OVERVIEW OF RULES PERTAINING TO TRANSACTIONS CODE OF VIRGINIA 2.2-3112 + 2.2-3115 THE VIRGINIA STATE AND LOCAL GOVERNMENT CONFLICT OF INTERESTS ACT 1. Introduction. By Kathleen Dooley, Fredericksburg City Attorney 1 September 29, 2014 The Virginia State and Local Government Conflict of Interests Act contains three general categories of restrictions and prohibitions: (1) conduct that is generally improper for officers and employees; (2) officers and employees personal interests in contracts with their governmental agency; and (3) restrictions on the participation of officers and employees in transactions of their governmental agencies. The purpose of this paper is to address the third topic as it applies to members of local governing bodies and local boards, committees and commissions. The Conflict of Interests Act is a complex statute with a number of well-defined, some poorly-defined, and some important undefined terms. Its correct application depends on the details of an individual officer s financial interests and their intersection with the precise question that is pending before the officer s governmental or advisory agency. Officers should be sensitive to situations where they feel that they are sitting on both sides of the table. But officers need to be guided by competent legal advice a simple smell test or gut feeling is not an adequate compass. Once the officer has the legal advice in place, if the situation permits the officer to use his or her judgment, then the officer should consider the potential for an appearance of impropriety in making a final decision. The goal of this paper is to make local government officers familiar with the transactions provisions of the Conflict of Interests Act so they will be alert to situations in which a conflict governed by the statute may be present, and so they will obtain legal advice in advance of their official activity. Well-informed officers will keep legal counsel informed as circumstances change, and they will exercise sound judgment in deciding whether to participate in situations where their participation is permitted. In so doing, the local government officers bolster the public confidence in local government that is essential to the success of their agency and their community. 2. Applicability. The Conflict of Interest Act provisions governing transactions apply to all officers of local governmental and advisory agencies. 2 So, whether the board or commission makes final decisions on applications (a governmental agency) or provides recommendations only ( advisory agency), the law on transactions applies. Members of local governing bodies, boards of zoning appeals, planning commissions, 1 This conference handout is only an overview of the law. It does not go into every detail. A public officer should never rely on a conference handout as a substitute for legal advice. 2 Code of Virginia 2.2-3112 governs participation in a transaction. Code of Virginia 2.2-3101 defines terms. Code of Virginia 2.2-3115 establishes disclosure and declaration requirements. This paper is generally based on these three statutes, without citing the statute after every sentence. Other legal resources are cited. 1
architectural review boards, and building code boards of appeal are all covered by the Conflict of Interests Act. The law also applies to standing commissions, ad hoc committees, and task forces appointed by the governing body. 3. Personal interest in a transaction. The concept of personal interest in a transaction is key to applying the conflict of interest rules. If the officer has a personal interest in a transaction, as defined by the Conflict of Interests Act, then the officer becomes subject to disclosure laws and may be required to disqualify himself from participating in the transaction. Unfortunately, the Conflict of Interests Act definition of personal interest in a transaction is one of the most complicated definitions in the Code of Virginia. It helps to break the concept down into its component parts. First, the type of personal interest recognized by the Conflict of Interests Act is a financial interest. Typically, the financial interest involved is connected with the officer s salary or business income, or the officer s ownership of real estate. Typically, the financial interest is due to a financial benefit like the salary or business income or ownership but it can also arise from the officer s financial liability. A financial liability may be in the form of a loan that the officer is obligated to pay, for example a mortgage or business loan. A financial interest benefit or liability -- of $5,000 is enough to trigger the requirements of the Act. 3 Second, the financial interest also includes business relationships where the officer or a member of his immediate family represents or provides services to an individual or business. The Act does not define the type of representation or service which is referred to. It would at least include traditional representational relationships such as lawyer/client relationships, and other professional services such as engineering, architecture, and real estate services. Third, the financial interest or business relationship may accrue to the officer or a member of his or her immediate family. Members of the immediate family are: (i) a spouse and (ii) any child who resides in the same household as the officer and who is a dependent of the officer. (A child is defined elsewhere in the Code of Virginia as a person less than 18 years of age. 4 ) Financial interests of members of the immediate family trigger the same personal interest in a transaction as do the officer s own personal financial interests. It will be important for the officer to be familiar with the financial interests of his or her spouse and children residing in the home who are claimed as dependents. The fourth component is the transaction, which is any matter considered by a governmental or advisory agency, whether in committee, subcommittee, or other entity of the agency, or before the agency itself, on which official action is taken or contemplated. Examples of transactions include applications that the board or commission decides, such as certificates of appropriateness for the Architectural Review Board. Appeals, like those heard by the Board of Zoning Appeals or Board of Building Code Appeals, are transactions. Applications where the commission s work is advisory only, 3 Before July 1, 2014, the threshold financial interest was $10,000. 4 Code of Virginia 1-207. The term dependent is not defined. 2
such as rezoning applications before the Planning Commission, are also transactions. If the agency is taking a vote on the question, or if the agency is contemplating taking a vote on the question, then it is a transaction, and the disqualification rules apply. So, putting these four components together, an officer has a personal interest in a transaction when he or she, or a member of his or her immediate family: a. Has a personal interest in property or a business or governmental agency, or b. Represents or provides services to any individual or business,and c. Such property, business or represented or served individual or business: i. Is the subject of the transaction, or ii. May realize a reasonably foreseeable direct or indirect benefit or detriment as a result of the action of the agency considering the transaction. A personal interest in a transaction does not exist where: a. An elected member of a local governing body serves without remuneration as a member of the board of trustees of a not-for-profit entity and the elected member or member of his immediate family has no personal interest related to the not-for-profit entity; or b. An officer is appointed by a local governing body to serve on a governmental agency, and the personal interest in the transaction of the governmental agency is the result of the salary, other compensation, fringe benefits, or benefits provided by the local governing body or separate governmental agency to the officer or member of his or her immediate family. 4. Disqualification requirements: If the officer has a personal interest in a transaction, then disqualification is mandatory in some instances, and discretionary in others. The officer is required to disqualify himself if the transaction has application solely to property or a business or governmental agency in which he has a personal interest or a business that has a parent-subsidiary or affiliated business entity relationship with the business in which he has a personal interest. In addition, the officer is required to disqualify himself if he falls into one of the categories listed below, but is not able to make the required declaration of objectivity. The officer may participate in the transaction, even though he has a personal interest in the transaction, if: a. The officer is a member of a business, profession, occupation, or group of three or more persons the members of which are affected by the transaction, and the officer complies with disclosure and declaration requirements that will be discussed below. 3
b. A party to the transaction is a client of his firm, if he does not personally represent or provide services to the client and he complies with the disclosure and declaration requirements. c. The transaction affects the public generally, even though his personal interest, as a member of the public, may also be affected by the transaction. The key to the first two categories of permissive participation is whether the officer is able to participate fairly, objectively, and in the public interest. The officer must formally make this declaration, in addition to disclosing the nature of his or her personal interest in the transaction. If the officer is unable to participate under this test of objectivity, then the officer must disqualify himself or herself from participating in the transaction. An officer is not required to disqualify himself from participating in a transaction merely because the officer is a party in a legal proceeding of a civil nature concerning the transaction. If the officer s body meets to discuss the civil lawsuit, the officer may participate in the deliberations, closed sessions, or voting on the topic of the lawsuit. 5. The three elements of disqualification: Officers may believe that abstaining from the vote is all that is required when there is a conflict. However, disqualification in fact imposes three obligations disclosure of the conflict of interest, nonparticipation on behalf of the agency, and a prohibition against discussion of the matter with other governmental officers or employees at any time. Merely abstaining from the vote is not enough. a. Disclosure: The disclosure of the conflict is a separate, enforceable obligation under the Conflict of Interests Act. Nonparticipation alone is not sufficient; it must be paired with a full and public disclosure of the existence of the personal interest. How to make the disclosure: The disclosure must include the elements required by Code of Virginia 2.2-3115, and is best made orally at each meeting where the transaction is considered (including work sessions and public hearings), and once in writing to be filed with your agency records. It is not enough to simply state, I have a conflict of interest, or to make some other informal allusion to what seems obvious or well-known to all. Make the required formal disclosure orally at each meeting where the application is considered and file it in writing with the secretary or clerk of your agency, for retention in the records of the agency for five years. What to disclose: If you disqualify yourself from participation in the transaction, either as a mandatory disqualification or a discretionary disqualification, then disclosure includes the full name and address of the business and the address or parcel number for the real estate (if the interest involves a business or real estate). 4
b. Nonparticipation The disqualification extends to the agency s deliberations, debate, motions and voting, as well as attendance at any closed session the agency may hold on the transaction. The officer may not participate in any of these activities if he is disqualified under the Conflict of Interests Act. c. Discussion The prohibition against discussions is not well-defined in the statute, but it appears to be very broad. It applies to discussing the matter in which the officer has a personal interest with other governmental officers, which would include members of your own governmental agency as well as members of any other local, regional, or state governmental agency that may consider the matter. 5 Likewise, the prohibition extends to discussions with governmental employees, which would include local, regional and state governmental employees. Questions arise as to the exact application of the prohibition on discussions for officers where (1) the officer is the applicant; (2) the officer represents the applicant, or (3) the officer is a member of a group affected by an application. The Attorney General issued an opinion in 2009 stating that an officer may not present his client s application to the agency on which he sits, even though he has disqualified himself from voting on the application, because the presentation would violate the prohibition against discussions. 6 If the disqualified officer is the applicant or a member of a group, then the officer should obtain legal advice on the scope of the discussion prohibition. 6. Permissive participation disclosure and declaration. When you are a member of a group affected by a transaction and you choose to participate in the transaction, then the Conflicts of Interest Act requires you to disclosure the nature of your interest, and to formally declare that you are able to participate in the matter. Disclosure includes (i) the transaction involved, (ii) the nature of your personal interest affected by the transaction, and (iii) that you are a member of a business, profession, occupation or group the members of which are affected by the transaction. When a party to a transaction is a client of your firm, and you choose to participate in the transaction, then disclosure includes (i) transaction involved, (ii) that a party to the transaction is a client of your firm, and (iii) that you do not personally represent or provide services to the client. Again, full disclosure of your interest is required for compliance with the law. The required declaration is that you are able to participate in the transaction fairly, objectively, and in the public interest. When participation is permitted, the declaration is a very important aspect of compliance. Consider this declaration from both an internal standpoint and the public s perspective. Consider all of the factors that bear on this declaration before making your decision. 5 A governmental agency has authority to make a decision on a transaction. 6 COI Adv. Op. No. 09-A02, November 25, 2009. 5
The law requires the officer to make an oral disclosure of the existence of the interest during each meeting of his or her agency at which the transaction is discussed, to be recorded in the minutes of the meeting. In addition, the officer makes the disclosure in writing once, to be filed with the clerk of the agency. 7. Fundamental fairness. An impartial decision-maker is essential to meeting procedural due process requirements when the action of a governmental agency is adjudicative in nature. An applicant for a variance, certificate of appropriateness, or an appellant in a zoning appeals or building code appeals case, for example, is entitled to fundamental fairness in the process by which his application is considered, and an impartial decision-maker is essential in meeting this requirement. The officer s own reputation, the public confidence in the board or commission, and the confidence of an applicant in the fundamental fairness of the process are all important. Under Robert s Rules of Order, an officer may abstain from a discussion or vote. This abstention is technically distinct from a disqualification under the Conflict of Interest Act, and it does not carry the same disclosure requirements as to the officer s reason for abstaining. An officer has a right to abstain from participating in a transaction, even if the type of interest involved does not trigger Conflict of Interests Act requirements. However, merely abstaining from a vote is not a substitute for compliance with the Conflict of Interests Act if it applies. 8. Effect of disqualification (or failure to disqualify) on the official action of the body. A governing body may conduct business only if a quorum a majority of the members -- is present. 7 Other statutes, local ordinances, or agency by-laws typically establish the same quorum requirement for other local government public bodies. Even if one or more members is disqualified from participating in a transaction that is on the agenda, the meeting of the body may convene only if a quorum of the body is physically present. 8 The Conflict of Interests Act then provides for when and how the remaining members may act on the matter. The disqualified member should remain in attendance while the transaction is discussed. The general rule is that if disqualifications of officers under COIA leave less than the number of members required by law to act, then the remaining member or members shall constitute a quorum for the conduct of the particular item of business, and they have authority to act for the agency by majority vote. If a unanimous vote of all members is required by law, then the remaining members may act by unanimous vote. The Constitution of Virginia and Code of Virginia require a supermajority of ¾ of the members of the governing body in order to approve the sale of certain public property. In that instance, members whose sole interest in the proposed sale is by virtue of their employment by a business involved in the 7 Code of Virginia 15.2-1415. 8 Jakabcin v. Town of Front Royal, 271 Va. 660, 668 (2006). 6
sale, whose participation is required in order to meet the supermajority requirement, may participate in the deliberation and vote on the proposed sale. Finally, official action taken under circumstances that violate the prohibited transactions requirements of the Conflict of Interests Act may be rescinded by the agency. Rescission is not mandated. The agency is required to consider the interests of the agency and any innocent third parties and to incorporate terms for any rescission that take these interests into account. 9. Seeking a legal advisory opinion. There are currently three sources of legal advice for local government officers, plus a potential appeal to the Attorney General,and the option to go straight to court for a declaratory judgment. In the future, the Conflict of Interests Advisory Council should provide a fourth resource for local government officers. As a practical matter, since this legal advice pertains to a public officer s public acts, the advice itself will likely become a matter of public record, especially if there is a question as to the propriety of the officer s participation in a transaction. In every case, the legal advice should be guided by the public policy stated in the Conflict of Interests Act that our system of representative government is dependent in part upon (i) citizen legislative members representing fully the public in the legislative process and (ii) its citizen maintaining the highest trust in their public officers and employees. a. Private attorney. Officers are encouraged to contact their personal attorney for legal advice in the application of the Conflict of Interests Act to their personal financial interests. The private attorney may have the benefit of familiarity with the officer s personal and business interests and financial liabilities. An additional benefit is the confidential nature of the personal attorney s advice. This advice is privileged and the officer may keep it confidential if he wishes. b. Local Government Attorney: The local government attorney represents the locality as an organization. 9 In this capacity, she is authorized to provide legal advice to its officers and directors including members of the governing body, the chief administrative officer, and officers of governmental and advisory agencies on questions of compliance with laws governing their official acts. Any officer may contact her for a legal advisory opinion for how to comply with the Conflict of Interests Act. The officer must recognize that this advice is being provided because of the local government attorney s lawyer/client relationship with the locality as an organization. It is not confidential to the officer. The information received and the advice provided may be shared with the members of the governing body, since they are the people who are ultimately responsible for the actions of the organization. The governing body may decide to release the advisory opinion, if it wishes. If the officer s actions are adverse to the interests of the locality, then the local government attorney must terminate communications with the officer. 9 Virginia Rules of Professional Conduct Rule 1.13. 7
The key to seeking an advisory opinion is complete disclosure by the officer of all relevant facts. If the officer does not fully and truthfully provide all relevant information to the local government attorney, then the officer is not entitled to rely on her legal advisory opinion. If an officer is later questioned as to his compliance with the Conflict of Interests Act, he may disclose the legal advisory opinion provided by the local government attorney. It is not a complete bar to criminal prosecution, but as a practical matter, assuming there was full disclosure of the relevant facts, it should show that the officer did not knowingly violate the law. c. Commonwealth s Attorney The Commonwealth s Attorney is the chief law enforcement officer for the locality. Compliance with her legal advisory opinion is a complete bar to criminal prosecution for a violation of the Conflict of Interests Act, so long as a very important caveat the officer has fully disclosed all of the relevant facts to the Commonwealth s Attorney. When the Commonwealth s Attorney issues an advisory opinion, she will issue it in writing, and it becomes a public record, which will be released on request. It is not confidential to the officer. If the Commonwealth s Attorney concludes that the proposed action does constitute a violation of the Conflict of Interests act, then the officer may request that the Attorney General review the opinion. The Attorney General may revoke the Commonwealth s Attorney s opinion. d. The new Virginia Conflict of Interest and Ethics Advisory Council. The General Assembly created a new Virginia Conflict of Interest and Ethics Advisory Council in 2014. However, Governor McAuliffe vetoed funding for the agency, promising to return to the 2015 General Assembly session with more robust ethics reform legislation and funding for the agency. The agency has legal authority to furnish formal advisory opinions, guidelines, and informal advice to state and local government officers. The informal advice it issues is proposed to be protected by the attorney/client privilege in the 2014 legislation. e. Declaratory judgment. Regardless of whether an opinion has been issued by the Commonwealth s Attorney or the Attorney General, any person has the right to seek a declaratory judgment or other judicial relief. This route would be available to the officer. It may also extend to any person who wishes to question an officer s participation in a transaction. 10. Violations. Knowing violation of the Conflict of Interests Act is a Class 1 misdemeanor. A knowing violation occurs when the officer engages in conduct or refuses to perform an act when he knows that the conduct is prohibited or required by this chapter. With respect to transactions, an officer may violate the Act by (1) failure to fully disclose a conflict of interest; (2) participation in a transaction when disqualification is required, or (3) discussing a transaction with other officers or staff when the discussion is prohibited. 8
The maximum penalty for a Class 1 misdemeanor is one year in jail and a $2500 fine. In addition, a person who knowingly violates the Conflict of Interests Act is guilty of malfeasance in office. Upon conviction of a violation, the judge or jury may order the forfeiture of the public office. Finally, if the officer benefited financially from his or her violation, then the officer shall be penalized in an amount equal to the amount of money or thing of value received as a result of the violation. The statute of limitations for a violation is one year from the time the Commonwealth s Attorney has actual knowledge of the violation or five years from the date of the violation, whichever event occurs first. 11. Resources and training. The State and Local Government Conflict of Interests Act is contained the Code of Virginia, Title 2.2, Chapter 31. For additional information, consult: Local Officials Resource Series: Guide for Local Government Leaders Virginia Freedom of Information Act, Virginia Conflict of Interests Act, and the Virginia Public Records Act, available from the Virginia Municipal League at www.vml.org Handbook for Virginia Mayors and Council Members, Chapter 5, Conflict of Interest, available from the Weldon Cooper Center for Public Service at www.coopercenter.org Conflict of Interest Act Training Virginia Attorney General at www.oag.state.va.us/opinions and Legal Resources/COI.html 9