What counts as a 'significant interest' that blocks a Texas school board from contracting with a trustee's business?

Plain-English summary

In 1993 the Legislature passed a new rule for school boards: a district cannot sign a contract with a business in which a current trustee, or a trustee's spouse, has a "significant interest," at least until that trustee is off the board. A state senator asked the Attorney General what "significant interest" actually means, because the statute never defined it.

The Attorney General could not give a bright-line number, and explained why. Texas already had a general conflict-of-interest law for local officials, chapter 171 of the Local Government Code, which uses the phrase "substantial interest" and pins it to specific ownership and income thresholds. That older law mostly tells a single board member to disclose and step aside, and it only voids a contract if the conflicted member cast the deciding vote. The new school-board rule is stricter in a different way: it bars the whole board from making the contract at all. And, tellingly, the Legislature used a new, undefined word, "significant," instead of the defined word "substantial," even reusing "substantial" elsewhere in the same section.

From that, the Attorney General drew the inference that "significant" was meant to be different from "substantial," not just a synonym. The opinion would not invent a precise test. It said the law's clear purpose was to stop self-dealing, that it should not bar ordinary deals (a district could still contract with a big company like Southwestern Bell just because a trustee happens to work there), and that there might be more room to maneuver in a small rural district than a big city one. In the end, whether any particular trustee's stake is "significant" is a fact-specific question the opinion process cannot resolve.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Education Code has been substantially recodified since 1993 (former section 23.201 has been renumbered), so the section numbers described here have changed; confirm the current school-district conflict-of-interest provisions and Local Government Code chapter 171 before relying on anything described here.

Background and statutory framework

Senate Bill 1342 (Acts 1993, 73d Leg., ch. 964) added Education Code section 23.201, which bars a school district board from contracting with a trustee, a trustee's spouse, or a business entity in which a trustee or spouse has a "significant interest" until the trustee's term expires or the trustee resigns and a successor is chosen. The section adopts chapter 171's definition of "business entity," states that a person has a "substantial interest" in an entity if he does for chapter 171 purposes, and provides that section 23.201 prevails over chapter 171 to the extent of any conflict.

Chapter 171 of the Local Government Code, first enacted in 1983 (former article 988b, V.T.C.S.), is the general local conflict-of-interest statute. Section 171.002 defines "substantial interest" by ownership thresholds (10 percent or more of voting stock or shares, or 10 percent or $5,000 or more of fair market value) or income (funds exceeding 10 percent of gross income for the prior year), with a $2,500 threshold for real property, and attributes a relative's interest to the official. Section 171.004 requires an affidavit and abstention when an action will have a distinguishable special economic effect, with an exception if a majority must file affidavits. Section 171.003 makes certain conduct a class A misdemeanor, and section 171.006 voids a contract only if the conflicted member's vote was decisive.

The Attorney General identified three differences between the two regimes: chapter 171 regulates the individual member while section 23.201 regulates the whole board; chapter 171 generally leaves a contract valid unless the conflicted vote was decisive while section 23.201 absolutely bars the contract (making it at least voidable); and chapter 171 turns on a defined "substantial interest" while section 23.201 turns on an undefined "significant interest." Applying the rule that every word be given effect (State v. Terrell; Gerst v. Oak Cliff Sav. & Loan Ass'n; Spence v. Fenchler) alongside the rule that the Legislature's word choice is deliberate (Bomar v. Trinity Nat'l Life & Accident Ins. Co.; Cox v. Robison), and giving weight to subsection (d), the AG concluded the Legislature deliberately chose "significant" to carry a meaning different from "substantial." The opinion concluded the statute was meant to proscribe self-dealing, that the standard might be more flexible in a sparsely populated district than a large urban one, and that whether particular facts fall within "significant interest" requires resolving factual issues outside the opinion process.

Citations

• Education Code § 23.201 (school board may not contract with a trustee, spouse, or a business entity in which a trustee or spouse has a "significant interest"; adopts chapter 171 definitions; prevails over chapter 171)
• Local Gov't Code § 171.001 (definitions of "local public official" and "business entity"); § 171.002(a), (b), (c) ("substantial interest" thresholds and attribution to relatives); § 171.003 (prohibited conduct; class A misdemeanor); § 171.004 (affidavit and abstention); § 171.006 (contract voidable only if conflicted vote was decisive)
• State v. Terrell, 588 S.W.2d 784 (Tex. 1979) (primary objective is legislative intent)
• Gerst v. Oak Cliff Sav. & Loan Ass'n, 432 S.W.2d 702 (Tex. 1968) (give effect to every word)
• Spence v. Fenchler, 180 S.W. 597 (Tex. 1915) (avoid rendering language superfluous)
• Bomar v. Trinity Nat'l Life & Accident Ins. Co., 579 S.W.2d 464 (Tex. 1979) (word choice is deliberate)
• Cox v. Robison, 150 S.W. 1149 (Tex. 1912)

Common questions

What does "significant interest" mean for a school-board contract?
The Attorney General concluded the Legislature did not define it, but meant to bar self-dealing. The opinion declined to set a precise threshold and said whether a particular interest is "significant" is a fact question outside the opinion process.

Is "significant interest" the same as "substantial interest" under chapter 171?
No. The Attorney General concluded the Legislature deliberately chose the new, undefined word "significant" to mean something different from the defined "substantial interest," especially given that section 23.201 declares it prevails over chapter 171.

Can a district still contract with a big company that employs a trustee?
The opinion indicated yes, that example, a district contracting with a company like Southwestern Bell even though a trustee is an employee, illustrates conduct the statute was not designed to bar. The target was self-dealing, where a trustee stands to benefit from the contract.

How is section 23.201 stricter than the general conflict-of-interest law?
Chapter 171 generally requires an individual member to disclose and abstain and voids a contract only if that member's vote was decisive. Section 23.201 bars the entire board from entering the contract at all, making such a contract at least voidable.

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0240
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0240.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

July 26, 1993

Honorable William R. Ratliff
Chair
Education Committee
Texas State Senate
P.O. Box 12068
Austin, Texas 78711

Opinion No. DM-240

Re: Construction of Senate Bill 1342, Acts 1993, 73d Leg., ch. 964, which prohibits a school district from contracting with a business entity in which a trustee or his spouse has a "significant interest" (RQ-571)

Dear Senator Ratliff:

You have requested our opinion regarding the proper construction of a portion of Senate Bill 1342, Acts 1993, 73d Leg., ch. 964. Section 2 of that bill amends chapter 23 of the Education Code by adding a new section 23.201, which provides:

(a) The board of trustees of a school district may not enter into a contract with a trustee of the district, the spouse of a trustee, or a business entity in which a trustee or the spouse of a trustee has a significant interest until the trustee's current term has expired or until the trustee has resigned and a successor has been chosen to fill the vacancy created by the resignation.

(b) In this section, the term "business entity" has the meaning provided by Section 171.001, Local Government Code.

(c) For purposes of this section, a person has a substantial interest in a business entity if the person has a substantial interest in the business entity for purposes of Chapter 171, Local Government Code.

(d) This section prevails over Chapter 171, Local Government Code, to the extent of any conflict.

Specifically, you inquire about the meaning of the term "significant interest" as used in subsection (a), supra. Before we address the meaning of this provision, we shall consider the scope of chapter 171, of the Local Government Code.

Chapter 171, first enacted in 1983 as article 988b, V.T.C.S., and subsequently codified in 1987, is the general "conflict of interest" statute regulating local governmental bodies. Section 171.002(a) provides that a "local public official" has a substantial interest in a business entity under the following circumstances:

(1) the person owns 10 percent or more of the voting stock or shares of the business entity or owns either 10 percent or more or $5,000 or more of the fair market value of the business entity; or

(2) funds received by the person from the business entity exceed 10 percent of the person's gross income for the previous year.

An individual is considered to have "a substantial interest in real property if the interest is an equitable or legal ownership with a fair market value of $2,500 or more." Id. 171.002(b). Furthermore, the person is deemed to have a "substantial interest" in either a business entity or in real property, as defined, "if a person related to the official in the first degree by consanguinity or affinity" has the requisite interest. Id. 171.002(c). Thus, for example, a local governmental official may not avoid the proscription of chapter 171 merely by transferring ownership of a "business entity" to his spouse.

Section 171.004 describes the consequences which flow from a local governmental official's having a "substantial interest in a business entity or in real property." Prior to the local governmental body's "vote or decision on any matter involving the business entity or the real property" in which the individual member has a substantial interest, the member is required, under certain circumstances, to file "with the official record keeper of the governmental entity" "an affidavit stating the nature and extent of the interest," and to "abstain from further participation in the matter." Those circumstances arise if:

(1) in the case of a substantial interest in a business entity the action on the matter will have a special economic effect on the business entity that is distinguishable from the effect on the public; or

(2) in the case of a substantial interest in real property, it is reasonably foreseeable that an action on the matter will have a substantial economic effect on the value of the property, distinguishable from its effect on the public.

Id. § 171.004(a).

Subsection 171.003, of the Local Government Code, proscribes certain conduct by a "local public official": 1) failure to file the affidavit and refrain from voting in accordance with section 171.004, supra; 2) acting "as surety for a business entity that has work, business or a contract with the governmental entity;" and 3) acting "as surety on any official bond required of an officer of the governmental entity." Id. § 171.003(a). Each of these offenses is declared to be a class A misdemeanor. Id. 171.003(b). Although chapter 171 thus criminalizes certain acts by a local governmental official, it does not render voidable board action taken in violation of its provisions "unless the measure that was the subject of an action involving a conflict of interest would not have passed the governing body without the vote of the person who violated the chapter." Id. § 171.006.

Thus, there are three principal distinctions between chapter 171 of the Local Government Code and section 23.201 of the Education Code. The first distinction relates to the subject of regulation. Chapter 171 regulates the conduct of each individual board member, by requiring disclosure of any interest he might have in a contract, and prohibiting his participation in any discussion in or vote on such contract. Section 23.201, on the other hand, is directed at the conduct of the entire board of trustees.

The second distinction concerns the consequences of regulation. As we have noted, under chapter 171, unless the disqualified member's vote is the decisive one, even his actual participation in the vote will not render the contract voidable. By contrast, section 23.201 absolutely bars the board from entering into the contract in the first place. Presumably, a contract entered in contravention of section 23.201 is at least voidable.

The third distinction between the two "conflict of interest" provisions relates to the particular kind of conduct which is proscribed. Under chapter 171, such conduct occurs when a member of a local governmental body has, inter alia, a "substantial interest" in a business entity which is a party to a contract with the board of which he is a member. By contrast, section 23.201 prohibits a school district board of trustees from contracting with, inter alia, "a business entity in which a [current] trustee or the spouse of a [current] trustee has a significant interest." Acts 1993, 73d Leg., ch. 964, § 2. The term "significant interest" is not defined. Thus, the legislature has prohibited certain conduct, but has failed to furnish any guidance as to the meaning of a key element of the conduct proscribed. Furthermore, it has declared that the newly enacted section 23.201, Education Code, shall prevail "to the extent of any conflict" with chapter 171 of the Local Government Code. Id.

It is axiomatic that, in construing a statute, the primary objective must be to discern the legislative intent. State v. Terrell, 588 S.W.2d 784 (Tex. 1979). To effectuate that end, every word in a statute must, if possible, be given effect, and any construction which renders any part of a statute superfluous should, if possible, be avoided. Gerst v. Oak Cliff Sav. & Loan Ass'n, 432 S.W.2d 702 (Tex. 1968); Spence v. Fenchler, 180 S.W. 597 (Tex. 1915). Relying on these rules of construction, one might argue that it is necessary to read "significant" to mean "substantial" in order to avoid a construction that would, in effect, nullify subsection (c).

It is also the case, however, that particular language chosen by the legislature must be presumed to have been selected with deliberation. Bomar v. Trinity Nat'l Life & Accident Ins. Co., 579 S.W.2d 464 (Tex. 1979); Cox v. Robison, 150 S.W. 1149 (Tex. 1912); see also Tex. Jur. 3d Statutes § 132, at 735-36. These rules of construction indicate that, in selecting the word "significant" in subsection (a), the legislature must have meant something other than "substantial." Although in some usages their meanings may overlap, the two words are in no wise synonymous. See definition of "significant," Oxford English Dictionary, v. 15, pp. 458-59 (2d ed. 1989), and definition of "substantial," id. v. 17, pp. 66-68. Particularly in view of subsection (d), which declares the hegemony of section 23.201 "to the extent of conflict" with chapter 171, Local Government Code, we simply cannot avoid the inference that the legislature deliberately opted to use the word "significant," and to endow it with a meaning different from that of the word "substantial" as used in chapter 171.

In summary, the legislature did not provide a definition of the word "significant," nor did it describe what "interest" might be deemed a "significant interest" for purposes of subsection (a) of section 23.201. In determining the extent of the term "significant interest," and its relationship to the statutorily defined "substantial interest," it should be borne in mind that, whereas chapter 171 permits a member having a "substantial interest" in a business entity to remain on the board, and further, does not prohibit the board from contracting with that entity, section 23.201 recognizes that, for some contracts, mere recusal is not sufficient; rather, the relationship between an individual board member and a business entity may be sufficiently troubling as to raise an absolute bar to any contract between the board and that business entity.

Furthermore, the language of section 23.201 may, in our view, be read to indicate that the legislature might allow more flexibility in defining the standard of "significant interest" in a sparsely populated district than in a large urban district. In addition, we believe it is evident that section 23.201 was designed, however imperfectly, to permit a school district to contract with, for example, Southwestern Bell, even though one of its trustees is an employee of that company. It is manifest that the intent of this legislation was to proscribe self-dealing. In applying section 23.201, one should focus on the extent to which an individual trustee might benefit from a particular contract. Whether a particular set of circumstances are included within the meaning of "significant interest" requires the resolution of factual issues not appropriate to the opinion process.

SUMMARY

Although the legislature, in enacting section 23.201, Education Code, did not specifically define the boundaries of the term "significant interest," it clearly intended thereby to proscribe self-dealing. Whether a particular set of circumstances are included within the meaning of "significant interest" requires the resolution of factual issues not appropriate to the opinion process.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Rick Gilpin
Deputy Chief, Opinion Committee