An advisory opinion has been requested concerning whether and to what extent an official must disclose loans made by the official to an incorporated business entity, on a financial disclosure statement submitted pursuant to Title 4 of the Maryland Public Ethics Law (Article 40A, Title 4, Annotated Code of Maryland, the Ethics Law).
This opinion is requested by a public official who has submitted a Financial Disclosure Statement. She disclosed on Schedule B of the Statement her interest in a business entity (the Firm), which she describes as "a small, non stock tax exempt charitable and educational corporation whose principle effort is the publication of specialized books." The Firm has also run some institutes, but does not do business with her State employer or otherwise with the State. The Requestor is a founder of the Firm and over the years has made loans to it. She included the following on Schedule B: "Loans made by me to the firm. Amount owed me as of December 31, 1979 approximates $32,802." She requests advice as to whether this is properly disclosed.
Section 4-103(b) of the Ethics Law requires the reporting of "all interests in any corporation, whether or not the corporation does business with the State." Sections 4-103(e) and 4-103(h) further require reporting of offices, directorships and salaried employment with entities doing business with the State and identification of entities from which outside income is earned. The Requestor, however, indicates that the Firm does not do business with the State; nor has she ever received income from it. She would thus be required to disclose her relationship with the Firm only to the extent it constitutes an interest in a corporation reportable on Schedule B.
The Requestor's transaction with the Firm consists of being a founder and providing it with an initial start-up loan and several additional loans through the years as the Firm needed funds. The loans are being repaid, without interest, though not on a set schedule. Her financial relationship with the Firm is thus not one of an investor holding an ownership interest, but of a creditor issuing a loan and entitled to repayment. She thus has equitable and legal rights common to all creditors; she has a right to repayment in accordance with the terms of the loan under normal circumstances and the rights of an ordinary creditor in case of dissolution or bankruptcy. The question is whether this constitutes an "interest" in a corporation as contemplated by § 1-201(n) and 4-103(b) of the Ethics Law.
The term "interest" is defined in § 1-201(n) as "any legal or equitable economic interest, whether or not subject to an encumbrance or a condition, which *is* owned or held, in whole or in part, jointly or severally, directly or indirectly...." The prior financial disclosure law included the same basic definition of interest, but included an additional detailed listing of holdings that would be considered interests, providing that "interest also includes an interest in a note, bond, debenture, or any other evidence of a creditor interest." (Former law, Article 33, § 29-2(a), Annotated Code of Maryland.)
The prior law thus quite clearly included creditor interests within the concept of a reportable interest. This definition of interest in the prior financial disclosure law was carried forward in the bills initially introduced in the 1979 Session of the Legislature. (S.B. 2, S.B. 581, H.B. 912.) The version included in the Ethics Law as finally enacted was apparently proposed during legislative consideration as part of an effort to delete excess verbiage from the bill. There is no indication that the intention was to substantively alter the concept of "interest" for financial disclosure purposes.
The right to demand repayment and the right to sue on a debt and thus acquire a judgment lien against a firm's assets would seem to be a legal or equitable economic interest. The holding of a substantial claim against an entity could be viewed as creating an interest in the continuing viability of the entity, and could thus reasonably be viewed as the type of potentially conflicting interest required to be disclosed on the financial disclosure statement. We thus believe that the notes held by the requestor from the Firm do constitute an interest in a corporation that must be disclosed on Schedule B of the Financial Disclosure Statement. This is consistent with the provision in Column 4 of the Schedule for disclosure of "OTHER INTERESTS IN CORPORATION (in notes, bonds, etc.)." All other appropriate columns on the Schedule should also be completed.
Herbert J. Belgrad, Chairman
Jervis S. Finney
Reverend John Wesley Holland
Barbara M. Steckel
Date: March 29, 1982