Untitled Texas Attorney General Opinion ( 2005 )

ATTORNEYGENERAL OF TEXAS
GREG ABBOTT
August 22,2005
Mr. John D. White, Chair Opinion No. GA-03 5 1
Board of Regents
The Texas A&M University System Re: Legal status of a state university’s contract
Post Office Box C-l with a law firm when an individual who became
College Station, Texas 77843 amember ofthe university’s board ofregents after
the contract was awarded subsequently became a
partner in the law firm (RQ-0320-GA)
Dear Mr. White:
Through your general counsel, your predecessor asked about the legal status of a contract
between The Texas A&M University System (“TAMUS”) and a law firm, when an individual who
became a TAMUS regent after the contract was awarded subsequently joined the law firm as a
partner.’ It was also asked whether TAMUS may pay the law firm for services rendered under the
contract after the regent joined the firm. Request Letter, supra note 1, at 1.
I. Factual Backmound
TAMUS contracted for outside counsel services on intellectual property matters with the law
firm (“the firm”) for the 2001-2002 state fiscal year, renewing the contract in subsequent years. The
contract inquired about covered the fiscal year from September 1,2003, to August 3 1,2004. See id.
at 1-2. Your predecessor stated that in October 2003, the regent in question was sworn in as a
member of the TAMUS Board of Regents (the “board”). In November of 2003, the same regent
joined the law firm as a partner. See id. at 2. Thus, the contract at issue predates the individual’s
appointment to the board and his joining the law firm. See id. at 1. The firm continued to provide
legal services for intellectual property matters from November 2003 through June 2004, to the
satisfaction of TAMUS. See id. at 2. Billings for that time period totaling more than $18,000 have
been submitted to TAMUS with the expectation that they would be paid pursuant to the contract.
See id.
‘Letter from Mr. Delmar L. Cain, General Counsel, The Texas A&M University System, to Honorable Greg
Abbott, Texas Attorney General (Feb. 10, 2005) at 1 (on file with Opinion Committee, also available at
http://www.oag.state.tx.us) [hereinafter Request Letter].
Mr. John D. White - Page 2 (GA-035 1)
II. Questions
The following questions were asked about the contract:
1. What effect, if any, did the fact that a firm partner became a
Member of the Board of Regents have on the legal status of the
pre-existing contract between the law firm and the A&M System?
2. Is the firm entitled to payment for services it rendered under the
agreement subsequent to the date the partner became a regent?
See id. at 1.
III. Common-law Conflict of Interest
A. Summary
Texas courts have held that a member of a governmental body may not have a personal
financial interest in a contract entered into by the governmental body. See Edinburg v. Ellis, 59
S.W.2d 99 (Tex. Comm’n App. 1933, holding approved); Delta Elec. Constr. v. City of San Antonio,
437 S.W.2d 602 (Tex. Civ. App.-San Antonio 1969, writ ref d n.r.e.); Meyers v. Walker, 276 S.W.
305, 307 (Tex. Civ. App.-Eastland 1925, no writ). This office has relied on these authorities in
addressing questions about contractual conflicts of interest. See Tex. Att’y Gen. Op. Nos. GA-0068
(2003) at 2, JC-0426 (2001) at 2. A contract made in violation of this principle is illegal and void,
because the public officer’s personal financial interest in an entity might cause him to favor that
entity, thereby interfering with his faithful discharge of public duty. See Meyers, 276 S.W. at 307;
see also Delta Elec. Constr., 437 S.W.2d at 609. The common-law doctrine also seeks to avoid
the appearance of impropriety. See Meyers, 276 S.W. at 307; Tex. Att’y Gen. Op. No. JC-0018
(1999) at 4.
Common-law conflict of interest rules have their effect at the time a contract is entered into.
See generally Tex. Att’y Gen. Op. Nos. JM-450 (1986) at 1, JM-3 10 (1985) at 2. A contract is
invalid under common law only if a public officer has or shares with others the authority to contract
with an entity in which he is financially interested. See Tex. Att’y Gen. Op. Nos. JM- 17 1 (1984)
at 3,0-2306 (1940) at 2. See also Tex. Att’y Gen. Op. No. JM-3 10 (1985) at 2 (conflict of interest
rules inapplicable to officer with no power to make or influence making the contract).
B. Legislative Modification of the Common-law Conflict of Interest Rules
The legislature may change common-law rules. See Tex. Workers ’Comp. Ins. Fund
v. Del Indus., Inc., 35 S.W.3d 591, 596 (Tex. 2000); Tex. Att’y Gen. Op. No. GA-0046 (2003)
at 3-4. It has adopted statutes modifying the common-law conflict of interest doctrine in various
ways. For example, the rules articulated in Meyers v. Walker no longer apply to local public
officials, who are now subject to the conflict of interest provisions in Local Government Code
Mr. John D. White - Page 3 (GA-035 1)
chapter 171. See TEX. Lot. GOV’T CODE ANN. 5 171.007(a) (Vernon 1999) (“[tlhis chapter
preempts the common law of conflict of interests as applied to local public officials”). If a local
public official has a substantial interest in a business entity or real property, chapter 17 1 requires him
to disclose his interest and cease to participate in a board vote or action that would have a special
economic effect on the business entity or value of the real property. See id. $ 171.004.
The members of state governmental boards, including the governing boards of state
universities, are generally subject to the Meyers v. Walker conflict of interest rules. See Tex. Att’y
Gen. Op. Nos. JC-0426 (200 1) (state university board ofregents); JM-884 (1988) (State Commission
for the Deaf); MW-179 (1980) (member of Texas Board of Health); V-640 (1948) (state college
board of regents). No statute comparable to Local Government Code chapter 17 1 applies to state
officers, but the legislature has repealed the common law for state-level entities in limited
circumstances. For example, Government Code section 404.02 11 permits a state agency to contract
with a bank as a depository for its funds even though “one or more officers or employees of the
agency who have the duty to select the agency’s depository are officers or directors of the bank” or
have a beneficial interest in the bank’s stock. TEX. GOV’TCODEANN. 9 404.0211 (Vernon 2005).
A majority of the members of the agency’s governing body must vote to select the depository, and
the interested officer or employee must not take part in the proceedings. See id. See also TEX.
EDUC.CODEANN. 9 5 1.923 (Vernon 1996) (institution of higher education may contract with a
corporation even though one or more members of the governing board is a stockholder or director
of the corporation, subject to certain conditions).
It has been argued that the predecessor of Government Code section 572.058 abrogated the
Meyers v. Walker rule for state agencies and institutions of higher education. See Tex. Att’y Gen.
Op. No. JM-671 (1987) (construing former Revised Civil Statutes article 6252-9b, section 6,* now
Government Code section 572.058(a)3); Request Letter, supra note 1, at 4 n.6. Chapter 572, which
establishes financial disclosure requirements for public officers and standards of conduct for public
officers and employees, see TEX. GOV’TCODEANN. 9 572.001(b) (Vernon 1994), includes the
following provision:
An elected or appointed officer, other than an officer subject
to impeachment under Article XV, Section 2, of the Texas
Constitution, who is a member of a board or commission having
policy direction over a state agency and who has a personal or
private interest in a measure, proposal, or decision pending before
the board or commission shall publicly disclose the fact to the board
or commission in a meeting called and held in compliance with
Chapter 55 1. The officer may not vote or otherwise participate in
2See Act ofMay28, 1973, 63d Leg., R.S., ch. 421, 9 6, 1973 Tex. Gen. Laws 1086, 1093
‘See Act of May 4, 1993, 73d Leg., R.S., ch. 268, 9 1, 1993 Tex. Gen. Laws 583, 640-41 (adopting
nonsubstantive revisions of certain statutes relating to state and local government).
Mr. John D. White - Page 4 (GA-035 1)
the decision. The disclosure shall be entered in the minutes of the
meeting.
Id. $ 572.058(a) (emphasis added).
A state agency for purposes of chapter 572 includes “a university system or an institution of
higher education as defined by Section 61.003, Education Code, other than a public junior college.”
Id. $572.001(10)(B) (V emon Supp. 2004-05). TAMUS is a university system within this definition.
See TEX. EDUC. CODE ANN. 5 61.003( 10) (Vernon Supp. 2004-05). A “‘personal or private interest’
has the same meaning as is given to it under Article III, Section 22, of the Texas Constitution,
governing the conduct of members of the legislature.” TEX. GOV’T CODE ANN. 4 572.058(f)
(Vernon 1994). Article III, section 22 provides that “[a] member who has a personal or private
interest in any measure or bill, proposed, or pending before the Legislature, shall disclose the fact
to the House, of which he is a member, and shall not vote thereon.” TEX. CONST. art. III, 0 22.
While the courts have not construed this provision, commentators have suggested that it leaves to
the individual legislator’s judgment whether the legislator has a “personal or private interest”
requiring disclosure and abstention. See Tex. Att’y Gen. Op. No. GA-0087 (2003) at 2 (citing TEX.
CONST. art. III, $ 22 interp. commentary (Vernon 1997)); 1 GEORGE D. BRADEN et al., THE
CONSTITUTIONOFTHE STATE OFTEXAS: AN ANNOTATED AND COMPARATIVEANALYSIS 14 l(l977).
An individual who violates section 572.058 is subject to removal from office. See TEX. GOV’T
CODE ANN. 0 572.058(b) (Vernon 1994).
Attorney General Opinion JM-6714 concluded that the predecessor of section 572.058 did
not change the Meyers v. Walker rule so as to allow a state university system to contract with a
private entity despite a board member’s personal interest in the entity. See Tex. Att’y Gen. Op. No.
JM-671 (1987) at 4-8. Attorney General Opinion JM-671 found that neither the statutory language
nor the legislative history expressed an intent to modify the common-law rule expressed in Meyers
v. Walker. See id. at 6-7. The statute was based on a provision applicable to legislators, who do not
enter into contracts on behalf of the state. See id. at 7. The legislature did not view this provision
as modifying the common-law prohibition against state contracts in which a member of the
contracting board is financially interested, but instead as affecting rulemaking and other regulatory
functions. See id. at 7. Section 572.058 does not modify the common-law rule for state officers,
although it does apply to other kinds of decisions by a state agency board or a state university
governing body. See Tex. Att’y Gen. Op. No. H-13 19 (1978) at 2 (considering whether board
member’s contract with licensee subject to disciplinary proceeding constituted a personal or private
interest in proceeding).
C. Argument for Abandoning the Meyers v. Walker Rule
The request letter argues that the Meyers v. Walker rule imposes an overly strict
standard that should no longer be applied to public contracts. See Request Letter, supra note 1,
4Attorney
GeneralOpinionJM-671 was requested by TAMUS.
Mr. John D. White - Page 5 (GA-035 1)
at 4,8-9 (referring to financial disclosure and open government laws that have been adopted since
Meyers v. Walker was issued). As we have pointed out, the legislature has modified the common-
law conflict of interest law for certain governmental entities and transactions. See TEX. GOV’TCODE
ANN. 4 404.0211 (Vernon 2005) (state agency’s selection of depository bank); TEX. Lot. GOV’T
CODE ANN. ch. 171 (Vernon 1999 & Supp. 2004-05) (local public officers’ conflict of interest law).
Education Code section 5 1.923, which authorizes an institution ofhigher education to contract with
a corporation despite a regent’s personal financial interest in it, was adopted to modify the common-
law rule as applied in a particular attorney general opinion. See SENATE COMM. ON EDUCATION,
BILL ANALYSIS, Tex. H.B. 1569,7 1st Leg., R.S. (1989) (citing Attorney General Opinion JM-671
(1987)). The legislature may change the common-law rule applicable to contracts between
universities and partnerships in which university regents are financially interested. And of course
Texas courts may modify common law rules on a cases-by-cases basis. See El Chico Corp. v. Poole,
732 S.W.2d 306, 311 (Tex. 1987); Otis Eng’g Corp. v. Clark, 668 S.W.2d 307, 310 (Tex. 1983).
It is for the legislature or the courts to modify or abandon the strict common-law conflict of interest
standard of Meyers v. Walker.
IV. Analvsis
A. Application of the Common-law Conflict of Interest Rules to TAMUS
The governance of TAMUS is vested in a board of nine regents, which “shall make bylaws,
rules, and regulations it deems necessary and proper for the government of the university system.”
TEX. EDUC. CODE ANN. $4 85.11, .21(a) (Vernon 2002). The board appoints a chief executive
officer who “is responsible to the board for the general management and success of the university
system, and the board may delegate authority, establish guidelines, and cooperate with the executive
officer to carry out that responsibility.” Id. $ 85.17(d). “The chief executive officer may delegate
his authority if approved by the board.” Id. The governance provision vests authority to contract
on behalf of TAMUS in the board, even though it has delegated to university administrators the
authority to approve contracts involving consideration of less than $300,000.5 See Bathe Halsey
Stuart Shields, Inc. v. Univ. of Houston, 638 S.W.2d 920,927,930 (Tex. App.-Houston [ 1st Dist.]
1982, writ ref dn.r.e.) (university board ofregents’ authority to manage university included authority
to delegate investment duties to employees and university was bound by acts of employees); Tex.
Att’y Gen. Op. No. JM-8 17 (1987) at 3-4 (a university officer or employee is authorized to contract
for the university only because the board of regents has adopted a rule, regulation, or order
delegating such power). Cf: Tex. Att’y Gen. LA-148 (1977) (employment of regent’s niece by state
university would violate the nepotism statute even though the board of regents had delegated
employment power).
The TAMUS Board of Regents is subject to common-law conflict of interest rules, except
where legislation modifies those rules for a particular kind of contract. See Tex. Att’y Gen.
5SeeTexas A&MUniversity SystemPolicy Manual $25.07,714(2), availableathttp:llsago.tamu.edu/policy/25-
07.hk-n (visited May 3, 2005).
Mr. John D. White - Page 6 (GA-035 1)
LO-93-12; Tex. Att’y Gen. Op. No. JM-671 (1987). Education Code section 51.923 authorizes
TAMUS to contract with a corporation despite a regent’s personal financial interest in it, but the law
firm in this case is a limited partnership.6 See generally Request Letter, supru note 1, at 1. Thus,
section 5 1.923 does not apply to a contract between TAMUS and the law firm. Attorney General
Letter Opinion 93-12, which dealt with a proposed contract between TAMUS and a law firm
operating as a partnership, concluded that TAMUS could not contract with a law firm in which a
TAMUS regent was a partner. See Tex. Att’y Gen. LO-93- 12, at 3. The regent’s personal financial
interests in the proposed contract, consisting in his salary from the law firm and his share in the
firm’s profits and losses, prevented the TAMUS Board from contracting with the law firm. See id.
at 2-3; see also TEX. REW. Crv. STAT. ANN. art. 6132b-4.01(a)-(b) (Vernon Supp. 2004-05)
(partnership provisions). Attorney General Letter Opinion 93-12 does not answer the question
before us, however, because there is a crucial difference between its facts and those of the present
request. Unlike the situation here, the TAMUS regent at issue in Letter Opinion 93-12 was a regent
and a partner in the law firm at the time TAMUS entered into the contract.
B. Effect of a Regent’s Conflict of Interest on a Pre-existing Contract with a Law
Firm
The conflict of interest that your predecessor inquired about did not exist when
TAMUS entered into the contract with the law firm. A conflict of interest arising after the contract
was made does not invalidate it. See Tex. Att’y Gen. Op. Nos. JM- 17 1 (1984) at 3,0-2306 (1940)
at 2. Thus, the individual’s appointment to the TAMUS Board and his joining the law firm did not
invalidate TAMUS’s pre-existing contract with the law firm. However, TAMUS may not enter into
another contract with the law firm while the regent remains a partner in the firm. The regent’s
conflict of interest prevents the TAMUS Board from exercising its contractual right to extend the
contract for an additional twelve-month period. See generally Request Letter, supra note 1, at 1.
Nor may the board amend the contract in which the regent is interested. See Flagship Hotel, Ltd.,
v. City of Galveston, 117 S.W.3d 552, 560 (Tex. App.-Texarkana 2003, pet. denied) (holding
amendment to lease created a new lease for the purpose of the maximum lease term allowed by Local
Government Code section 307.023); Boudreaux Civic Ass ‘n v. Cox, 882 S.W.2d 543,547-48 (Tex.
App.-Houston [ 1st Dist.] 1994, no writ) (“A modification to a contract creates a new contract that
includes the new, modified provisions and the unchanged old provisions.“).
C. Whether TAMUS May Pay the Law Firm for Services Rendered Under the
Contract
We have already determined that the regent’s joining the law firm did not invalidate
the TAMUS contract with the law firm. TAMUS may thus fulfill obligations it incurred under the
contract before its termination on August 31,2004. See generally Fed. Sur. Co. v. Pitts, 29 S.W.2d
1046, 1049 (Tex. 1930) (a contract is a “deliberate engagement between competent parties . . , to do,
or to abstain from doing, some act”) (quoting Pelham v. State, 30 Tex. 426 (Tex. 1867). Common-
60ur opinion addresses a specific type of business organization and we do not consider whether the conclusion
would differ if the law firm were organized differently.
Mr. John D. White - Page 7 (GA-035 1)
law conflict of interest rules do not prohibit TAMUS from paying the law firm for the services it
rendered under the contract after the regent joined the law firm. If the board approves the payments,
the regent with an interest in the contract must announce his interest and recuse himself as required
by Government Code section 572.058(a). See TEX. GOV’T CODE ANN. 5 572.058(a) (Vernon 1994);
see also TEX. EDUC. CODEANN. 0 85.22 (Vernon 2002) (procedure for paying TAMUS expenditures
by vouchers approved by the president of the board or by an officer or officers designated by him in
writing to the comptroller).
Your predecessor asked several more questions based on the assumption that “contracts made
prior to appointment of a board member [may] be voided for no reason other than the fact that the
member may benefit from their continued existence.” Request Letter, supra note 1, at 9. In view
of our conclusions to the first two questions, we need not address the remaining issues that were
raised.
Mr. John D. White - Page 8 (GA-035 1)
SUMMARY
Common-law conflict of interest rules do not invalidate a
contract formed before the conflict arose. When The Texas A&M
University System had previously contracted with a law firm, the fact
that a university regent was appointed after contract formation and
subsequently joined the law firm as a partner did not invalidate the
contract. Common-law conflict of interest rules do not prevent the
university from paying for services that the law firm provided under
the pre-existing contract after the regent was appointed to the board
and joined the law firm. The Texas A&M University System may not
enter into another contract with the law firm while a regent is a
partner in the firm.
BARRY R. MCBEE
First Assistant Attorney General
DON R. WILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
Susan L. Garrison
Assistant Attorney General, Opinion Committee