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Unofficial Opinion 95-11

Unofficial Opinion 95-11

June 22, 1995
To: 

District Attorney
Rome Judicial Circuit

Re: 

A hospital authority may not own or operate a business corporation consistent with the mandate of the Georgia Hospital Authorities Law, O.C.G.A. § 31-7-70 et seq. Further, a member of a hospital authority board has an impermissible conflict of interest where he has any financial interest, not de minimis, in an entity conducting business with the authority notwithstanding the existence of an intermediary between the board and the entity.

You have asked for an opinion concerning the legality of a hospital authority purchasing a business corporation under the Georgia Hospital Authorities Law, O.C.G.A. § 31-7-70 et seq., and also about the existence of a potential conflict of interest where a hospital authority board member possesses an interest in an entity with which the authority transacts business, albeit through a management company.

With regard to your first inquiry, the Georgia Supreme Court in Tift County Hosp. Auth. v. MRS of Tifton, Ga., Inc., 255 Ga. 164 (1985), addressed the question of whether a hospital authority could operate a durable medical equipment company in competition with private enterprises within the community. The Court reviewed the Hospital Authorities Law, O.C.G.A. § 31-7-70 et seq., and concluded that "[a] careful review discloses no legislative authorization -- express or implied -- for an enterprise which offers durable medical equipment for sale or rent to the general public. Accordingly, we agree with the trial court that these activities were ultra vires." 255 Ga. at 166 (italics in original). In light of this decision, it is

my opinion that a hospital authority may not own or operate a business corporation. See O.C.G.A. § 31-7-77. That is not to say however that a hospital authority may not contract with a business corporation provided that other legal requirements are satisfied. See Richmond County Hosp. Auth. v. Richmond County, 255 Ga. 183 (1985).

Your second inquiry relates to whether a hospital authority board member has a conflict of interest where the member possesses a financial interest in an entity with which the authority transacts business. In your situation the question is complicated by the fact that the board has elected to conduct operations through a management company which exercises the powers of the board. Thus, it is first necessary to address whether the presence of an intermediary between the board and the entity from which the potential conflicts arise eliminates the conflict.

It is a principle of long standing in the jurisprudence of this state that when anything is prohibited directly, it is also prohibited indirectly. Ford Motor Co. v. Abercrombie, 207 Ga. 464, 473 (1950). Thus, creation and use of a management company to circumvent conflict of interest principles will be ineffective for that purpose because a corporate entity may not be used to defeat a public convenience, to justify wrong, protect fraud, defend crime or offend principles of equity and good conscience. See ITT Business Services Corp. v. Roberts, 184 Ga. App. 764, 767 (1987). A hospital authority may not utilize its powers to create corporations for purposes inconsistent with its statutory mission or public charge. See generally Colquitt County Hosp. Auth. v. Health Star, Inc., 262 Ga. 285, 286 (1992). Based on the foregoing, I believe the existence of a management company would not eliminate a conflict of interest arising from an authority board member's having a financial interest in an entity with which the authority transacts business.

As to whether a conflict of interest actually exists, it is necessary to review Richmond County Hosp. Auth. v. Richmond County, 255 Ga. 183 (1985). In that case the Supreme Court approved a hospital authority's use of management companies and other organizations notwithstanding the fact that some of the members of the hospital authority board also held positions on the boards of the corporations under contract with the authority. In authorizing such arrangements, however, the Court devised a two part test for ascertaining the existence of an impermissible conflict. The Court first required adherence to the statutory guidelines contained in O.C.G.A. § 31-7-74(b)(1), (2), (3). Thus, a board member deemed to have a conflict must disclose that potential conflict, withdraw from any discussion of the matter presenting the conflict, and refrain from participating in any decision relating to the matter presenting the conflict. Id. Satisfying these statutory conditions does not end the inquiry. See 1992 Op. Att'y Gen. 92-15.

The Court in Richmond County was careful to recognize that hospital authority board members are public officers who are trustees and servants of the people and are at all times amenable to them. Id. at 189; citing Ga. Const. 1983, Art. I, Sec. II, Para. I. The Court expressly stated, with respect to the principles embodied in this constitutional provision and O.C.G.A. § 31-7-74(b):

These two considerations are sufficient, we believe, to safeguard against prohibited conflicts of interest, inasmuch as no Authority member who serves on the board of the lessee and the other corporations is permitted to obtain any financial benefit, either directly through compensation or indirectly through dealings with the corporations.

Id. at 189 (emphasis added).

Consequently, even given meticulous compliance with the statutory provisions, a board member who also sits on the board of a contractor is not permitted "to obtain any financial benefit, either directly through compensation or indirectly through dealings with the corporations." Id. at 189. Should any such benefit be received, a prohibited conflict would exist.

When interpreting statutes, one must look diligently for the legislative intent, keeping in mind at all times the old law, the evil, and the remedy. O.C.G.A. § 1-3-1(a). The obvious intent of the conflict of interest provisions is to assure that public decision-making occurs outside the shadow of undue influence and to instill public confidence in the deliberative process. The General Assembly has declared that notwithstanding any contrary law, members of authorities and other governmental organizations shall adhere to standards of conduct which preclude official decision-making where monetary interest, direct or indirect, may exist. O.C.G.A. § 45-10-3(9). There may exist situations in which the interest held by the public official may be de minimis so as to lead to the conclusion that a conflict does not exist, see 1982 Op. Att'y Gen. 82-82, though the courts have not defined a bright line as to what constitutes a de minimis interest. In addition, conflicts may arise even in the absence of a financial gain where a divided loyalty exists between a public official and the entity he serves. 1982 Op. Att'y Gen. 82-82. The arrangement you describe and the specific facts of that arrangement must be measured against these principles of general application to state government.

In summary, it is my unofficial opinion that a hospital authority may not own or operate a for profit corporation. Further, it is my unofficial opinion that a board member of an authority possesses an impermissible conflict of interest where

he possesses a financial interest, not de minimis, in an entity transacting business with the authority even though selection of that entity was accomplished by an intermediary organization exercising contractually delegated powers of the authority.

Prepared by:

WILLIAM M. DROZE
Assistant Attorney General


Business corporations operate for profit. See O.C.G.A. § 14-2-101 et seq.