The Executive Committee of the Maryland Historical Trust (the Trust) has requested our advisory opinion concerning the activities of one of its trustees (the Trustee).
The Trust was established in 1961 by the General Assembly "for the purpose of preserving and maintaining historical, aesthetic and cultural properties...pertaining in any way to...the State of Maryland from earliest times, to encourage others to do so and to promote interest in and study of such matters." Md. Ann. Code Art. 41, §181A (1978 Repl. Vol.).
The Trust is composed of fifteen trustees, all of whom serve without compensation. The Governor, the President of the Senate of the General Assembly and the Speaker of the House of Delegates are ex officio members of the Trust. The original twelve other trustees were appointed by the Governor for terms of several years. Since then, the trustees have elected their successors to four year terms.
The Executive Committee of the Trust is composed of four trustees and the Executive Director of the Trust, who is not a trustee. With its request for an advisory opinion, the Executive Committee submitted memoranda from the Executive Director, the Trustee and the Assistant Attorney General who is counsel to the Trust (the Assistant Attorney General). Our staff then made inquiries of the members of the Executive Committee and the Assistant Attorney General.
Since the Trustee desired to preserve the right of confidentiality granted to a person who is the subject of an advisory opinion (see Attorney General's Opinion, dated November 13, 1979, to the Chairman of the State Ethics Commission of the applicability of the Governor's Executive Order on open meetings to those proceedings of the Commission that involve the issuance of advisory opinions) by §2-104 of Title 2 of Article 40A, the Commission held its hearing on the matter in executive session. Appearing at the hearing were the Executive Director, the Trustee and the Assistant Attorney General.
In 1973, the Trust and the owner (the Owner) of an important historical property (the Property) executed certain documents, one of which purported to give the Trust the right of first refusal (the Right) to purchase the Property should the Owner ever sell. There is some dispute among the parties involved as to the legal validity of the Right. It is not the function of this Commission to resolve that issue, nor is its resolution necessary in order for us to decide the ethical questions involved here.
The Trustee was aware of the contractual documents executed by the Owner because of his active role in a local historical group in the town in which the Property is located. He was elected to the Trust in mid 1970's and is presently a member of the Executive Committee. In early 1979, the Trustee informed the Executive Director and another member of the Executive Committee of the Owner's death and suggested that the Executive Director determine the status of the Right. The Executive Director expressed the hope that the Owner might have willed, or the Owner's heirs might give, the Property to the Trust.
The Trustee subsequently discovered the terms of the Owner's will, which left the Property as part of the res of a trust agreement, the trustee of which is a trust department of a bank (the Bank). The Trustee passed on this information to the Executive Director, who again expressed the hope that the Property might be given to the Trust.
At least one month after that conversation between the Trustee and the Executive Director, the Trustee telephoned the Bank and learned that it planned to sell the Property at public auction. According to the Trustee, he told the Bank that auctioning the Property would neither be in the best interest of historic preservation nor the Owner's estate, and urged the Bank instead to hire him and the real estate firm of which he is a vice-president to sell the Property.
Soon thereafter, the Trustee told the Executive Director that there was a possibility the Trustee might be representing the Bank and asked the Executive Director about the status of the Right. The Trustee stated that his representation of the Bank would result in better historic preservation of the Property than would result should the Bank act without him.
In May of 1979, the Bank agreed to the Trustee's proposal and hired him, his firm and his wife, also an employee of his firm, as the broker for the Property. Under their agreement with the Bank, the Trustee and his wife will receive a percentage of the purchase price, which would be a commission of significantly more than One Thousand Dollars ($1,000.00), if they consummate a sale of the Property.
At some time during his negotiations with the Bank, the Trustee had mentioned his relationship with the Trust. The Trustee informed the Commission that his position as a Trustee was a hindrance to his obtaining the real estate brokerage contract initially because the Bank was afraid that he might not do his best to find the highest offer, but would look instead for the potential purchaser most interested in historic preservation.
The Trustee informed the Executive Director in May of the brokerage arrangement and of the asking price for the Property. The Trustee mentioned that the Bank appeared to continue to recognize the Right. According to the Executive Director, the Trustee also said that he had explained to the Bank the details of the Right, how much delay it would involve once a purchaser submitted a contract on the Property and his belief that the Trust would not exercise it unless an undesirable purchaser was involved.
Three days later, the Executive Director requested the advice of the Assistant Attorney General as to whether the Trustee had an impermissible conflict of interest. About one week later, the Executive Committee met to discuss the possibility that the Trustee had such a conflict. At that meeting, the Trustee submitted a memorandum to the Committee, disclosing his relationship with the Bank. He repeated that because of his interest in historic preservation, he would want the Property sold to a "good buyer". As a result of that meeting, the Executive Committee requested the Assistant Attorney General's opinion as to the status of the Right.
Almost one month after the meeting, on June 25, 1979 the Trustee submitted a Notice of Disqualification to the Trust and to the prior Board of Ethics, which stated that he, his wife and his employer will benefit financially from the sale of the Property and that "he will continue to use his best efforts to cause the current owner...to offer to sell...to (the Trust) on the same terms...as are offered in any bona fide contract of sale acceptable to the current owner for purposes of eliminating a possible cloud on title...", but that "he is reliably informed" that the Right is not a "valid property interest", and that he neither has any "confidential information concerning property, government or affairs of the State, nor has he disclosed any such information to any party for personal gain or advantage of any individual or entity." In the notice, he disqualified himself from participating in the discussion of and voting on any matter concerning the Property.
The following day, the Assistant Attorney General advised the Executive Committee that the Trust might still have a valid Right. He recommended that the Committee seek an advisory opinion from this Commission on the conflict of interest issue, which it promptly did.
At the time of our hearing, the Trustee and his wife were continuing their efforts to sell the Property. They had shown the Property to several prospective purchasers and planned an Open House. The Trustee also continued to attend Executive Committee and Trust meetings. He and the Executive Director reported that the Property had not been discussed at those meetings, except with regard to the question whether the Trustee had a conflict.
At the hearing before the Commission, the Executive Director presented us with copies of a letter to him, dated October 2, 1979, from the Bank. The letter formally advised the Trust of the asking price for the Property and further states:
"Inasmuch as your corporation holds the recorded Right of First Refusal on the property, we wish at this time to take this opportunity to advise you that the property is for sale and that we hope, in the near future, we will be submitting an Agreement of Sale, and at such time, it can be determined whether you will exercise this Right of First Refusal or not. To date, we have received no offers, but will advise you of any firm offers we do receive."
The Trustee had advised the Bank to send the letter.
The General Assembly has empowered the Trust to purchase historical properties and has set up a Capital Revolving Fund for that purpose. Although that fund's balance does not equal the full asking price for the Property, it might be possible to use the fund to make a downpayment. The Executive Director emphasized that the prime concern of the Trust is to ensure the careful preservation of the Property.
The facts raise at least two questions: (1) whether the Trustee has an impermissible conflict of interest; (2) if he does, whether it has been cured by his Notice of Disqualification. The Trustee has consistently maintained that he does not have a conflict of interest and that he has, at all times, acted in the Trust's best interests.
The General Assembly recently enacted the Maryland Public Ethics Law, 1979 Md. Laws Ch. 513, effective July 1, 1979, which governs our decision in this case. Because the statute is new and, therefore, unfamiliar to the public, we set forth below the provisions of Article 40A involved in this matter.
1. Section 3-101(a): Conflicts of Interests: Acts of Officials and Employees.
"Except as permitted by regulations of the Commission...an official or employee may not participate in any matter, except in the exercise of an administrative or ministerial duty which does not affect the disposition or decision with respect to that matter, if to his knowledge, he, his spouse, parent, minor child, brother or sister has an interest therein or if any of the following is a party thereto:
(1) Any business entity in which he has a direct financial interest of which he may reasonably be expected to know;
(2) Any business entity of which he is an officer, director, trustee, partner or employee...;"
2. Section 3-103. Employment Restrictions.
"(a) An official or employee, except a member of the General Assembly, may not be employed by, or have an interest in, any entity subject to the authority of that official or employee or of the government agency with which he is affiliated or by any entity which is negotiating or has entered a contract with that government agency. This prohibition does not apply to a public official who is appointed to a regulatory or licensing authority pursuant to a statutory requirement that persons subject to the jurisdiction of the authority be represented in appointments to it.
. . .
(c) An official or employee may not assist or represent a party for contingent compensation in any matter before or involving any agency other than a judicial agency or the Workmen's Compensation Commission, or if permitted by law or regulation, before an agency or a quasi-judicial agency of the State or a political subdivision.
3. Section 3-107. Disclosure of Confidential Information.
"Other than in the discharge of his official duties, an official or employee may not disclose or use for his own economic benefit or that of another party confidential information which he has acquired by reason of his public position and which is not available to the public."
Section 3-101(a), the "Disqualification" provision, clearly requires that the Trustee, at a minimum, disqualify himself from any discussions or deliberations of the Trust with respect to the Property. The Trustee is a "public official", as defined by 1-201(z) (1)(i) in Title 2 of Article 40A, since he has been appointed to an executive agency (the Trust) which has not been exempted by the Commission from any or all of the provisions of Article 40A.
Additionally, he, his wife and his real estate firm hold both an "interest" and a "financial interest" in the disposition of the Property which brings him within the coverage of 3-101(a), (a)(1) and (a)(2). As of the writing of this opinion, the Commission has requested an opinion from the Attorney General's office concerning the correct interpretation of the words "interest" and "financial interest" in §3-101(a) and 3-103(a). Since the Trustee would be entitled to receive more than $1,000.00 as a commission if he sells the Property, he has both an "interest" and a "financial interest" in the matter.
The Trustee has complied with the demands of 3-101(a) by submitting, on June 25, 1979, his Notice of Disqualification to the prior Board of Ethics under a similar disqualification provision, Article III, §6, of the old Code of Ethics. We will treat that Notice as sufficient for 3-101(a) purposes.
However, 3-101(a) does not stand alone. Sections 3-103(a) and (c) by their terms carve out broad categories of outside employment which are absolutely prohibited to State officials and employees and which cannot be cured by a 3-101(a) disqualification.
The General Assembly framed §3-103(a) as a blanket prohibition of a State official's or employee's outside employment by, or possession of an economic interest in, any entity which "is negotiating or has entered a contract with" the State agency or board with which the individual is affiliated. From the facts presented to us, we find that the Trust has been and is involved in contractual negotiations with the Bank through the Trustee/broker concerning both the validity of the Right and the intentions of the Trust with respect to exercising that Right. Moreover, based upon the Assistant Attorney General's opinion and the Bank's October 2, 1979, letter, we find that the Trust may well have the Right, which is itself a contract. Thus, §3-103(a) forbids the Trustee from his representation and forbids his wife's and his firm's representation of the Bank so long as he remains a trustee.
Similarly, §3-103(c) forbids the Trustee to continue his dual roles of trustee and real estate agent for the Property, since he is representing the Bank under a contingent compensation arrangement in a matter "involving" the Trust.
The Commission has been empowered by §2-103(h) to grant waivers to boards and commissions or to public officials on boards and commissions from any or all of the provisions of Article 40A if it finds that:
"The application of the Article would constitute an unreasonable invasion of privacy or otherwise constitute unreasonable hardship and would significantly reduce the availability of qualified persons for public service and if it also finds that the exemption or modification would not be contrary to the purposes of this Article."
We decline to grant a waiver in this case since the Trustee is not only in technical violation of 3-103(a) and (c), but his dual role as Trustee/broker has resulted in a substantial conflict between his private interests and his official duties which has the effect of eroding public confidence and trust in the impartial administration of State government.
The heart of the conflict here is that the Trustee has placed himself in the position of assuming a fiduciary relationship to two principals, the Trust and the Bank, whose interests are not always compatible and in some respects are entirely antagonistic. It is elementary that a fiduciary owes complete loyalty to his principal and cannot place himself in any other position which would subject him to conflicting duties.
In many important aspects concerning the sale of the Property, the Trustee, despite his best intentions, cannot possibly serve the best interests of the Bank and the Trust simultaneously.
The Bank, acting as the trustee for the Owner's estate, wants the Property sold for the highest possible price in the shortest possible period of time. It may or may not have a subsidiary interest in historic preservation.
The Trust is primarily interested in historic preservation of the Property. The Trust, at the present time, has three options. One is to try to purchase the Property without regard to other potential purchasers (and might be forced to decide this immediately as a result of the October 2, 1979 letter from the Bank). The second is to exercise its Right, assuming it has one, only if an undesirable purchaser makes an offer. The third is to decide not to attempt to purchase the Property at all.
As a potential purchaser, the Trust's interest, i.e., buying the Property at the lowest possible price, is antithetical to the Bank's interest and the Trustee's economic return on his commission.
The "unacceptable buyer" contingency places an additional burden on the Trustee. If an unacceptable buyer triggers the Trust's interest in buying the house, certain time delays will be created which will be to the disadvantage of the Bank, but to the advantage of the Trust. Furthermore, the Trustee is in an ideal position to influence the Trust in its evaluation of whether a particular purchaser is undesirable. If he believes, as a trustee, that a buyer is questionable from a historic preservation perspective, he must decide whether to inform the Trust, thus fulfilling his fiduciary duties as a Trustee, or make every attempt to facilitate the sale by minimizing or ignoring the buyer's disadvantages, thus fulfilling his fiduciary duty to the Bank.
The Trustee is also in an awkward situation since the Property is eligible to receive grants from the Trust for preservation purposes. He has informed the Commission that the Property would move to the top of the list of those eligible for grants.
As the Bank's fiduciary, he should be emphasizing the potential for grant money and the procedure for obtaining it, but if he does this, he runs the risk of using his position with the Trust for his own economic benefit and for the benefit of third parties.
We have highlighted only the most glaring aspects of the conflict involved here. The conflict is heightened since in every situation in which he must decide whether to act in the best interest of the Trust or of the Bank, he stands to gain financially in direct proportion to the Bank's gain. Furthermore, while we specifically do not find a violation of Section 3-107 forbidding the use of confidential information, the fact that he wears both fiduciary hats might lead the public to suspect that he had access to confidential information concerning the Property which would either enhance his position as broker or which would be useful to one side or the other.
As the prior Board of Ethics recognized in Opinions 20, 78, 83 and 92, potential access to confidential information is a factor which weighs heavily in deciding whether a conflict exists between an official's outside employment and his official duties. We emphasize that the Trustee maintains that he has no confidential information concerning either the Right of First Refusal or the position of the Trust with respect to the Property. We have discovered no information to the contrary.
The Commission believes that its waiver power concerning boards and commissions and officials on boards and commissions should be exercised sparingly and under only compelling circumstances.
We have no doubt that the Trustee is sincerely interested in the historic preservation of the Property. He has been most generous with his time and effort over the years to preserve the historical heritage of the citizens of this State. We do not doubt either his honesty or integrity.
However, we believe for the reasons stated above that to grant a waiver in this case would be "contrary to the purposes of this Article" and find that the standards of conduct set forth in Article 40A forbid the Trustee from his representation and forbid his wife's and his firm's representation of the Bank so long as he continues to serve as a trustee.
If the Trustee, his spouse and his firm do not wish to give up their representation of the Bank, the Trustee must resign from the Trust. We do not at this time address whether he could then continue to represent the Bank without violating §3-103(b) which limits the employment former State officials and employees may undertake.
We note that Commissioner Finney disqualified himself from all participation in this advisory opinion request.
Herbert J. Belgrad, Chairman
William B. Calvert
Reverend John Wesley Holland
Barbara M. Steckel
Date: October 17, 1979