July 19, 1989

FACTS:


Early in 1988, alter a state agency received authorization to
acquire certain property, the agency identified a parcel of land
in the Commonwealth as a priority acquisition. property was
previously proposed by its owners as a site for future development.

Upon researching title to the property, the agency discovered
that it was owned by a general partnership. You, a state employee,
own a significant part of that

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general partnership. Because of certain proscriptions contained in
the conflict of interest law, the state agency realized that it
might be prohibited from acquiring the property directly from the
general partnership because of your ownership interest in that
partnership. As a consequence, shortly before Thanksgiving 1988,
the state agency contacted a private third-party in order to make
other arrangements.

The third-party is a tax-exempt, not-for-profit entity whose
corporate purpose is to identify, acquire and ultimately transfer
property that it believes is threatened by development. Its usual
practice is to initiate transactions by first identifying property
it seeks to acquire and then contacting a conservation minded entity
(or governmental agency) in the hope of persuading that entity to
acquire the property from it subsequent to the acquisition.
Generally, the greater the risk that the entity will not acquire
the property, the less likely that the third party will acquire
the property in the first place. Since 1984, the third party and
the state agency have completed a series of transactions whereby
the third party has acquired property which was later re-conveyed
to the state agency. In those previous transactions, ultimate
acquisition by the state agency has taken approximately one and a
half to two years.

According to the state agency's supervisory department, it is
apparently standard practice in the commonwealth for a state agency
and a third party to enter into a "memorandum of understanding" to
set forth their agreement that the agency will purchase the
property from the third party upon the acquisition of title by the
third party.[1]

The third party and the state agency have stated that no such
understanding, oral or written, exists in this matter. The state
agency's supervisory department at first concluded that such an
understanding did exist between the state agency and the third
party. After conferring with state agency officials, however, the
supervisory department confnmed to the Commission that no such
formal agreement existed in this case. The supervisory department
stated, however, that such an omission is a departure from standard
practice.

In the present matter, the third party had not previously
identified the property as a potential acquisition. The state
agency, however, shared with the third party its desire to acquire
the property on a priority basis. Apparently, the agency did
not, at first, reveal to the third party its reasons for not acquiring
the property directly from the general partnership. Because the
property was considered a state agency priority acquisition, the
agency informed the third party that it would expedite the
acquisition from the third party (approximately six months). The
third party shared the agency's concern for the property and agreed
to make arrangements to purchase it.

Sometime in January 1989, state agency officials asked the third
party to contact you for the purpose of beginning the transfer.
Third party officials met with you two weeks later. The first time
that this series of transactions was proposed to you, you expressed
your concern that the transactions could violate s.7 of the
conflict of interest law. The state agency thereupon contacted the
State Ethics Commission for an opinion as the whether the series
of transactions were permitted under G.L c. 768A. The Commission
responded by informing the state agency that any such opinion
request had to come from the subject person (i.e. yourself).
Several weeks later, you contacted the Commission for such an
opinion.

Although the third party has expressed its belief that it would
be free later to sell the property to any party after it acquires
title, it told the Commission that it would not initiate Such an
action barring extreme circumstances. Both the state agency and
the third party have an understanding and an expectation that the
state agency will acquire the property from the third party in the
next few months once it acquires the property from you. A state
agency official stated her belief that the third party would be
surprised and "angered" by a reversal of the state agency's
decision not to purchase the property from the third party. The
third party, for its part, cannot contemplate any transferee except
the state agency.[2]


QUESTION:


Does G.L. c 268A s.7 permit you to transfer your interest in
the property to the third party under the circumstances described
above?


ANSWER:

No, for the reasons described below.


DISCUSSION:


As a member of the General Court, you are a state employee for
purposes of G.L. c. 268A. As a state employee, you are subject to
the restrictions of G.L. c. 268A, s.7 which, with certain
exceptions, prohibits a state employee from having a financial
interest in a contract made by a state agency. Based upon the facts
presented, we conclude that, were you to proceed with the sale of
the land, you would be in violation of s.7

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because you would be acting upon the financial interest you have
in the contract between the State agency and the third party for
the subsequent transfer of the property. In effect, the financial
interest which the third party would have in its contract with the
state agency would be attributable to you.

In determming whether the financial interest of a transferee is
attributable to a state employee, the Commission, to date, has
examined both the divestiture and the subsequent relationship to
ascertain whether the public employee can fairly be said to retain
a financial interest in the transferee's contract. Buss, The
Massachusetts Conflict of Interest Law: An Analysis,
45 B.U. Law
Rev. 299, 375 (1965). Such attribution cases have arisen primarily
in connection with spousal relationships. In resolving such cases,
the Commission has looked at a number of factors to determine
whether the spousal transferee is independent of the state
employee, including, among other things, adequacy of consideration
paid by the transferee liquidation of the state employee's interest
and prior independent business experience of the transferee. See,
EC-COI-83-123
(no attribution found where state employee transfer
was based on arm's-length transaction and asset liquidation to
spouse who had independent experience in the business); 89-9
(attribution found where: (1) no money passed hands in the transfer
of the business to the spouse, (2) the state employee's initial
investment was not liquidated, (3) the state employee continued to
own the property transferred, and (4) the state employee continued
to participate in the management and control of the business).

Consideration of these factors is necessitated by the obvious
fact that any purported transfer could easily be a contrivance to
evade the reach of the conflict of interest laws. The same risk
exists with respect to other third-party transferees, where the
potential for abuse is less obvious but no less real. In general,
a transferee would not be considered independent of a state
employee where the former is, in effect, acting as a conduit for
the latter pursuant to some contractual, agency/principal, or other
established relationship.

In the present case, the facts weigh heavily against finding
that the transfer to the third party would be anything more than
a pass-through or a conduit relationship prohibited by the broad
scope of G.L. c. 268A, s.7. The state agency initiated the
transactional structure as a way to avoid the application of s.7.
The transaction is also not typical from both the state agency
perspective and from the third party perspective. First, it is
unusual because the third party admits that it typically initiates
the land acquisition process by identifying the land it seeks to
acquire and then contacting an agency that might be interested in
ultimately acquiring the land. Second, it is unusual because the
Commonwealth's standard practice is to enter into a written
understanding prior to the original acquisition of title, which in
this case would have been prohibited by G.L. c. 268A. Here, not
only did the state agency initiate the transaction by contacting
the third party and requesting that the third party acquire the
property, but also, the normal agreement policy of the supervisory
department was altered. While no written agreement may exist,
however, there remains an expectation and an understanding among
the parties regarding the timing, purpose and ultimate outcome of
this transaction, and that understanding obtains the same result
as if the formal written agreement had been entered into.[3] The
Commission finds that the actions of the third party and the state
agency, whether intended or not, rise to the level of a contract
for purposes of c. 268A.

The Commission cannot ignore the circumstances surrounding the
relationship between certain of the parties where the ultimate
outcome of that relationship results in a violation of G.L. c.
268A. See, EC-COI-83-111. If the third party were an entity
created solely for this transaction, there is no doubt that it
would be considered a "straw" entity. A contract with this "straw"
entity would violate s.7. The fact that the third party is an
established entity does not affect the result where, as here, some
of the parties have agreed in advance to accomplish a certain goal
but have not formalized their relationship in writing, despite
established practice, and execution of such agreement would result
in a violation of G.L. c. 268A.[4]

This conclusion is consistent with an analogous finding made by
the Supreme Judicial Court. In Perkins v. Hilton, 329 Mass. 291
(1952), a veteran (Hilton) entitled to benefits under the GI Bill
of Rights had an understanding with his parents that he would take
title to a house, execute a mortgage on it pursuant to the terms
of his GI bill benefits and subsequently convey the house to his
mother. This arrangement, which resulted in a trust relationship
between Hilton and his mother,[5] was constructed by them in order
to secure the benefits of a GI loan (lower interest rates and a
longer term). Hilton was entitled to receive these benefits but
Hilton and his mother were both aware that his mother would not
have been so entitled had she taken title in her own name.
Subsequently, Hilton transferred the property to his mother while
he was insolvent.

The Court held that "it would be a strange

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construction of the [serviceman's] act that would allow a non-
veteran to secure its benefits by using a veteran as a mere
"straw"... the intent to benefit and protect only veterans is plain
throughout that act." Id. The Court could not "escape the
conclusion that the trust for the mother's benefit was illegal and
invalid" as it was devised to circumvent the law in an attempt to
obtain special benefits for the mother of a veteran to which she
was not otherwise entitled. This contrivance was, in effect, a
fraud upon the serviceman's act and upon public policy. See,
Id. The Court, therefore, refused to give effect to this type of straw
arrangement.

The Commission is not now articulating a rule that would
prohibit transactions which involve independent third party
transferees. Rather, the timing, purpose and ultimate transfer of
the property indicate that the parties are, in reality, acting
pursuant to an arrangement prohibited by the broad scope of the
conflict of interest law and which is not permitted by any
exemption. As in Perkins, nothing here would have prevented the
arrangement between the third party and the state agency had the
third party first acquired the property from you and then
subsequently, even if immediately thereafter, entered into
negotiations with the state agency.[6]

Accordingly, the proposed sale of the property is prohibited by
s.7 unless some exemption is applicable. The only exemption
available to you under s.7 would be a divestment of all but 10% of
your interest in the general partnership. See G.L.c. 268A, s.7(c).
However, any such liquidation of your investment in the general
partnership must be based on its currently appraised value (as
determined by an independent appraiser without reference to the
state agency's or third party's interest in the property), not on
a post-transfer valuation. Upon divestment of most of your
interest in the general partnership there would be no attribution
of the third party's financial interest back to you as a result of
the transfer of the property because of the exemption in G.L. c.
268A, s.7(c).


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[1] The third party involved here has informed the Commission that
it is not its practice "to formalize land acquisition relationships
with agencies until [it] owns or otherwise controls the property
in question."

[2] These facts were supplied to the Commission by you, the third
party, the state agency and by the supervisory department. Because
of the number of interested parties in this matter and the
complicated fact situation, this statement of facts was submitted
by the Commission stalf to each of the parties for comment and
review as to its accuracy.

[3] Although the Commission has not yet articulated a comprehensive
standard applicable to all third party transferee attribution
cases, consideration of these factors, given the circumstances
surrounding the initiation of this series of transactions, was
warranted and critical to the Commission's conclusion in this case.
See, e.g., EC-COI-83-111 (purpose and timing of transaction); Buss,
p. 375 (consideration of likely interaction between state agency
and state employee).

[4] For purposes of the conflict statute, a contract need not be
in writing. See, EC-COI-85-79 (for purposes of c. 268A, the term
"contract" refers "not only to a formal written document setting
forth the terms of two or more parties' agreement, but also has a
much more general sense. Basically, any type of agreement or
arrangement between two or more parties under which each undertakes
certain obligations in consideration of promises made by the
other(s) constitutes a contract.") See also, Conley v. Ipswith, 352
Mass. 201 (1967). It is also of no consequence that the
understanding in this case is for an interest in land because the
Statute of Frauds prevents action of a contract but does not void
the contract. ABC Auto Parts, Inc. v. Moran, 359 Mass. 327
(1971); Witherington v. Eldredge, Mass. 166 (1928). A contract for
an interest in land is a contract for c. 268A purposes even if it
is not in writing.

[5] Although such a trust relationship resulted in the Perkins case
because Hilton had supplied no consideration, a trust will also
result where, at the time the grantee contracts for property, he
has an understanding with an ultimate transferee that payment of
consideration will take place later in accordance with that
understanding. See, Blodgett v. Hildreth, 103 Mass. 484(1870). The
courts will look to the manner in which the transaction is
subsequently treated by the parties to understand the true nature
of the transaction. See, Kennedy v. Innis, 339 Mass. 195 (1959).

[6] The Commission, by its decision here, does not address the
merits or goals of the series of transactions initiated by the
state agency. The Commission's conclusion is, however,
necessitated by the requirements and goals of c. 268A, among which
is the avoidance of even the appearance of impropriety.
Quinn v. State Ethics Commission, 401 Mass. 210 (1987).

End Of Decision