87.18

OPINION NO. 87-18

A staff member in the Policy and Research Division in the Department of Housing and Community Development (DHCD) has requested an advisory opinion as to whether he may purchase real property from the Maryland Housing Fund (MHF or the Fund), a unit of DHCD. Based on the Requestor's description of his plans, and our understanding of the agency's organization, we advise him that this activity would be inconsistent with the outside employment and financial interest provisions of the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law), and that an exception cannot be applied to overcome this prohibition.

This Requestor is employed in the Research and Policy Division of the newly established Department of Housing and Community Development. This is an agency created by legislative reorganization of housing and economic development activities in the 1987 Legislative Session. The DHCD, which includes units formerly part of the Department of Economic and Community Development, became a separate cabinet level Department dealing strictly with housing, community and cultural affairs. As part of this reorganization the Policy and Research Division was created as basically a new unit that reports directly to the Secretary through the Deputy Secretary (formerly the Assistant Secretary for Housing and Community Development). The Division includes two professional staff, the Requestor and the Division Director.

The Department has only been in existence for a few months and many of the programs, especially in the support services area, are still being refined. There is apparently no position description for the Requestor's position, and both the Division Director and the Deputy Secretary indicate that it is not entirely clear what kind of role the Research and Policy Division will play in the Department. To date, however, the unit has apparently been functioning as a general support unit responding to specific tasks assigned by the Secretary or the Deputy. They have collected data and analyzed issues pertaining to housing, and prepared reports including advice and recommendation to the Secretary and Deputy Secretary.

Projects have included statistical research and policy development on general issues as well as legislative review and recommendations, and it is anticipated that in the future the office will be concentrating on general research and policy matters dealing with all aspects of the State's housing program. Both the Director and the Deputy Secretary indicate that the Division's activities can be expected to cut across all of the units of the Department and to involve interaction with all of the agency's operating programs, including the Maryland Housing Fund.

This request arises from the Requestor's interest in purchasing, for investment purposes, real property being offered for sale by the Maryland Housing Fund. This is a unit within the Department that operates a variety of mortgage insurance programs that are designed to assist State citizens of all income levels to become houseowners, and to stimulate the flow of private investment capital into the State. The programs include insurance of single-family mortgage loans up to 100 percent of the purchase price, and the insurance of both construction and permanent multi-family mortgage loans. The program involves cooperation with private lending institutions, with local housing agencies and with other units of the Department.

The properties that would be at issue in this request are ones that become the property of the Fund when a borrower defaults. They become Fund property in a variety of ways depending on the extent of the agency's insurance liability and the particular program involved. In some situations, for example, the private lender may foreclose on the property, sell it and file a claim with the Fund. In other circumstances, where a private foreclosure auction is unsuccessful because there are no purchasers at an adequate price, then the property would be assigned to the Fund. The Fund might also take a direct assignment of the property, paying the loan to the private entity and attempting to clear the delinquency, and trying to recover the monetary value with a foreclosure sale.

The Director of the Fund indicates that the agency's goal in these sales is to get the best possible price to limit the extent of the Fund's loss. The properties are therefore offered through the regular real estate market, either with direct advertising or through realtors with which the agency has standing agreements. He advises that an asking price is usually established based on the amount of the outstanding principle balance, and if possible, the amount of expenses connected with the foreclosure and sale process. Apparently the difficulty with the process is that the properties very often are not in very good condition and are sometimes not particularly marketable. They may have to be put in saleable condition before they can be sold, and also require agency expenditure for things such as upkeep and taxes. The Fund also has a general policy against selling the properties to investors. Overall, the Director describes this as a difficult and sensitive process that involves significant agency discretion and decisions based on subjective evaluation.

The Requestor here is interested in purchasing Fund properties for investment purposes. He says that as the properties are included in a list which is posted and is available to the public he would not envision having any particular advantage as a DHCD employee. He says he would submit his bids and negotiate the selling price just as any other member of the public. He does not have any particular property in mind now, and would anticipate this being a continuing investment activity. The Requestor would purchase a property, do what work was necessary to make it marketable and resell it or lease it. He does not anticipate that he would finance through an agency program.

This request presents issues under the outside employment and financial interest prohibitions of §3-103(a)(1) of the Ethics Law. Subsection (a)(1)(i) of this section prohibits an employee from being employed by or having a financial interest with an entity that contracts with or is negotiating contracts with his agency. In reviewing application of this provision to real property activities, we have in the past said that ownership of real property for investment purposes results in the existence of an entity in which the individual has both an interest and employment relationship as contemplated in this provision. (See for example Opinions No. 85-3 and 84-27).

We have also concluded that these kinds of purchase transactions result in contracts with the individual's agency, and have particularly considered the application of the §3-103(a) prohibition to individuals employed by the Department of Economic and Community Development (predecessor Department to the DHCD). In our Opinion No. 83-27, for example, we generally considered the issue, and advised that the prohibition would be applied "to bar an employee's having or negotiating a loan contract with his agency if the employee's investment or commercial interest exceeds $1,000 (as set forth in the definition of 'financial interest,' §1-201(m) of the Ethics Law)." We indicated there that exception would be possible for some DECD employees, but further advised of the potential applicability of other provisions of the Law to these types of transactions with their agency. This Opinion was subsequently clarified in No. 84-27, where an employee of the Community Development Administration was advised that she could not enter into a loan transaction with the agency as to a piece of investment property held by her.

The Requestor here intends his purchases to be part of a business and investment activity, and the contracts of sale contemplated by him must in our view be treated as contracts with his agency. We therefore believe that this situation comes within the §3-103(a)(1)(i) prohibitions and the question is thus whether an exception would be allowable. Basically, the exception allowed in §3-103(a) permits exception from the prohibition in accordance with Commission regulations, where the relationship would not result in a conflict of interest or appearance of conflict. The Commission's regulations are published at COMAR 19A.02.01 (outside employment exception) and 19A.02.02 (financial interest exception). Their approach is to set forth general guidance criteria for assuring that an outside employment or interest relationship is so remote from the individual's agency activities and official duties that the possibility of a conflict or appearance thereof is remote.

The criteria include, for example, consideration of possible impact by the employee on his outside employer or interest, and also the relationship of the employee to supervisors, other employees, or the unit of his agency that impact on his outside employer or interest. Also considered is the nature of the private responsibilities and how they relate to the agency's contractual dealings with the entity. In this situation, though the Requestor may not be viewed as having authority to impact as an agency employee on his proposed private contractual relationships with his agency, it is clear that his duties would involve interaction with MHF staff. Moreover, his private responsibilities raise several questions under the criteria. The business would be organized, apparently, for the express purpose of doing business with the agency, and the Requestor would be personally negotiating with agency employees and executing contracts in what are described as difficult and sensitive transactions.

The exception regulations also require an evaluation of other provisions of the Law and a consideration of the total circumstances in view of the Law's conflict or appearance of conflict criteria. Of concern in this regard is the inconsistent employment provision of §3-103(a)(1)(ii). This section complements the prohibition of subsection (a)(1)(i), barring any employment that would impair the individual's impartiality or independence of judgment. In applying this provision, we have generally looked at the individual's duties, and prohibited the activity where there were official duties that could impact on the private activity. Both the Requestor's direct supervisor and the Deputy Secretary advise here that his research duties could be expected to involve interaction with the Fund, presenting a situation similar to that discussed in Opinion No. 84-27, where the Requestor could be dealing in an official capacity with agency staff with whom he is privately negotiating important and sensitive financial transactions.

Moreover, we are aware in evaluating the general circumstances of this situation of the concerns expressed by the Director of the Fund about this proposed activity. He indicates that the sale process is difficult and risky given the fact that the properties may be sold at a loss, without adding the complication of dealing with an agency employee. In our view agencies and their operating units should not be put to the task of defending their programs based on the private activities of their employees. We believe, in fact, that the employment prohibitions of §3-103(a)(1) were intended to restrict these very kinds of relationships, in order to meet the goal expressed in §1-201 of ensuring that the State's business is not subject to improper influence or even the appearance of improper influence.

Under all of these circumstances, we must advise the Requestor that the activity that he proposes would be prohibited by §3-103(a)(1) of the Law. Moreover, given the situation as described to the Commission, the relationships between his proposed private activities and his agency and his own official duties are not sufficiently remote to justify application of an exception to permit the activity.

M. Peter Moser, Chairman
   William J. Evans
   Reverend John Wesley Holland
   Betty B. Nelson
   Barbara M. Steckel

Date: October 27, 1987