EVALUATING THE POTENTIAL CONFLICTS OF INTEREST OF MUNICIPAL ELECTED OFFICIALS: A STATUTORY AND CONSTITUTIONAL ANALYSIS.

• Author: Davis, Eric T.

1. INTRODUCTION

   Of the 311 incorporated municipalities in South Dakota, 268 of them (86%) have fewer than 1500 residents. (1) In smaller communities like Groton (population 1458), Salem (population 1347), Eagle Butte (population 1318), and Gregory (population 1295)--and often in our larger communities--people know each other intimately. (2) They are friends and coworkers. Many do business together, attend the same church, or are related by blood or marriage. These kinds of connections are not only common--they arc sometimes inevitable in "Small Town, South Dakota." Accordingly, many elected officials frequently find themselves asking their legal counsel whether a particular interpersonal connection could amount to a conflict of interest. All too often, clear answers are not apparent. (3)

   Generally speaking, elected municipal officials are faced with three potential conflicts of interest in the discharge of their official duties: (1) holding incompatible offices, (2) entering into contracts with their own municipality, and (3) having a personal or business interest in the outcome of a decision before his or her own governing body. (4) The third of these is the most common and complex type of potential conflict of interest an elected official will encounter in the discharge of his or her duties. (5) This article will analyze potential conflicts of interest when an elected official has a personal or business interest in the outcome of a legislative decision. (6) This article will start by examining one of the first South Dakota cases to begin developing recent conflict-of-interest case law, Hanig v. City of Winner, (7) and the legislative response to the South Dakota Supreme Court's analysis and test created therein. (8) This article will then present and evaluate the thesis that Hanig requires potential conflicts of interest to be analyzed differently depending on whether the legislative decision before the governing body implicates due process. (9) Finally, this article will evaluate several hypotheticals to illustrate the distinctions drawn by Hanig and propose a workable solution for the future. (10)

2. FOUNDATION AND BACKGROUND

   1. HANIG V. CITY OF WINNER

      The 2005 South Dakota Supreme Court case of Hanig v. City of Winner--and the legislation that followed--brought about significant changes to the way potential conflicts of interest are evaluated in South Dakota. In 2003, Tony Hanig applied to the City of Winner for a renewal of his inactive liquor license so that he could build a new steakhouse and lounge. (11) One of the members of the Winner City Council was a part-time waitress at a different steakhouse in town. (12) The owner of that steakhouse (and the Councilwoman's employer) urged her to vote to deny Hanig's application. (13) The Councilwoman also acknowledged that her tips could potentially decrease if another steakhouse came to town. (14) Following a public hearing on Hanig's application, the City Council unanimously voted to deny the application based on remaining questions "about the business plan and suitability of the location." (15)

      Hanig sued the City of Winner, claiming that the Councilwoman had a conflict of interest and that he consequently did not receive a fair and impartial hearing. (16) Hanig wanted the trial court to disqualify the Councilwoman and order the City to hold a new public hearing. (17) The trial court denied Hanig's request. (18) Hanig appealed to the South Dakota Supreme Court. (19)

      The Supreme Court reversed the trial court, disqualified the Councilwoman, and ordered the City of Winner to conduct a new public hearing. (20) In reaching its decision, the Supreme Court made several important observations. First, it observed that the then-existing, general statutory scheme in South Dakota regarding conflicts of interest "demand[ed] that officials normally disqualify themselves when they have a business or personal interest in the subject on which they must vote, regardless of whether this interest creates an actual bias." (21) The Supreme Court noted that "the circumstances and facts of each situation should control whether disqualification is required." (22) "If the circumstances show a likely capacity to tempt the official to depart from his duty, then the risk of actual bias is unacceptable and the conflict of interest is sufficient to disqualify the official." (23)

      In deciding Hanig, the South Dakota Supreme Court looked to an opinion of the New Jersey Supreme Court for guidance and adopted four categories of conflicts of interest, which the South Dakota Supreme Court called "succinct and informative." (24) These categories are:

      1. A direct pecuniary interest. An elected official has a direct pecuniary interest when she votes on a matter benefiting her own property or affording her a direct financial gain;

      2. An indirect pecuniary interest. An elected official has an indirect pecuniary interest when he votes on a matter that financially benefits a person closely tied to him, such as an employer or family member;

      3. A direct personal interest. An elected official has a direct personal interest when she votes on a matter that benefits a blood relative or close friend in a non-financial way but still a matter of great importance, such as her mother being in the nursing home subject to a zoning issue; and

      4. An indirect personal interest. An elected official has an indirect personal interest when he votes on a matter in which his judgment could be affected because of membership in some organization and a desire to help that organization further its policies. (25)

      The South Dakota Supreme Court said these categories "can serve as guidance to South Dakota officials and courts in determining whether an actual bias or unacceptable risk of actual bias exists." (26) "If a board member's interest fits within any of these categories, that board member either has an actual bias or an unacceptable risk of actual bias." (27) After employing this analysis, the Supreme Court held four-to-one that the Councilwoman should be disqualified because she had an indirect pecuniary interest in that her tips could have decreased and her employer urged her to deny the application arguably to benefit his own business. (28)

      Chief Justice Gilbertson, however, authored a dissenting opinion and argued that the majority inappropriately placed too much emphasis on a single council member's de minimus financial interest. (29) Chief Justice Gilbertson opined that public decision-makers should be "presumed to be objective and capable of judging controversies fairly." (30) Actual, demonstrated bias or an unacceptable risk of actual bias should be required to overcome these presumptions. (31) He argued that the Councilwoman should not have been disqualified on the basis that she received tips from employment that might have competed with Hanig's business, as this did not pose an unacceptable risk of bias. (32) Chief Justice Gilbertson conceded, however, that the Councilwoman's contact with her employer regarding Hanig's application could have been enough to disqualify her. (33) While she could have been disqualified, the remaining votes could have been made for valid reasons; thus, it was improper to invalidate the entire City Council's vote and order a new public hearing. (34)

   2. S.D.C.L. SECTION 6-1-17

      Shortly after the South Dakota Supreme Court set forth this new, hyper-rigid rule by which to evaluate an elected municipal official's potential conflicts of interest, the South Dakota Legislature enacted section 6-1-17 of the South Dakota Codified Laws, which provides:

      No county, municipal, or school official may participate in discussing or vote on any issue in which the official has a conflict of interest. Each official shall decide if any potential conflict of interest requires such official to be disqualified from participating in discussion or voting. However, no such official may participate in discussing or vote on an issue if the following circumstances apply: (1) The official has a direct pecuniary interest in the matter before the governing body; or

      (2) At least two-thirds of the governing body votes that an official has an identifiable conflict of interest that should prohibit such official from voting on a specific matter.

      If an official with a direct pecuniary interest participates in discussion or votes on a matter before the governing body, the legal sole remedy is to invalidate that official's vote. (35)

      Section 6-1-17 was drafted and passed in direct response to Hanig out of concern that the Supreme Court's holding was too broad. (36) State Senator Lee Schoenbeck, who introduced the bill, feared that the categories adopted by the court, particularly the "indirect personal interest" category, would mean that "no one" on governing boards of small, South Dakota communities would be able to vote. (37) Therefore, the new law set forth that only "direct pecuniary interests]" would preclude officials from discussing or voting on issues before the board...