June 6, 1995

 

FACTS:



You are counsel to a high-ranking state employee.[1] Your
client has a 5% ownership interest in ABC, Inc. ("ABC"). He is not
an officer or a director of ABC and has had no involvement in the
management or control of ABC's business since resigning from its
Board of Directors several years ago.

In 1989, state agency XYZ awarded a multi-million dollar
consultant contract to a corporation ("the Corporation") for
services related to a state project. In 1994, your client learned
that ABC was one of several sub-consultants selected by the
Corporation in 1989.[2] ABC was one of two firms listed in the
direct expense budget submitted by the Corporation for testing.
The value of ABC's services was estimated at several thousand
dollars.

Since the Corporation's contract was first awarded, there have
been no changes in ABC's scope of work or budget. Of the funds
budgeted, ABC has received most of the fund allotted for that
testing. Of that amount, approximately half was received after
your client became a management-level official at XYZ.

During his tenure at XYZ, two modifications to the
Corporation's contract were voted by its board. The first extended
the completion date for approximately two years. The second
represented a multi-million dollar increase in funds for extra work
completely unrelated to ABC.

After assuming his current state position, your client
delegated all XYZ and related agency contract approvals to a
subordinate and, since that date, has not seen any documents
relating to the Corporation's contract. However, he has been
advised by his designee that there have been three additional
modifications to the Corporation's contract, none of which affected
the scope or budget for ABC's work.

Despite steps taken by your client to separate his private
interests from his public responsibilities, and to be aware of and
take appropriate action under Chapter 268A with regard to private
interests he may have, he did not learn of ABC's sub-consultant
relationship to the Corporation until a year ago. Therefore, to
resolve all questions arising from his 5% interest ownership of
ABC, and other financial interests he may be required by Chapter
268A to dispose of, he has created an irrevocable trust ("Trust").


The Trust


The Trust was created with your client as Settlor and First
Beneficiary of the Trust. Other parties and his successors in
trust are the Trustees. The Trust is irrevocable as he does not
reserve the right to amend or revoke the Trust Agreement.
Successor Trustees shall be designated in writing by the Policy
Committee of a law firm, or the immediate or remote successor to
said firm.

From time to time, your client will cause to be delivered to
the Trust certain property which the Trustees shall receive and
administer according to the terms of the Trust Agreement. Under
that Agreement, the Trustees shall pay the net income of the Trust
at least annually and shall, from time to time, pay to, or for the
benefit of, your client so much of the principal of the Trust as
the Trustees, in their sole discretion, shall determine. The Trust
Agreement further provides that the "Trustees shall segregate in a
separate fund any property transferred to them by [your client] for
the purposes of disposing of any financial interest he may have in
such property to the extent required by Chapter 268A of the General
Laws of Massachusetts." ("Fund Property"). You have confirmed
that, pursuant to this provision, your client has placed in trust
the stock representing his entire 5% interest in ABC. The net
income of the Fund Property (e.g., the ABC stock) shall be paid at
least annually to your client's spouse, who is listed as the Second
Beneficiary. The Trustees have sole discretion to pay principal to
or for the benefit of said spouse. Further, pursuant to G.L. c.
184B, which powers are expressly incorporated by reference in the
Trust Agreement, the Trustees have power to "sell, exchange or
otherwise dispose of the property at public or private sale on such
terms as [they] may determine...." G.L. c. 184B, s.2(1)(a).
However, "[i]n the event the Trustees dispose of [the Fund
Property] by sale, exchange, or otherwise, the proceeds of such
disposition shall be deposited in trust for the benefit of [your
client]." Additionally, if said spouse shall die before all of the
Fund Property is distributed, and while your client occupies a
position or office in the government of the Commonwealth that is
inconsistent with the acquisition of a financial interest in any
specific property in such trust corpus ("Prohibited Position"),
such specific property shall be paid to said spouse's estate. If
your client does not occupy a Prohibited Position at the time of
his wife's death, the Fund Property shall be distributed to the
Trust held for the benefit of him. Accordingly, there is the
possibility that interests previously "disposed" of during his
tenure as a state employee could revert to him.



QUESTION:



Does G.L. c. 268A, s.7 permit your client to dispose of
financial interests in property to his wife under the circumstances
described above?



ANSWER:



No, unless he takes further steps to ensure that the
prohibited financial interests do not revert to him.



DISCUSSION:



Your client is a state employee[3] for purposes of the
conflict law. As such, he is subject to the restrictions of G.L.
c. 268A, s.7 which, with certain exceptions, prohibits a state
employee from having a direct or indirect financial interest in a
contract made by a state agency. As a 5% owner of ABC, which is a
subconsultant under the Corporation's contract with state agency
XYZ, he has an indirect financial interest in an XYZ contract.
See, e.g., EC-COI-83-5; 82-117. Because his ownership interest in
ABC exceeds one percent,[4] and as a high-ranking state official,
he participates in or has official responsibility for the
activities of XYZ, he does not qualify for any of the exemptions to
s.7.[5] Thus, s.7(a) requires that he dispose of his interest in
ABC's contract with the state. To this end, he has established a
Trust which, in general, operates to pay and distribute to his
spouse those financial interests which s.7 prohibits him from
retaining. As a result, we must first consider whether s.7 permits
a state employee to dispose of a prohibited financial interest in
a state contract by creation of a trust, and second, whether, as
spouses, his spouse's financial interest in the stock placed in
trust should be imputed to your client for purposes of s.7.

Turning to the first question, we note that this Commission
has previously sanctioned disposition of a s.7-prohibited financial
interest through use of an irrevocable trust. Specifically, in EC-
COI-80-86
, a member of the judiciary was also a part owner of
building, a portion of which was to be leased to a state agency.
Upon execution of such a lease, the state employee would have a
financial interest in a state contract in violation of s.7. The
question presented

Page 628

was whether, pursuant to s.7(a), the state employee could transfer
his interest in the building in trust for the benefit of his adult
children and their issue. The state employee proposed two methods:

(1) a so-called Clifford Trust whereby his interest in the building
would be held in trust for a period of 10 years with all income
paid or accumulated for the benefit of his adult children and their
issue (i.e., until the state employee reached the state's mandatory
retirement age for judges, whereupon his interest in the building
would revert to him), or (2) an irrevocable trust for the benefit
of his adult children and their issue.

In 80-86, we concluded that a state employee does not "dispose
of" a s.7-prohibited financial interest simply by placing that
interest out of his control for a term of years. Thus, we opined
that, where, under the Clifford Trust, ownership in the building
would revert to the state employee, that employee would continue to
have an indirect financial interest in the lease in violation of
s.7. However, we concluded that the irrevocable trust "would not
offend s.7 so long as the terms of the trust expressly provide that
in no event could ownership of the property revert to [the state
employee]."

While 80-86 provides some guidance for resolution of your
client's situation, it is important to note that that decision
involved a trust for the benefit of emancipated adult children who
presumably did not reside with, and who were not supported by, the
state employee. In the instant case, we are asked to decide
whether our reasoning in 80-86 is also applicable where the trust
is for the benefit of the state employee's spouse. That is, we
must ask whether the spouse's financial interest in the property
placed in trust should be attributed to the state employee for
purposes of s.7.

As noted by one commentator, "section 7 does not automatically
attribute the financial interest of the employee's wife ... to the
employee himself. This should not mean, however, that the interest
of a spouse ... must ... never be considered as the basis of an
interest by the state employee himself. The test should be whether
such an interest can fairly be said to be the employee's." Buss,
The Massachusetts Conflict of Interest Law: An Analysis, 45 B.U.
Law Rev. 299, 375 (1965). Recognizing this fact, we do not
attribute to a state employee his spouse's financial interest in a
state contract solely because of the marriage relationship. EC-
COI-83-123; see also EC-COI-84-13
("In general, s.7 does not
prohibit both a husband and wife from serving as state employees,
even with the same agency. While the husband obviously benefits
from his wife's income (and vice-versa), the husband does not,
strictly speaking, have a financial interest in his wife's
employment contract with the state.") However, we have closely
examined inter-spousal transfers of interests held by the state
employee. See, e.g., EC-COI-83-37; 83-111; 83-125. Where there
has been a divestiture of the state employee's interest to his
spouse, we have looked at a number of factors to determine whether
the state employee has truly transferred all right and title to the
interest and any benefit that might flow from it, or whether the
purported transfer is merely "a contrivance to evade the reach
of the conflict of interest laws." EC-COI-89-14.

Our precedent regarding inter-spousal transfers has almost
exclusively concerned the transfer of an interest in a going
concern, where the state employee prior to the transfer has not
only owned, but has played a role in the management and control of
the business. In evaluating such transfers, we have looked to find
evidence that the transferring spouse has relinquished all right,
title and interest in the property and has ceased to deal with it
as his own. Among the factors which we have considered in
determining whether there has been a relinquishment of the interest
are (1) the consideration paid by the transferee, (2) whether the
state employee's initial investment has been liquidated, and (3)
whether the state employee continues to own the property
transferred. Further, we have considered whether the state
employee continues to participate in the management and control of
the business, such that it can fairly be said that he continues to
deal with the property as his own. EC-COI-89-14.

In certain cases, we have found that attribution was
warranted. For example, in EC-COI-83-37, a state employee assigned
to his wife his rights, title and interests as a general and
limited partner in two limited partnerships, together with an
irrevocable power of attorney. The limited partnerships were
formed to develop real property using funding secured from a state
agency. The wife was not involved in the work of the limited
partnerships prior to the assignment and had no background,
expertise or interest in real estate development. Further, the
transfer to the wife was without consideration and was made in part
because she was someone the state employee could rely on to handle
the project in the same manner as he. We concluded that the facts
of the assignment were such that the state employee could "fairly"
be said to still have a financial interest in the project funded by
the state. This conclusion was based on our concern that, despite
the purported transfer of the interest, the transferring spouse
continued to deal with the property as his own, albeit through his
wife. In our view, that concern was warranted because the wife
lacked the expertise to manage the business interest alone, and

Page 629


the absence of consideration paid by the wife to her husband was at
least some evidence of the husband's failure to completely
relinquish the interest.

We also found that attribution was warranted in EC-COI-83-111,
where a state employee transferred his ownership interest in land,
formerly held jointly with his wife, to his wife alone. The
transfer was made to protect the land from being subject to any
liability which the employee might incur in the performance of his
state duties. Subsequently, his wife proposed to sell the property
to the state agency that employed her husband. In attributing the
wife's interest to her state employee husband, we noted that the
transfer was not in return for any consideration, nor was its
purpose to benefit the wife by giving her sole right and title to
the land and all benefits which might come from it. Moreover,
there was no independent evidence that the state employee husband
had relinquished his financial interest in the proceeds of the
wife's proposed sale to the Commonwealth. We said: "Absent
evidence that you will not derive any financial benefit, direct or
indirect, from the sale of the land, the Commission concludes that
you will have a financial interest in the sale by your wife to [the
state agency] in violation of s.7." See also EC-COI-83-125
(attribution found where state employee regularly participates in
the company's financial decisions); 85-24 (attribution found where
employee shares in management and control of spouse's business).

Turning to the issue at hand, we note that the question --
whether transfer of stock into an irrevocable trust for the benefit
of one's spouse constitutes "disposal" of that interest for
purposes of the conflict law -- is a question of first impression
for this Commission. As noted above, our prior precedent (other
than 83-111 ) has concerned transfers of interests in going concerns
where the state employee's management and control of that interest
was a central factor in our analysis. In the present situation,
your client's ability to manage and control ABC is derived from his
stock in that company, which the he has now placed in trust for the
benefit of his wife. Although this type of inter-spousal transfer
has never been considered by this Commission, we think that the key
question remains the same: can your client fairly be said to have
a financial interest in the property transferred. EC-COI-84-13.

As noted above, following our earlier precedent, we will not
attribute his wife's interest in this property to him solely
because of the marital relationship, the extent to which husband
and wife may share in common household expenses, or the equitable
rights they may have in each other's property. See Kindregan and
Inker
, Massachusetts Practice: Family Law and Practice s.406 at
pp. 17-18, Vol 2.; deCastro v. deCastro, 415 Mass. 787, 795 (1993).
Rather, we will examine whether it can fairly be said that, apart
from the mere fact of his marriage, your client retains a direct or
indirect financial interest in the property held in Trust for the
benefit of his wife. We conclude that, in general, the settlor of
an irrevocable retains neither a direct nor an indirect financial
interest in the property placed in trust. However, because the ABC
stock placed in trust for his wife can revert to your client, we
conclude that the Trust does not dispose of the indirect financial
interest in the state contract held by ABC. Thus, in order to
comply with s.7, your client must take further steps to ensure that
the beneficial ownership of the property cannot revert to him.

By placing the ABC stock in an irrevocable trust, your client
no longer holds legal title to that stock, nor is he the
beneficial owner of it. Welch v. Davidson, 102 F.2d 100, 102 (1st
Cir. 1939) ("in equity, the beneficiary of a trust is the owner of
the trust res; ... he has an equitable estate in the property
constituting the trust and is considered the real owner; ... the
trustee, on the other hand, holds the legal title to the property
with the right to administer it for the benefit of the beneficiary
and in accordance with terms of the trust."); see also Markell v.
Sidney B. Pfeifer Foundation, Inc
., 9 Mass. App. Ct. 412 (1980)
(the legal effect of an irrevocable voluntary trust is to alienate
the settlor's power to control assets placed in trust).
Furthermore, because the Trust is irrevocable, the transfer of
stock into the Trust "'cannot be revoked or set aside at the will
of [the settlor,], Lovett v. Farnham, 169 Mass. 1, 2-3 [1897], '
without proof of mental unsoundness, mistake, fraud or undue
influence.' Sands v. Old Colony Trust Co., 195 Mass. 575, 577
[1907], and cases cited." Clune v. Norton, 306 Mass 324, 326
(1940). Moreover, to the extent that the ABC stock represents his
legal right or entitlement to participate in ABC's business
decisions, your client has relinquished all such rights and
entitlements. The Trustee, not your client, retains control over
the administration of the ABC stock and the distribution of income
derived therefrom to your client's wife. Moreover, your client
does not select successor trustees. Pursuant to G.L. c. 184B, the
trustee may even sell the stock. Thus, unlike the case in EC-COI-
83-37 and 83-111
, your client has manifested some intention to give
to his wife the financial interests that flow from the ABC stock
and, in general, has done so in a manner where he does not retain
control over the property transferred. In other words, despite a
lack of consideration, the use of a trust vehicle creates a
transaction that is different from the assignment for no
consideration in EC-COI-83-37 and the sale without consideration in
EC-COI-83-111.

Page 630

However, we are mindful that your client has not completely
disposed of all interest in the ABC stock. For example, if the
stock is sold, even while your client is a state employee and ABC
is under contract with the state, the proceeds of the sale will be
placed in trust for his benefit. Under another scenario, ownership
of the stock could revert to him after a period of years. That is,
if, after he leaves state service, his wife should predecease him,
the property previously placed in trust for her benefit would not
pass to her estate, but would be placed in trust for him. As we
concluded in EC-COI-80-86, a trust that contains this type of
reversionary interest does not obviate the s.7 violation. That is,
where such reversion is not merely possible but is expressly called
for in the Trust Agreement, we think that it can fairly be said
that your client retains an indirect financial interest in the
property. 2 Scott on Trusts, s.128.2 (4th ed. 1982) ("if the
settlor manifested an intention that the beneficiary should take
the principal only if during his lifetime the trustee should elect
to give it to him, [the beneficiary] has not the entire beneficial
interest under the trust, and unless there is a gift over to a
third person, the trustee will hold the property upon a resulting
trust for the settlor or his estate.") Accordingly, unless your
client takes additional steps to ensure that beneficial
ownership of the property cannot revert to him, we conclude that he will
continue to have an indirect financial interest in violation of
s.7.


-------------------------

[1] The subject of this opinion has had other positions in
state government, including a management position within the agency
that he now oversees.

[2] This opinion request was submitted shortly after he
learned of ABC's subcontract.

[3] "State employee," a person performing services for or
holding an office, position, employment, or membership in a state
agency, whether by election, appointment, contract of hire or
engagement, whether serving with or without compensation, on a
full, regular, part-time, intermittent or consultant basis,
including members of the general court and executive council. No
construction contractor nor any of their personnel shall be deemed
to be a state employee or special state employee under the
provisions of paragraph (o) or this paragraph as a result of
participation in the engineering and environmental analysis for
major construction projects either as a consultant or part of a
consultant group for the commonwealth. Such contractor or
personnel may be awarded construction contracts by the commonwealth
and may continue with outstanding construction contracts with the
commonwealth during the period of such participation; provided,
that no such contractor or personnel shall directly or indirectly
bid on or be awarded a contract for any construction project if
they have participated in the engineering or environmental analysis
thereof. G.L. c. 268A, s.1(q).

[4] Section 7 does not apply "if such financial interest
consists of ownership of less than one percent of the stock of a
corporation."

[5] The s.7(b) exemption is the only exemption generally
available to regular state employees. Among other things, the
s.7(b) exemption requires that the state employee "not participate
in or have official responsibility for any of the activities of the
contracting agency."

Page 631
 


End Of Decision