Can a company that's partly owned by a Tennessee Board of Regents member bid as a subcontractor on a TBR contract?

Subject

Opinion No. 13-38, Conflict of Interest of Board Member of the Tennessee Board of Regents, May 7, 2013

Plain-English summary

Chancellor John G. Morgan asked whether a company co-owned by a member of the Tennessee Board of Regents (TBR) could bid as a subcontractor on a contract with a TBR institution that requires TBR approval.

The AG said no. Tenn. Code Ann. § 49-8-203(d) provides:

It is unlawful for any member of the board to be financially interested in any contract or transaction affecting the interests of any institution governed by the board. . . . A violation of this subsection (d) shall subject the member so offending to removal by the governor or the board.

The statute's text is broad. "Any" contract or transaction. "Any" institution governed by the board. The financial interest restriction is "not limited to contracts" with the institution; it extends to "any transaction 'affecting'" the institution. Subcontracting clearly falls within this scope.

The AG drew on a 1975 opinion analyzing the parallel statute for the University of Tennessee Board of Trustees, § 49-9-207. The 1975 opinion concluded that allowing a UT board member's company to subcontract for work at the University violated § 49-9-207. The reasoning was: subcontract revenue creates a financial interest, and § 49-9-207 explicitly extends to any transaction "affecting" the University. The same reasoning applies to TBR under § 49-8-203(d).

The opinion further noted that this would be true whether or not the contract requires TBR approval. The statute's prohibition is on the financial interest itself, not on the approval requirement.

§ 49-8-203(d) is stricter than the general state board conflict-of-interest rule at § 12-3-106(b). The general rule specifies equity ownership greater than 1% and ties the conflict to membership on a board responsible for letting or approving the contract. § 49-8-203(d) states no ownership threshold and applies to institutions governed by TBR. The specific TBR statute controls over the general state board statute. Keough v. State, 356 S.W.3d 366, 371 (Tenn. 2011) (specific statute prevails over general).

The opinion also described a common-law policy against public officials placing themselves where personal interests may conflict with public duties. It quoted an earlier AG opinion saying an officer's good faith is not a consideration under that policy.

Currency note

This opinion was issued in 2013. 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.

Background and statutory framework

The request. The Chancellor of the Tennessee Board of Regents asked about a company co-owned by a board member bidding as a subcontractor on a contract with a TBR institution that required TBR approval.

Common law conflict-of-interest principle. Tennessee follows the common-law rule that a public official may not place himself in a position where personal interest may conflict with public duty. Anderson v. City of Parsons, 209 Kan. 337, 496 P.2d 1333 (1972). The policy is not limited to one category of officials. Low v. Madison, 135 Conn. 1, 60 A.2d 774 (1948). The good faith of the official is not relevant; the policy exists to prevent the official from being influenced by anything other than the public good.

Statutory codification for TBR: § 49-8-203(d).

It is unlawful for any member of the board to be financially interested in any contract or transaction affecting the interests of any institution governed by the board. . . . A violation of this subsection (d) shall subject the member so offending to removal by the governor or the board.

The quoted text reached any contract or transaction affecting a governed institution and specified removal by the governor or board for a violation.

Parallel statute for UT: § 49-9-207 (formerly § 49-3308). Identical language for UT Board of Trustees members. The AG had opined in 1975 (unnumbered opinion) that a UT trustee whose company sought to subcontract for UT-related work violated § 49-9-207:

Any financial interest by a Board member is prohibited. Importantly, the restriction . . . is not limited to contracts with the University of Tennessee. It extends to any transaction "affecting" the University. The statute is specific and unambiguous. Thus a subcontract is within the proscription.

The same logic carries over to § 49-8-203(d).

Comparison with general state board conflict rule (§ 12-3-106(b)).

[I]t is a conflict of interest for any person or any company with whom such person is an officer, a director, or an equity owner having an ownership interest greater than one percent (1%) to bid on any public contract for products or services for a governmental entity if such person or a relative of such person is a member of a board or commission having responsibility for letting or approving such contract.

The general rule specifies equity ownership greater than 1%; the conflict requires the board member to be on a board responsible for "letting or approving" the specific contract. The TBR provision instead addresses a financial interest in a transaction affecting a governed institution.

The TBR provision did not state the general statute's greater-than-1% ownership threshold or limit the prohibition to contracts the board approved. The opinion's footnote 2 construed "co-ownership" to include any ownership interest in the company.

Specific vs. general. When two statutes appear to address the same subject, the more specific controls. Keough v. State, 356 S.W.3d 366, 371 (Tenn. 2011). § 49-8-203(d) is the specific TBR-member conflict rule. It governs over § 12-3-106(b)'s general state board rule.

"Co-ownership" includes any ownership interest. Footnote 2 said the opinion construed "co-ownership" of a company to include "any ownership interest in the company." The opinion did not set a minimum ownership percentage for the board member in its answer.

Common questions

Can a TBR board member own a company that does business with a TBR institution?

The opinion said a company co-owned by a TBR board member could not bid on a contract with a TBR institution, whether or not the contract required TBR approval. It also answered the subcontracting question in the negative.

Does the contract have to be one TBR approves?

No. The opinion was explicit: the prohibition applies "regardless [of] whether the contract required TBR approval." The financial interest itself is what's banned.

What's the difference between the TBR rule and the general state board rule?

The general rule (§ 12-3-106(b)) specifies ownership greater than 1% and concerns contracts the relevant board is responsible for letting or approving. The TBR rule (§ 49-8-203(d)) states no ownership threshold and reaches transactions affecting TBR-governed institutions. The opinion treated the TBR provision as stricter.

What about other state university or college boards?

The opinion said the University of Tennessee Board of Trustees provision, § 49-9-207, had identical language. It relied on a 1975 opinion concluding that a University trustee's financial interest in a subcontract for University work violated that provision.

What's the remedy if a TBR member violates the rule?

§ 49-8-203(d) provides "removal by the governor or the board." That's a substantial consequence and reflects the seriousness Tennessee places on the rule.

Citations

Tenn. Code Ann. § 49-8-203 (TBR conflict of interest, especially subsection (d)); § 49-9-207 (UT Board of Trustees conflict of interest); § 12-3-106 (general state board conflict of interest, especially subsection (b)). Cases: Madison County v. Alexander, 116 Tenn. 685, 94 S.W. 604 (1906); Anderson v. City of Parsons, 209 Kan. 337, 496 P.2d 1333 (1972); Low v. Madison, 135 Conn. 1, 60 A.2d 774 (1948); Housing Authority of New Haven v. Dorsey, 164 Conn. 247, 320 A.2d 820 (1973); Keough v. State, 356 S.W.3d 366 (Tenn. 2011). Prior AG opinions: Op. 12-104 (Nov. 9, 2012); Op. 85-036 (Feb. 14, 1985); Op. 83-278 (Aug. 15, 1983); Op. 78-088 (May 16, 1978); 11 Tenn. Att'y Gen. Op. (Sept. 4, 1975) (unnumbered); Op. 90-22 (Feb. 26, 1990).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-038.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

May 7, 2013

Opinion No. 13-38

Conflict of Interest of Board Member of the Tennessee Board of Regents

QUESTION

Is a company co-owned by a board member of the Tennessee Board of Regents ("TBR") prohibited from bidding as a subcontractor on any contract that is with the TBR institution and must be approved by the TBR?

OPINION

Yes.

ANALYSIS

Tennessee has a longstanding common law policy that precludes public officials from placing themselves in a position where their personal interests conflict with their public duties. This Office recently explained the rationale for this policy as follows:

At common law, "the essence of the offense [of having a conflict of interest] was acting or appearing to act inconsistently with the best interest of the public . . ." Note: Conflicts of Interests: State Government Employees, 47 Va. L.R. at 1048. In Anderson v. City of Parsons, 209 Kan. 337, 496 P.2d 1333 (1972), the common law principle was described as not permitting the public officer "to place himself in a position that will subject him to conflicting duties or cause him to act other than for the best interests of the public." Id. at 1337. This policy is not limited to a single category of officers, but applies to all public officials. Low v. Madison, 135 Conn. 1, 60 A.2d 774 (1948); Housing Authority of the City of New Haven v. Dorsey, 164 Conn. 247, 320 A.2d 820 (1973), cert denied 414 U.S. 1043.

The common law principle has been followed in several opinions of this office. For example, this office has stated:

[t]here exists a strong public policy which opposes an official placing himself in a position in which personal interest may conflict with public duty . . . A public office is a trust conferred by the public. The duties of that office must be exercised with fairness and impartiality. The good faith of the officer is not a consideration, for the policy exists to prevent an officer being influenced by anything other than the public good.

Op. Att. Gen. 83-278 (August 15, 1983). See also Op. Att. Gen. 78-088 (May 16, 1978).

Tenn. Att'y Gen. Op. 12-104 (Nov. 9, 2012) (quoting Tenn. Att'y Gen. Op. 85-036 at 2 (Feb. 14, 1985)).

Conflicts of interest for board members of the TBR are governed by statute. Tenn. Code Ann. § 49-8-204(d) states in relevant part:

It is unlawful for any member of the board to be financially interested in any contract or transaction affecting the interests of any institution governed by the board. . . . A violation of this subsection (d) shall subject the member so offending to removal by the governor or the board.

(emphasis added). Tennessee courts have recognized that conflict of interest statutes such as Tenn. Code Ann. § 49-8-203(d) are designed to ensure "that a public official may not contract with the body of which he is a member, because it may lead to other contracts very detrimental to the public interest." Madison County v. Alexander, 116 Tenn. 685, 688, 94 S.W. 604 (1906).

This Office in interpreting Tenn. Code Ann. § 49-9-207 (formerly Tenn. Code Ann. § 49-3308), which applies to board members of the University of Tennessee Board of Trustees ("UTBT") and has language identical to Tenn. Code Ann. § 49-8-203(d), has opined that allowing a company whose president is a board member of the UTBT to subcontract to do work for the University of Tennessee violates Tenn. Code Ann. § 49-9-207. 11 Tenn. Att'y Gen. Op. (Sept. 4, 1975)¹ (copy attached).

As this Office succinctly explained:

Any financial interest by a Board member is prohibited. Importantly, the restriction . . . is not limited to contracts with the University of Tennessee. It extends to any transaction "affecting" the University. The statute is specific and unambiguous. Thus a subcontract is within the proscription of T.C.A. § 49-3309 (currently Tenn. Code Ann. § 49-9-207).

Id. (emphasis in original). See also Tenn. Att'y Gen. Op. 90-22 (Feb. 26, 1990) (observing that Tenn. Code Ann. § 49-9-207 is "apparently intended to prohibit board members from deriving a financial gain from any of the University's contracts or transactions").

The reasoning of the opinion issued by this Office on September 4, 1975, is equally applicable to the language of Tenn. Code Ann. § 49-8-203(d). Thus Tenn. Code Ann. § 49-8-203(d) prohibits a company co-owned² by a TBR board member from bidding as a subcontractor on any contract that is with a TBR institution and must be approved by the TBR. Indeed this statute by its terms would prohibit a company co-owned by a TBR board member from bidding on any contract with a TBR institution, regardless whether the contract required TBR approval.

The conflict of interest provisions for TBR board members under Tenn. Code Ann. § 49-8-203(d) are stricter than the general conflict of interest provisions governing other members of State boards set forth at Tenn. Code Ann. § 12-3-106(b). Compare Tenn. Code Ann. § 49-8-203(d) (providing it "is unlawful for any member of the [TBR] board to be financially interested in any contract or transaction affecting the interests of any institution governed by the board") with Tenn. Code Ann. § 12-3-106(b) (stating that "[i]t is a conflict of interest for any person or any company with whom such person is an officer, a director, or an equity owner having an ownership interest greater than one percent (1%) to bid on any public contract for products or services for a governmental entity if such person or a relative of such person is a member of a board or commission having responsibility for letting or approving such contract"). The specific provisions of Tenn. Code Ann. § 49-8-203(d) describing conflicts for TBR board members take precedence over the general conflict of interest standards for other State board members established by Tenn. Code Ann. § 12-3-106(b). See, e.g., Keough v. State 356 S.W.3d 366, 371 (Tenn. 2011) (stating general rule of statutory construction that a special statute will prevail over a general provision in another statute).

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

EUGENIE B. WHITESELL
Senior Counsel

Requested by:
The Honorable John G. Morgan
Chancellor
Tennessee Board of Regents
1415 Murfreesboro Road, Suite 340
Nashville, TN 37217-2833

¹ This opinion is unnumbered.

² This opinion construes "co-ownership" of a company to include any ownership interest in the company.

September 4, 1975

Mr. Beauchamp E. Brogan
General Counsel
University of Tennessee
Suite 810 - Andy Holt Tower
Knoxville, Tennessee 37916

Dear Mr. Brogan:

Your office has requested the opinion of the Attorney General on the following factual situation: The University of Tennessee has taken bids for a construction project. The low bid was submitted by construction company "C" which desires to subcontract part of the work to company "B." Company "B" is a wholly owned subsidiary of company "A." Company "A" is a publicly owned corporation. A member of the University of Tennessee Board of Trustees is a stockholder of company "A" and is president of company "B." Company "B" is one of very few companies with the capability of doing the work required for the project. In all likelihood, no matter who is awarded the general contract, company "B" will be the subcontractor. The question asked is whether such a subcontractual arrangement would be a violation of T.C.A. § 49-3308, the University of Tennessee's conflict of interest statute.

It is the opinion of the Attorney General that allowing a member of the Board of Trustees to subcontract to do work for the University of Tennessee is a violation of T.C.A. § 49-3308 which prohibits "any member of the Board of Trustees from being financially interested in any contract or transaction affecting the interest of the University." Undoubtedly, the Trustee, who is president of the subcontracting company, is financially interested in the transaction. Any financial interest by a Board member is prohibited. Importantly, the restriction imposed by T.C.A. § 49-3308 is not limited to contracts with the University of Tennessee. It extends to any transaction "affecting" the University. The statute is specific and unambiguous. Thus a subcontract is within the proscription of T.C.A. § 49-3308.

I hope that this opinion fully answers your question. Whenever this office can be of assistance to you in the future, please feel free to call upon us.

Sincerely,

Richard Lodge
Assistant Attorney General
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