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HomeMy WebLinkAbout02-586 McMahonMark J. Hollenbeck, City Solicitor Office of the City Solicitor City Hall — 24 Kennedy Street Bradford, PA 16701 Re: Conflict; Public Official /Employee; Executive Director; Office of Economic and Community Development; City; Regional Planning Commission; Business, Corporation, Partnership; Loan; Real Estate; Creditor; Subordinate; Funding; Abstain; Approval; Contract; Committee; Member; Redevelopment Authority; Auction; Inventory; Stock. Dear Mr. Hollenbeck: ADVICE OF COUNSEL August 12, 2002 02 -586 This responds to two letters of July 12 and 29, 2002, by which you and Raymond McMahon (McMahon) requested advice from the State Ethics Commission. Issue: Whether the Public Official and Employee Ethics Act ( "Ethics Act "), 65 Pa.C.S. § 1101 et seq., presents any prohibition or restrictions upon an Executive Director of the Off e of Economic and Community Development (OECD) for the City of Bradford and committee member of the Overall Economic Development Program (OEDP) of the North Central Pennsylvania Regional Planning and Development Commission (NCPRPDC) regarding a financial interest he has in a corporation through stock ownership and in a partnership which is a creditor of the corporation as to certain corporate property that is contemplated being purchased by a businessman who seeks to obtain loans through OECD and NCPRPDC. Facts: Beginning in the late 1970's, McMahon has held public positions with the CbiThf Bradford and Beaver County: Executive Director of the Bradford Redevelopment Authority and Beaver County Redevelopment Authority. Since 1987, McMahon has been the Executive Director of the OECD for the City of Bradford. In 1984, McMahon purchased an interest in a local corporation, Bovaird Company, Inc., which was owned by Maxwell Moore and Ed Lamag until Lamag gifted his share of the corporation to his son, David. At about that time, McMahon, together with two other individuals, Lee Moorehouse and Bob Klussman, purchased approximately 12.5% of the outstanding stock for $50,000. After the stock purchase, the daily operation of the corporation was run by Lamag and Moorehouse who received unspecified salaries. As to the corporation, Lamag was President, Moorehouse was Vice President, McMahon was Secretary and Klussman was Treasurer, with the latter Hollenbeck- McMahon 02 -586 August 12, 2002 Page 2 two only being corporate officers, corporate directors, and investors. The corporation in 1995 bought back the shares of Klussman for approximately $22,000. As a result of the declining business environment, the corporation ceased operations in May of 1999 and began liquidation proceedings. The corporation sold its inventory and conducted an auction in October of 1999. The corporation also owned real estate that consisted of approximately 1% acres of land and five buildings from which an industrial supply business, a custom order machine shop and a motor repair shop operated. After the inventory was liquidated in 1999, some bills were paid but there were still unpaid creditors. However, it was not necessary for the corporation to file for bankruptcy protection. The corporate real estate was listed for sale for 2% years through Colligan Agency, a local real estate agency. In September of 2000, Lamag, McMahon and Moorhouse formed a partnership, LRD Holdings, in which they each invested $13,300. The partnership was formed to gather a pool of money to eliminate some of the additional debt relative to the Bovaird Company while ensuring that the additional funds were secured. From the total of $39,000, the main creditor, National City Bank via a mortgage, received payment of approximately $25,000 and the partnership, at that point, took a first mortgage position against the Bovaird Company real estate. Colligan Real Estate found a buyer for the Bovaird Company real estate, a businessman in New York State who wishes to open a business in Bradford with primary financing of approximately $100,000 from a bank in Olean, NY for the purchase of the business and start -up expenses. The loan will be "mostly" guaranteed by the Small Business Administration. The prospective purchaser requires secondary financing and McMahon's agency, OECD of the City of Bradford, provides that type of funding for start -up businesses. OECD regularly provides funds through its revolving loan program and other multiple programs that are administered to help individuals purchase businesses, real estate and inventory. The Olean, NY bank has indicated that its commitment is contingent upon the prospective purchaser also receiving approximately $35,000 in funding from McMahon's agency. Because of McMahon's relationship with the agency, he has abstained from any discussion or involvement in the matter. If the purchase is effectuated, the building will sell for approximately $70,000 and the net proceeds, after the payment of certain debts, will be split between McMahon and Moorehouse. Concern exists because Section 1103(a) of the Ethics Act prohibits a public official from using his position for a financial gain to himself and requires complete abstention. You question whether McMahon's agency may proceed to loan the money to this prospective purchaser without subjecting McMahon to any problems under the Ethics Act. Since McMahon files Statements of Financial Interests as required by the Act on an annual basis, he would report his proceeds if the property is sold. You state that this type of transaction occurs on a regular basis so as to be a customary, ordinary and core part of the operation of McMahon's agency. Final approval of the loan would not be made by McMahon himself or by any of his employees within OECD but the approval, like all loans through his office, will be made by the entire City Council of the City of Bradford under the Third Class City Code. You proffer an analysis of Section 1103 of the Ethics Act, compare the disclosure requirements of the Ethics Act to Section 1109 of the Third Class City Code and conclude that McMahon would not be precluded from processing public funding as to a matter in which he has a personal interest provided he discloses his interest and abstains from any involvement. Hollenbeck- McMahon 02 -586 August 12, 2002 Page 3 By letter of July 29, 2002, McMahon reiterated some of the above facts and added the following. McMahon represents the OECD on various professional organizations and serves on various boards and committees. One of these committees is the OEDP Committee of NCPRPDC, a Local Development District (LDD) serving a 6 county area of Northwest Pennsylvania which includes McKean County. Because the City of Bradford is located in McKean County, McMahon has served as a member of the OEDP Committee since the late 1980's when he was appointed by the McKean County Commissioners. In that OEDP is one of the formal committees of NCPRPDC, it meets on a bi- monthly basis to discuss economic development projects, issues and various programs. One of the programs operated by NCPRPDC is providing low- interest loans to individuals and businesses located in the 6 county service area. The funds are primarily from various state and federal sources. Intakes and initial reviews of loan applications are performed by employees of NCPRPDC. Applications are reviewed and recommended for approval by a Loan Review Committee with formal approval by the Executive Board of NCPRPDC. Through McMahon's employment with the OECD, he refers clients to NCPRPDC for loan financing and often attends meetings with staff but does not attend meetings of the Loan Review Committee. The OEDP Committee does not review or recommend any loan applications. McMahon is not a member of the Executive Board, officer, employee, consultant or independent contractor of NCPRPDC and is not a member of its Loan Review Committee. In June of 2003, the Director of NCPRPDC's loan program was contacted by Rob Konwinski, the Incubator Manager of the OECD of the City of Bradford concerning subordinated loan financing in connection with the sale of the Bovaird Company, Inc., real estate. Konwinski reports to McMahon as an employee of the OECD and has handled this project on behalf of the OECD because of McMahon's "potential" conflict of interest. After Konwinski disclosed McMahon's financial interest in Bovaird Company, Inc., he was told by NCPRPDC's Director of Loan Programs that the prospective purchaser could not proceed with a loan application for the Bovaird Company, Inc. because of McMahon's membership in NCPRPDC's OEDP Committee. Since McMahon disagrees with the decision of the Director of NCPRPDC's loan program, McMahon is considering challenging that decision but desires a ruling from the State Ethics Commission prior to taking any action. Discussion: It is initially noted that pursuant to Sections 1107(10) and 1107(11) of the Ethics Act, 65 Pa.C.S. § §1107(10), (11), advisories are issued to the requestor based upon the facts which the requestor has submitted. In issuing the advisory based upon the facts which the requestor has submitted, the Commission does not engage in an independent investigation of the facts, nor does it speculate as to facts which have not been submitted. It is the burden of the requestor to truthfully disclose all of the material facts relevant to the inquiry. 65 Pa.C.S. § §1107(10), (11). An advisory only affords a defense to the extent the requestor has truthfully disclosed all of the material facts. Second, since the Commission only reviews the conduct of public officials /public employees but not private citizens in the context of Section 1103(a) of the Ethics Act, it is beyond the scope of the Commission's jurisdiction to rule or comment upon the propriety of the loan application by the prospective purchaser of the Bovaird Company real estate. Hollenbeck- McMahon 02 -586 August 12, 2002 Page 4 As Executive Director of the OECD for the City of Bradford, McMahon is a public official /public employee as those terms are defined in the Ethics Act. In addition, the Commission has determined NCPRDC to be a political subdivision under the Ethics Act and its members to be public officials. See, DeRaymond, et al. /Area Loan Organization under the Capital Loan Fund Act, Opinion 95 -006. Although McMahon is not on the Executive Board of NCPRPDC and is not an officer or employee, the submitted facts do not indicate what powers and duties the OEDP Committee has. It will be assumed for purposes of this Advice that McMahon is also a public official by virtue of his membership on the OEDP Committee. Section 1103(a) of the Ethics Act provides: § 1103. Restricted activities (a) Conflict of interest. - -No public official or public employee shall engage in conduct that constitutes a conflict of interest. 65 Pa.C.S. § 1103(a). The following terms are defined in the Ethics Act as follows: § 1102. Definitions "Conflict" or "conflict of interest." Use by a public official or public employee of the authority of his office or employment or any confidential information received through his holding public office or employment for the private pecuniary benefit of himself, a member of his immediate family or a business with which he or a member of his immediate family is associated. The term does not include an action having a de minimis economic impact or which affects to the same degree a class consisting of the general public or a subclass consisting of an industry, occupation or other group which includes the public official or public employee, a member of his immediate family or a business with which he or a member of his immediate family is associated. "Authority of office or employment." The actual power provided by law, the exercise of which is necessary to the performance of duties and responsibilities unique to a particular public office or position of public employment. "Business." Any corporation, partnership, sole proprietorship, firm, enterprise, franchise, association, organization, self - employed individual, holding company, joint stock company, receivership, trust or any legal entity organized for profit. "Business with which he is associated." Any business in which the person or a member of the person's immediate family is a director, officer, owner, employee or has a financial interest. Hollenbeck- McMahon 02 -586 August 12, 2002 Page 5 "Financial interest." Any financial interest in a legal entity engaged in business for profit which comprises more than 5% of the equity of the business or more than 5% of the assets of the economic interest in indebtedness. "Contract." An agreement or arrangement for the acquisition, use or disposal by the Commonwealth or a political subdivision of consulting or other services or of supplies, materials, equipment, land or other personal or real property. The term shall not mean an agreement or arrangement between the State or political subdivision as one party and a public official or public employee as the other party, concerning his expense, reimbursement, salary, wage, retirement or other benefit, tenure or other matters in consideration of his current public employment with the Commonwealth or a political subdivision. 65 Pa.C.S. § 1102. In addition, Sections 1103(b) and 1103(c) of the Ethics Act provide in part that no person shall offer to a public official /employee anything of monetary value and no public official /employee shall solicit or accept anything of monetary value based upon the understanding that the vote, official action, or judgment of the public official /employee would be influenced thereby. Reference is made to these provisions of the law not to imply that there has been or will be any transgression thereof but merely to provide a complete response to the question presented. Section 1103(j) of the Ethics Act provides as follows: §1103. Restricted activities (j) Voting conflict. - -Where voting conflicts are not otherwise addressed by the Constitution of Pennsylvania or by any law, rule, regulation, order or ordinance, the following procedure shall be employed. Any public official or public employee who in the discharge of his official duties would be required to vote on a matter that would result in a conflict of interest shall abstain from voting and, prior to the vote being taken, publicly announce and disclose the nature of his interest as a public record in a written memorandum filed with the person responsible for recording the minutes of the meeting at which the vote is taken, provided that whenever a governing body would be unable to take any action on a matter before it because the number of members of the body required to abstain from voting under the provisions of this section makes the majority or other legally required vote of approval unattainable, then such members shall be permitted to vote if disclosures are made as otherwise provided herein. In the case of a three - member governing body of a political subdivision, where one member has abstained from voting as a result of a conflict of interest and the remaining two members of the governing body have cast opposing votes, the member who has abstained shall be permitted to vote to break the tie vote if disclosure is made as otherwise provided herein. 65 Pa.C.S. § 1103(j). Hollenbeck- McMahon 02 -586 August 12, 2002 Page 6 In each instance of a conflict, Section 1103(j) requires the public official/ employee to abstain and to publicly disclose the abstention and reasons for same, both orally and by filing a written memorandum to that effect with the person recording the minutes or supervisor. In the event that the required abstention results in the inability of the governmental body to take action because a majority is unattainable due to the abstention(s) from conflict under the Ethics Act, then voting is permissible provided the disclosure requirements noted above are followed. See, Mlakar, Advice 91- 523 -S. Section 1103(a) of the Ethics Act, prohibits a public official/ public employee from using the authority of public office /employment or confidential information received by holding such a public position for the private pecuniary benefit of the public official /public employee himself, any member of his immediate family, or a business with which he or a member of his immediate family is associated. It is noted that Section 1103(a) of the Ethics Act pertaining to conflicts of interest does not prohibit public officials /public employees from having outside business activities or employment; however, the public official /public employee may not use the authority of his public position - -or confidential information obtained by being in that position - -for the advancement of his own private pecuniary benefit or that of a business with which he is associated. Pancoe, Opinion 89 -011. Examples of conduct that would be prohibited under Section 1103(a) would include: (1) the pursuit of a private business opportunity in the course of public action, Metric , Order 1037; (2) the use of governmental facilities, such as governmental telephones, postage, staff, equipment, research materials, or other property, or the use of governmental personnel, to conduct private business activities, Freind, Order 800; Pancoe, supra; and (3) the participation in an official capacity as to matters involving the business with which the public official /public employee is associated in his private capacity, Gorman, Order 1041, or private client(s). Miller, Opinion 89 -024; Kannebecker, Opinion 92 -010. If the private employer or business with which the public official /public employee is associated or a private client would have a matter pending before the governmental body, the public official /public employee would have a conflict of interest as to such matter. Miller, supra; Kannebecker, supra. A reasonable and legitimate expectation that a business relationship will form may also support a finding of a conflict of interest. Amato, Opinion 89 -002. In each instance of a conflict of interest, the public official /public employee would be required to abstain from participation and to satisfy the disclosure requirements of Section 11030) set forth above. The abstention requirement would not be limited merely to voting, but would extend to any use of authority of office including, but not limited to, discussing, conferring with others, and lobbying for a particular result. Juliante, Order 809. The issues of whether McMahon has a conflict will not be addressed, first as to his membership on OEDP and then as Executive Director of OECD. As noted above, it will be assumed for purposes of this Advice that McMahon is a public official by virtue of his membership on the OEDP Committee of NCPRPDC. McMahon would have a conflict as to the Bovaird Company property. First, McMahon's interest in LRD holdings establishes that he has a "financial interest" in Bovaird Company /real estate as that term is defined under the Ethics Act. Consequently, Bovaird Company is a "business with which he is associated" under the Ethics Act. Assuming that McMahon, as an OEDP Committee Member, has no involvement either individually or through delegation to a subordinate regarding the loan as to the Bovaird Company real estate, McMahon's conflict would not be problematic provided he totally removes himself from the process and does not delegate action to any subordinate. In Hollenbeck- McMahon 02 -586 August 12, 2002 Page 7 this regard, McMahon states that loans are approved by the Executive Board of NCPRPDC based upon review /approval of the Loan Review Committee and that he is not a member of the Executive Board or Loan Review Committee. Turning to McMahon's position as Executive Director of OECD, McMahon has a conflict as to the Bovaird Company real estate and loans for the reasons noted above. McMahon states that Konwinski, a OECD employee, is handling the Bovaird Company matter given McMahon "potential" conflict of interest. However, such action by McMahon as Executive Director of OECD in delegating a subordinate to handle the matter will not remove McMahon from the conflict. Further, the fact that the City Council of Bradford actually approves the loans is unavailing given the involvement of OECD. In this regard, the Commission has held that use of authority of office is broader than the formal approval process. See, Juliante, supra. In Confidential Opinion 02 -004, the Commission considered the issue of whether a public official could remove himself from a conflict as to the hiring of an immediate family member to a compensated position of employment by delegating responsibility in the selection /hiring process to a subordinate. Because the subordinate was in a subservient position, the Commission concluded that the act of substituting a subordinate itself constituted a use of authority of office by the public official in derogation of Section 1103(a) of the Ethics Act: Pursuant to Section 1103(a), where there is no pre- existing mechanism in place specifying how and by whom a public official's authority is to be exercised in the event of a conflict, the public official's delegation of such authority to a subordinate is itself a use of authority of office. Cf., Edwards, Opinion 91 -003 at 6. In this case, there is no pre- existing mechanism for delegation in the event of a conflict. In this case, Director K and other I members are your subordinates. Therefore, in selecting one of your subordinates to choose the successful applicant, you would be choosing the chooser. We point out the above not to suggest that there would be any improper influence exerted as to this appointment, but merely to explain why the delegation of your approval authority to one of your subordinates would fail to avoid a conflict of interest. Id at 7. Thus, the delegation of McMahon's authority to one of his subordinates would fail to avoid a conflict of interest. Unless there is a preexisting mechanism in place for an independent agency /individual to handle conflicts that McMahon has, like the Bovaird Company real estate funding, McMahon will not be able to remove himself from the conflict by delegating the matter to a subordinate. In this regard, any action already taken by McMahon or any delegation by McMahon to Konwinski or other subordinates cannot be addressed in that such action is past conduct. The propriety of the proposed conduct has only been addressed under the Ethics Act; the applicability of any other statute, code, ordinance, regulation or other code of conduct other than the Ethics Act has not been considered in that they do not involve an interpretation of the Ethics Act. Specifically not addressed herein is the applicability of the respective municipal code. Hollenbeck- McMahon 02 -586 August 12, 2002 Page 8 Conclusion: As Executive Director of the Office of Economic and Community Development (OECD) for the City of Bradford, Raymond McMahon is a public official /public employee subject to the provisions of the Public Official and Employee Ethics Act ( "Ethics Act "), 65 Pa.C.S. § 1101 et seq. It is assumed that McMahon, as a Committee Member of the Overall EconorrR Development Program (OEDP) of the North Central Pennsylvania Regional Planning and Development Commission (NCPRPDC), is a public official in that position. Loan applications to OECD and NCPRPDC by a prospective purchaser of real estate of the Bovaird Company, Inc., in which McMahon has a financial interest, creates conflicts of interest for McMahon. As to the conflict by McMahon regarding the loan with NCPRPDC, McMahon's conflict would not be problematic provided he totally removes himself from the process and does not delegate action to any subordinate. As to the conflict by McMahon regarding the loan with OECD, unless there is a preexisting mechanism in place for an independent agency /individual to handle conflicts that McMahon has, like the Bovaird Company real estate, McMahon will not be able to remove himself from the conflict by delegating the matter to a subordinate. See, Confidential Opinion 02 -004. Any action already taken by McMahon or any delegation by McMahon to subordinates cannot be addressed in that such action is past conduct. Lastly, the propriety of the proposed conduct has only been addressed under the Ethics Act. Pursuant to Section 1107(11), an Advice is a complete defense in any enforcement proceeding initiated by the Commission, and evidence of good faith conduct in any other civil or criminal proceeding, provided the requestor has disclosed truthfully all the material facts and committed the acts complained of in reliance on the Advice given. This letter is a public record and will be made available as such. Finally, if you disagree with this Advice or if you have any reason to challenge same, you may appeal the Advice to the full Commission. A personal appearance before the Commission will be scheduled and a formal Opinion will be issued by the Commission. Any such appeal must be in writing and must be actually received at the Commission within thirty (30) days of the date of this Advice pursuant to 51 Pa. Code § 13.2(h). The appeal may be received at the Commission by hand delivery, United States mail, delivery service, or by FAX transmission (717 -787 -0806. Failure to file such an appeal at the Commission within thirty (30) days may result in the dismissal of the appeal. Sincerely, Vincent J. Dopko Chief Counsel