Speckels v. Baldwin

512 N.W.2d 171, 1994 S.D. LEXIS 22, 1994 WL 46935

Opinions

HENDERSON, Justice (on reassignment).

PROCEDURAL HISTORY/ISSUES

Taxpayer Jerome Speckels sought to declare null and void a lease-purchase agreement between the City of Custer City (City) and Homes, Inc., a for-profit corporation which included the Custer City Attorney, Gerald Baldwin, as one of its principals. Following trial on January 8, 1992, Findings of Fact and Conclusions of Law were entered by the trial court upholding the contract. On appeal, we consider the following issues:

I. Does SDCL 6-1-1 apply to the lease-purchase agreement herein?

II. Does SDCL 6-1-1 apply to Baldwin?

III. Does the lease-purchase agreement violate public policy?

IV. Is this action barred by the statute of limitations?

Whereas this transaction was subject to the mandates of SDCL 6-1-1 and is violative of public policy, we reverse and remand.

FACTS

In an effort to place a nursing home in the Custer community, on August 5, 1963, the City of Custer conveyed a parcel of land, Lot E, to Custer Manor, Inc. (a non-profit corporation comprised of several local business people) for its appraised value of $20,000. Not so coincidentally, City appropriated out of its general funds the same amount to Custer Manor as a donation.

Baldwin moved to Custer in 1965 and began practicing law. The following year, he was appointed Custer City Attorney. In March, 1967, Baldwin and co-defendant Edward A. Himrieh, along with others, formed Homes, Inc. (a/k/a Home Corporation), a for-profit entity. Within five days of its inception, Homes, Inc. had met with Custer’s Common Council seeking a bond issue to finance the nursing home’s construction. Baldwin, as city attorney, drafted the ordinance calling for a public vote on the question. Although the bonds were approved by voters in May, 1967, the bonds never sold.

In March of 1969, Custer Manor executed a warranty deed granting Lot E to Homes, Inc., however, the deed was not recorded. At a Common Council meeting in September, 1970, Himrieh, a member of the city planning commission from October 7, 1968 through 1972, proposed new plans to build a nursing home for the community. Although the minutes of the meeting reflect that Himrieh was representing Custer Manor, Baldwin, who served as city attorney during this meeting, testified that the minutes were incorrect because Himrieh was actually representing Homes, Inc. On October 21, 1970, another bond election was held and passed. The following day, Baldwin recorded the warranty deed obtained from Custer Manor back in March of 1969.

After approval by the Common Council, City executed a lease-purchase agreement with Homes, Inc. conveying Lot E to City, which in turn leased it to Homes, Inc. for twenty years. After expiration of the twenty years, Homes, Inc. would have the option of extending the lease for two consecutive ten-year terms or purchase the land for one dollar ($1.00). That same day, Homes, Inc. sublet the property to CM Corporation (CM). Lease payments would be used for retiring the revenue bonds. Because City was the recorded fee owner, the interest on the bonds was free from federal taxes. CM operated the nursing home as subtenant of Home, Inc. which paid taxes on the monthly rent payments as ordinary income. Baldwin was ac tive in the management of the nursing home since its opening.

By September, 1986, all revenue bonds had been retired. Per the lease agreement, all future rent payments made by CM, thereafter, were remitted directly to Baldwin and Himrieh, the only remaining investors in Homes, Inc. whose corporate status had since lapsed.

Two months shy of the expiration of the lease-purchase, Speckels, a citizen of Custer, ¡Sled this action seeking to (1) void the agreement between Homes, Inc. and City, (2) have the monthly lease payments from October, 1986 forward paid to City, and (3) recover attorney fees.

DECISION

I. SDCL 6-1-1 applies to this agreement.

Under SDCL 6-1-1,

Footnotes

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* it is unlawful for a city officer to have a personal interest in a contract wherein the city purchases real estate. Trial court relied upon expert testimony and held that this statute is not applicable "because City’s lease-purchase agreement was merely a legal mechanism by which the city acted as a conduit for a tax-exempt investment to facilitate construction of a nursing home with revenue bonds and does not constitute the purchase of public property. While it is within the broad discretion of the trial court to accept expert testimony, Stormo v. Strong, 469 N.W.2d 816 (S.D.1991), this finding is clearly erroneous as a matter of law. Permann v. Dept. of Labor, 411 N.W.2d 113 (S.D.1987). It is contrary to a prior decision of this Court concerning the same piece of real estate. Petition of CM Corp., 334 N.W.2d 675 (S.D. 1983). Therein, a unanimous court, cognizant of the lease-purchase agreement, noted, “Under the stipulation of facts ... the City of Custer is the owner of the nursing home property.” CM Corp., 334 N.W.2d at 677. We are bound by that holding, and so is the trial court.

City claims the purchase of the property was in name only; however, it was a purchase of real property by city officers nonetheless. By failing to apply SDCL 6-1-1 to this transaction, we are definitely and firmly convinced that a mistake has been made by the trial court. Chamberlain Livestock Auction v. Penner, 462 N.W.2d 479, 482 (S.D.1990).

II. Baldwin acted as a city officer.

In 1966, Baldwin was appointed city attorney for Custer — a municipal officer under SDCL 9-14-1 — and received a $100 per month retainer until 1971, just prior to the city’s lease-purchase agreement with Homes, Inc., a corporation which Baldwin essentially controlled.

Aware of the potential conflict of interest, Baldwin asked not to be sworn in as city attorney in 1970. Nevertheless, he continued to perform city attorney duties, compensated at an hourly rate. As established in the minutes published by the Common Council, Baldwin acted in the capacity of city attorney at all times relevant to this cause of action. Although other attorneys purportedly handled the various aspects of the bond election and related transactions, Baldwin, the only city attorney of record, drafted, and at city meetings read aloud, legal documents and ordinances pertaining to this transaction between Custer and his corporation. He acted as a city officer per SDCL 9-14-1, thus subjecting the transaction to SDCL 6-1-1.

Local government officers and employees are not to be interested, directly or indirectly, in any contract of their govern ment. McGhee v. Glenn, 244 Ark. 1000, 428 S.W.2d 258 (1968); Millbrae Ass’n v. City of Millbrae, 262 Cal.App.2d 222, 69 Cal.Rptr. 251 (1968). As stated in the first issue, it is unlawful for a city officer to have an interest in a contract wherein the city purchases real estate. SDCL 6-1-1. Baldwin’s work on the bond election proposal, which inured to his personal benefit, highlights the very conflicts which SDCL 6-1-1 was enacted to prevent. See also Dodaro v. Commonwealth, State Ethics Comm’n, 527 Pa. 539, 594 A.2d 652 (1991); People v. Scharlau, 141 Ill.2d 180, 152 Ill.Dec. 401, 565 N.E.2d 1319 (1990), cert. denied, — U.S. —, 113 S.Ct. 1945, 123 L.Ed.2d 651 (1991); Place v. Bd. of Adjust. of Saddle River, 42 N.J. 324, 200 A.2d 601 (1964). This constituted a conflict of interest, and Baldwin knew it. The City of Custer knew it. However, both attempted to side-step the conflict by appointing and retaining Baldwin, yet skipping the administering of his oath of office as required by SDCL 9-14^6. We scrutinize these facts with great care and condemn those actions which indicate corruption or favoritism in a public office. Van Itallie v. Borough of Franklin Lakes, 28 N.J. 258, 146 A.2d 111 (1958); 2A Antieau’s Local Government Law § 22.62 (rev. ed. 1992). In light of these proceedings, the City of Custer’s deliberate failure to administer the oath of office to Baldwin gives credence to such an indication.

In fact, Baldwin testified he was “an employee doing legal work of the City;” yet he countered, “I do not believe that I was an officer of the City as City Attorney may be.” It is impossible to stand up in a meeting, prepare an ordinance as city attorney, read a resolution as city attorney, be paid as city attorney, and then deny that you are the city attorney. Now, using parol evidence, both Baldwin and the City have attempted to contradict, deny, and supplement the very documents and minutes on file at city hall. This cannot be done. Lewis v. Bd. of Educ. of Johnson County, 348 S.W.2d 921 (Ky.App.1961); 5 McQuillin Mun. Corp. § 14.07 (rev. 3d ed. 1989).

Local government officers and employees have a duty to serve their government and the people, uninfluenced by adverse motives and interests. State v. Weleck, 10 N.J. 355, 91 A.2d 751 (1952). “Such required conduct demands undivided loyalty and compels public officers to refrain from outside activities which interfere with proper discharge of their duties, or which may expose them to the temptation of acting in any manner other than in the best interests of the public.” 2A Antieau’s Local Government Law § 22.59 (rev. ed. 1992). New Jersey has held that these principles were violated when a municipal engineer did engineering work for a developer when he knew, or should have known, that it would be used by the developer in connection with a city project which he represented. His conflict was that he would be required to pass judgment on his own work. Newton v. Demas, 107 N.J.Super. 346, 258 A.2d 376 (App.1969). The same holds true for Baldwin.

When the mayor of Ralston, Nebraska was a shareholder in a corporation involved in a real property sale with the city, a city resident alleged conflict of interest. The Nebraska Supreme Court disagreed on grounds that the mayor had agreed to leave any city council meeting and did not take part whenever the sale of the land was discussed. Abboud v. Lakeview, Inc., 237 Neb. 326, 466 N.W.2d 442 (1991). Conversely, though other attorneys may have had involvement with this project, Baldwin never isolated himself from the transaction or its discussion. The Nebraska mayor did not take part but Baldwin did. As an attorney, he knew to avoid even the appearance of impropriety. See Canon 9 (a lawyer should avoid even the appearance of professional impropriety).

III. Public policy is undermined by this transaction.

Without question, this conflict of interest violates South Dakota public policy for it amounts to building a facility financed in a contract between a municipality and one of its officers. In fact, it appears that the City of Custer has failed to receive revenues from lease payments since 1986. This amounts to nearly $700,000 which Attorney Gerald Baldwin and Edward Himrieh, two of the defendants herein, have unlawfully received and unlawfully appropriated. Public policy requires that local government officials cannot be permitted to place themselves in a position in which personal interest may conflict with public duty. Sciuto v. City of Lawrence, 389 Mass. 939, 452 N.E.2d 1148 (1983); Josephson v. Planning Board, 151 Conn. 489, 199 A.2d 690 (1964). “It is the policy of the law to keep the official so far from temptation as to ensure his unselfish devotion to the public interest.” Tuxedo Conservation & Taxpayers Ass’n v. Town Bd., 69 A.D.2d 320, 418 N.Y.S.2d 638, 640 (1979) (quoting Mills v. Town Plan and Zoning Comm’n, 144 Conn. 493, 134 A.2d 250, 253 (Conn.1957)).

“It is fundamental law that an attorney must not while representing a client do anything knowingly that is inconsistent with the terms of his employment or contrary to the best interests of his client.” City of Hastings v. Jerry Spady, 212 Neb. 137, 322 N.W.2d 369, 372 (1982). Since the revenue bonds were retired, the annual lease payments made by the subtenant to Baldwin (and Himrich) have deprived his client of approximately $700,000 so far, contrary to the best interests of the people of the City of Custer. An attorney is, by virtue of his office, disqualified from representing interests which are adverse in the sense that they are in conflict with each other. City of Hastings, 322 N.W.2d at 372; 7A C.J.S. Attorney & Client § 150 (1980). It is a violation of the fiduciary duty of a local government officer to use his position in any way for private gain. State v. McKelvey, 12 Ohio St.2d 92, 232 N.E.2d 391 (1967). We will not permit a conflict of interest to be disregarded merely because Baldwin bypassed his oath of office.

These dealings cannot be condoned by this Court. Here, the citizens of Custer, through its city officials, gave land to a nonprofit corporation to construct a nursing home. SDCL 47-26-30 does not permit a non-profit organization to dispose of its assets to a corporation organized for profit. By maneuvering within the confines of municipal government, the land all became the property of an entity existing for profit, a corporation co-owned by city attorney Gerald Baldwin and city planning commissioner Edward Himrich.

Even if the contract, under a public policy argument advanced by Baldwin and Himrich, were advantageous to the City, such a thesis is of no consequence. Norbeck and Nicholson Co. v. State, 32 S.D. 189, 142 N.W. 847 (1913). The wrong lies in the creation of a situation tending to weaken public confidence in the integrity of the public service, and to undermine the sense of security of individual rights, which the citizen and property owner must feel assured will always exist in the exercise of public authority. Dodaro, 594 A.2d at 653-54; Katz v. Brandon, 156 Conn. 521, 245 A.2d 579, 587 (1968). Rather, this Court has taken the position that the conflict of interest, reflected by this scenario, is inherently bad for the people of this state.

IV. Statute of limitations issue not properly raised.

City and Home allege that Speckels’ claim is barred by the statute of limitations; however, City and Home failed to file a notice of review pursuant to SDCL 15-26A-22, thus precluding it from being raised on appeal. A.L.S. Properties, Silver Glen v. Graen, 465 N.W.2d 783, 787 (S.D.1991).

Reversed and remanded.

MILLER, C.J., and WUEST and SABERS, JJ., concur. AMUNDSON, J., dissents.

SDCL 6-1-1 states:

It shall be unlawful for any officer of a county, municipality, township or school district, who has been elected or appointed, to be interested, either by himself or agent, in any contract entered into by said county, municipality, township or school district, either for labor or services to be rendered, or for the purchase of commodities, materials, supplies, or equipment of any kind, the expense, price or consideration of which is paid from public funds or from any assessment levied by said county, municipality, township or school district, or in the purchase of any real or personal property belonging to the county, municipality, township or school district or which shall be sold for taxes or assessments or by virtue of legal process at the suit of such county, municipality, township or school district. Such contract shall be null and void from the beginning. (Emphasis supplied.)