overlap was inevitable. The carve-out was narrow but explicit.
The Norbeck & Nicholson principle from 1913 was a doctrinal anchor that survived in South Dakota law: contracts founded on penal statutes were void without need for express voidance language. The 1913 case had involved a contract made by a state board where statutory authority was lacking, but the principle was broad.
The opinion's structure (canvassing the operative statutes, identifying the specific-vs-general question, applying the legislative history, and concluding with a recommendation for legislative attention) was a model of how a state AG opinion could work through a tangled statutory situation cleanly.
Citations and references
Statutes:
- SDCL 4-6-2 (bank as public depository)
- SDCL ch. 6-1 (officer interest in contracts)
- SDCL 22-1-2(37) (public officer definition)
- SDCL 46A-4-49 (irrigation district officer conflict)
- SDCL 53-9-1 (contracts contrary to law)
Cases:
- Norbeck & Nicholson Company v. State, 142 N.W. 847 (S.D. 1913)
- J. Ray McDermott and Company Inc. v. Vessel Morning Star, 457 F.2d 815 (5th Cir. 1972) (en banc)
- Argo Oil Corporation v. Lathrup, 72 N.W.2d 431 (S.D. 1955)
- Rehurek v. Rapid City, 275 N.W. 859 (S.D. 1937)
Earlier AG opinions referenced:
- 1919-1920 AGR 410
- 1957-58 AGR 161
- AGR 70-47
- AGR 85-9
Source
Original opinion text
Applicability of statutes to an irrigation district officer who both sells insurance to the district and is an officer of the bank which holds deposits of the district
Dear Mr. Christiansen,
You have described the following factual situation:
FACTS:
'X' is the treasurer of a certain irrigation district. 'X' in addition, is the selling agent for the insurance purchased by the district. 'X' is also an officer of the bank used as depository for the district.
Based on the above facts, you have asked the following questions:
QUESTIONS:
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Is a contract of insurance entered into between an irrigation district and an insurance company valid when the selling agent of the insurance is also the treasurer of the irrigation district?
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Can a bank act as a depository for the fund of an irrigation district if one of the officers of the bank is the treasurer of the irrigation district?
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Does the statutory arrangement set out in SDCL 6-1-1 to 6-1-3 have applicability to the situation?
IN RE QUESTION NO 1:
The first question raises the issue of whether a contract of insurance entered into between an insurance company and an irrigation district can be valid in light of the fact that the treasurer of the irrigation district is the selling agent of the insurance. The most pertinent statute regarding this issue is
SDCL 46A-4-49 which states:
No director or officer named in this chapter, or chapters 46A-5 to 46A-7, inclusive, may be interested in any manner, directly or indirectly, in any contract awarded, or to be awarded, by the irrigation district board, or in the profits to be derived therefrom, nor may he receive any bonds, gratuity or bribe. Such a director or officer who is interested in any manner, directly or indirectly, in any contract awarded, or to be awarded, by the board of directors provided for in said chapters, or in the profits derived therefrom, or who receives any bonds, gratuity or bribe, is guilty of a Class 5 felony.
It seems clear that the selling agent of an insurance policy would be a person who is 'interested' either 'directly or indirectly' in a 'contract awarded.' Therefore, the sale of the insurance contract constitutes a violation of SDCL 46A-4-49.
Reference must also be made to the provisions of SDCL 53-9-1 which states:
A contract provision contrary to an express provision of law or to the policy of express law, though not expressly prohibited or otherwise contrary to good morals, is unlawful.
The contract of insurance, is one 'contrary to an express provision of law' and therefore itself unlawful.
In 1919 my predecessor considered a situation which is analogous to this one. In that situation, a statute made it a misdemeanor for a school district officer to enter into certain contracts. A school district officer had, however, entered into such a contract. My predecessor considered, along with the misdemeanor statute, the provisions of the forerunner of SDCL 53-9-1, which declared to be unlawful contracts contrary to 'an express provision of law.' The Attorney General noted that the statutory arrangement did not expressly provide the contract would be void. He found, however, based upon case law persuasive to him that the contract in violation of the misdemeanor statute would be void. 1919-1920 AGR 410.
The decision of the South Dakota Supreme Court in Norbeck & Nicholson Company v. State, 142 N.W. 847 (1913), supports this conclusion. In that case, the Court stated that 'a contract founded on a statute making an act penal is void, although the statute does not pronounce it void or expressly prohibit it.' See 142 N.W. at 849.
I note that in the Norbeck & Nicholson case the Court added that the result followed even though there was 'no personal moral turpitude or dishonesty of any kind . . . that the state may have made an advantageous contract and have suffered no loss by reason thereof. . . .' 142 N.W. at 850. The same may very well be true in this case and, indeed, I have assumed that it is true. Nonetheless, the statutory law, case law and the opinions of this office all support the conclusion that the contract of insurance at issue is void. My answer to your first question is, therefore, no.
IN RE QUESTION NO. 2:
Your second question raises the issue of whether a bank may act as a depository for an irrigation district even though the treasurer of the irrigation district is an officer of the bank. SDCL 46A-4-49, as noted, states essentially that no officer of an irrigation district may be 'interested in any manner, directly or indirectly, in any contract' entered into by the irrigation district board.
This statute must, however, be considered together with SDCL 4-6-2 which states:
Any state or national bank located in South Dakota, may be designated as the official depository of public moneys, notwithstanding the fact that a public officer, official or employee may have a direct or an indirect interest in said bank either as an officer, director, stockholder, or employee.
In my view an irrigation district officer qualifies as a 'public official.' See SDCL 22-1-1(37); see generally, AGR 85-9. The issue is, therefore, whether the terms of SDCL 4-6-2 should prevail over the terms of SDCL 46A-4-49. The controversy resolves to which statute more directly addresses the situation and further to which interpretation better serves the legislative intent. It should be first noted that SDCL 4-6-2 does directly address the situation presented; i.e., whether a bank can hold deposits of a public entity despite the fact that an officer of the public entity is an officer of the bank. In contrast, SDCL 46A-4-49 provides a sweeping rule of conduct not specifically applicable to bank accounts. It is possible to argue, however, that the direct reference to 'irrigation district' officers in SDCL 46A-4-49 should prevail over the indirect reference to such officers in SDCL 4-6-2. Under such reasoning SDCL 46A-4-9 would be the more specific statute.
In analyzing the strength of these arguments it is important to keep in mind the rationale underlining these statutes. This rationale seems to be to protect the public from misuse of its funds. Thus, the issue may be rephrased as being whether the Legislature believed that the funds of all public entities except irrigation districts could be adequately protected by the terms of SDCL 4-6-2. The answer to this question is clear--there is no particular reason to believe that the Legislature found that the funds of irrigation districts to be deposited in banks needed more protection than the funds of other units of government to be deposited in banks. Thus, the Legislative purpose which underlies SDCL 4-6-2 and SDCL 46A-4-49 is well served by finding that the provisions of SDCL 4-6-2 provide an exception to the general rule of SDCL 46A-4-49.
In my opinion, a bank may act as a depository for an irrigation district even though the treasurer of the irrigation district is an officer of the bank. My answer to your second question is yes.
IN RE QUESTION NO. 3:
You finally ask whether the provisions of SDCL 6-1-1 to SDCL 6-1-3 affect this analysis.
These statutes provide for the voiding of certain contracts made by officers of certain local units of government; the statutes go on to provide, however, certain measures to mitigate this harsh result. The mechanism by which this is accomplished is through exceptions to the rule against an interest in contracts. For example, even though the particular officers identified therein may have an interest in a contract, the contract will nonetheless not be void if it is for less than one hundred dollars and is reasonable and just, SDCL 6-1-2(1), if competitive bidding is not required and certain conditions are met, SDCL 6-1-2(2) and (3), or if competitive bidding is required and more than one bid has been submitted. SDCL 6-1-2(4). See also SDCL 6-1-3 (regarding banks).
Thus, if SDCL 6-1-1 to SDCL 6-1-3 did apply to irrigation districts, the result set out above could be different with regard to the insurance question.
The terms of the statute indicate, however, that the statutes were not intended to apply to irrigation districts. The statute specifically identifies only the officers of a 'county, municipality, township or school district.' SDCL 6-1-1. See also SDCL 6-1-3. The statutory listing has been held to be exclusive by this office and not to include other units of government. See 1957-58 AGR 161.
The view of the list as an exclusive one is supported, moreover, by its legislative history. As recognized in AGR 70-47, the statute as originally enacted in 1955 dealt only with municipal officers. See Session Law 1955, Chapter 206. It was expanded in 1957 to include officers of townships and school districts. Session Law 1957, Chapter 254. In 1959 the statute was again broadened to apply to counties. Session Law 1959, Chapter 273. The Legislature has thus devoted substantial attention to the problem of which governmental units should be included within the purview of SDCL 6-1-1 to SDCL 6-1-3. The Legislature has not, however, specifically included irrigation districts on the list nor has it employed a broad brush definition of, for example, the term 'state agency' such as is included in SDCL 1-24 or 'public officer' as included in SDCL 22-1-2(37). The Fifth Circuit Court of Appeals has set out the general rule that:
Where Congress has carefully employed a term in one place but excluded it in another, it should not be implied where excluded.
J. Ray McDermott and Company Inc. v. Vessel Morning Star, 457 F.2d 815, 818 (5th Cir. 1972) (en banc). The South Dakota Supreme Court has been quite cautious about employing this rule of construction to actions of the State Legislature, see Argo Oil Corporation v. Lathrup, 72 N.W.2d 431, 434 (S.D. 1955); Rehurek v. Rapid City, 275 N.W. 859 (S.D. 1937). Given, however, unambiguous wording such as exists here and given also the legislative history behind the wording, it appears to me that the South Dakota Supreme Court would read the exclusion of irrigation districts from the list as binding upon it.
I therefore conclude that SDCL 6-1-1 to SDCL 6-1-3 have no application to irrigation districts. I note, however, that the Legislature may well wish to examine the possibility for inclusion of irrigation districts and other local units of government within the compass of the statute so as to provide for uniform treatment of all officers of local government. Nonetheless, given the present situation, I am forced to conclude that my answer to your third question is no.
Respectfully submitted,
Mark V. Meierhenry
Attorney General