Did two directors of a Texas water conservation district have to disclose their conflicts of interest and sit out a vote on a district rule that benefited them?

TX AG Opinion GA-0796: Did water-district directors have to recuse from a rule vote?

Plain-English summary

A state representative asked whether the conflict-of-interest rules in chapter 171 of the Local Government Code required two directors of the Uvalde County Underground Water Conservation District to disclose their interests and abstain from a 2009 vote on a district rule. Chapter 171 requires a local public official who has a "substantial interest" in a business entity or in real property to file an affidavit and step aside from a vote when the action will have a "special economic effect" on that business (distinguishable from its effect on the public), or a reasonably foreseeable special economic effect on the value of that real property (again distinguishable from the public).

The facts: a proposed rule revision would have capped irrigation groundwater withdrawals at 2.5 acre-feet per acre, cumulative across aquifers and permitting authorities. That would have limited applicants who already held 2 acre-feet per acre from the Edwards Aquifer Authority to a 2.5 acre-foot total from the district. In March 2009 the board voted 4-3 to delete the cumulative-cap language, and Board member A made the motion and Board member B seconded it. After the rule changed, the board reconsidered three pending permit applications and granted the applicants the full amount, so they ended up with 4.5 acre-feet per acre. Board member A had a substantial interest through employment with one of the applicants (and had recused on the applications themselves), and Board member B owned land in the district worth more than $2,500. Both substantial interests were undisputed.

The Attorney General explained that this office usually cannot decide whether an action has a "special economic effect" because that is a fact question, and it has resolved such questions as a matter of law mainly in the narrow context of buying or selling goods, services, or real property. A rule adoption is different. The opinion noted a prior standard that broadly applicable regulatory actions ordinarily do not have a "special economic effect" on one business. But here it was not clear the March 2009 action was broadly applicable: it arguably affected only a small class of landowners with land over multiple aquifers, a class that included the two directors' interests, and the economic benefit to them was arguably direct and foreseeable when they voted. On those facts a court could find the rule applied and required disclosure and abstention. Still, because the inquiry was inherently factual and no court had addressed conflicts in the rule-adoption setting, the Attorney General could not conclude that a court would find a special economic effect requiring the two directors to file affidavits and abstain.

Currency note

This opinion was issued in 2010. 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.

Chapter 171 of the Local Government Code and chapter 36 of the Water Code have been amended since 2010, including the substantial-interest thresholds and procedures. Confirm the current statutes and any later case law before relying on anything below.

Who this opinion affected (as of 2010)

Water district directors and other local officials: The opinion told them that voting on a rule that mostly benefits a narrow class including their own interests could trigger chapter 171's disclosure-and-abstention duty, even though broad regulations usually do not.

Groundwater conservation districts: The opinion warned that a board action voidable under section 171.006 (if it would not have passed without the conflicted member's vote) created real legal exposure for narrowly targeted rules.

Permit applicants and neighboring landowners: The opinion meant the validity of the March 2009 rule and the permits flowing from it was legally uncertain, hinging on fact findings about the rule's economic effect.

Common questions

What is a "substantial interest" under chapter 171?
A person has a substantial interest in a business entity if, among other things, more than 10 percent of the person's gross income came from it, and a substantial interest in real property if the person owns an interest worth $2,500 or more.

Why couldn't the Attorney General just answer yes or no?
Because whether the vote had a "special economic effect" distinguishable from the effect on the public is a fact question. The opinion process generally cannot resolve fact questions, and the office had decided such issues as a matter of law mainly for purchases or sales, not rule adoptions.

Does a broad regulation usually create a conflict?
No. The opinion noted that broadly applicable regulatory actions ordinarily do not have a "special economic effect" on one business or property. The concern here was that the rule arguably affected only a small class that included the directors' interests.

What happens to a vote taken in violation of chapter 171?
Under section 171.006, an action involving a conflict can be voidable if it would not have passed without the vote of the official who violated the rule, and a knowing violation of section 171.004 is also a criminal offense.

Background and statutory framework

The Uvalde County Underground Water Conservation District is a groundwater conservation district governed by an eight-member board and subject to chapter 36 of the Water Code (Tex. Water Code Ann. § 36.058) and to chapter 171 of the Local Government Code. Chapter 171 requires a local public official to disclose a "substantial interest" in a business entity or real property and abstain from a vote or decision involving it when the action will have a special economic effect on the entity, or a reasonably foreseeable special economic effect on the value of the property, distinguishable from the effect on the public (Tex. Loc. Gov't Code Ann. §§ 171.002-.004, 171.007(a)). A substantial interest in a business entity exists where funds received exceed 10 percent of the person's gross income (§ 171.002(a)(2)), and in real property where the ownership interest is worth $2,500 or more (§ 171.002(b)). A knowing violation of section 171.004 is an offense (§ 171.003(a)(1)), and an action taken in violation is voidable if it would not have passed without the conflicted member's vote (§ 171.006). An official who files an affidavit need not abstain if a majority of the body must likewise file affidavits of similar interests (§ 171.004(c)).

The opinion explained that determining whether an action has a "special economic effect" generally requires resolving fact questions the office cannot decide, and that it had answered as a matter of law mainly in the purchase-or-sale context (citing prior opinions and Walk v. State, 841 S.W.2d 430, 435 (Tex. App.—Corpus Christi 1992, pet. ref'd); Dallas Cnty. Flood Control Dist. No. 1 v. Cross, 815 S.W.2d 271, 281-82 (Tex. App.—Dallas 1991, writ denied)). Drawing on a prior standard that broadly applicable district regulation ordinarily lacks a special economic effect on a particular business, the opinion found it unclear that the March 2009 action was broadly applicable, since it arguably affected only a limited class of landowners (those subject to permitting by both the district and the Edwards Aquifer Authority) that included the directors' interests, and the benefit was arguably direct and foreseeable. (One acre-foot is roughly 325,850 gallons; see Barshop v. Medina Cnty. Underground Water Conservation Dist., 925 S.W.2d 618, 624 n.1 (Tex. 1996).) On those facts a court could find chapter 171 applied, but the office could not predict that it would.

Citations

Statutes:

• Tex. Water Code Ann. § 36.058 (West 2008)
• Tex. Loc. Gov't Code Ann. §§ 171.001(2), 171.002, 171.002(a)(2), 171.002(b), 171.003(a)(1), 171.004(a), 171.004(c), 171.006, 171.007(a) (West 2008)

Cases:

• Barshop v. Medina Cnty. Underground Water Conservation Dist., 925 S.W.2d 618 (Tex. 1996)
• Walk v. State, 841 S.W.2d 430 (Tex. App.—Corpus Christi 1992, pet. ref'd)
• Dallas Cnty. Flood Control Dist. No. 1 v. Cross, 815 S.W.2d 271 (Tex. App.—Dallas 1991, writ denied)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0796
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2010/ga0796.pdf

Original opinion text

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

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

September 13, 2010

The Honorable Allan B. Ritter
Chair, Committee on Natural Resources
Texas House of Representatives
Post Office Box 2910
Austin, Texas 78768-2910

Opinion No. GA-0796

Re: Whether the conflict of interest provisions of chapter 171, Local Government Code, required two board members of the Uvalde County Underground Water Conservation District to disclose their respective interests and abstain from voting on a District rule (RQ-0853-GA)

Dear Representative Ritter:

The Uvalde County Underground Water Conservation District (the "District") is a groundwater conservation district subject to chapter 36 of the Water Code and governed by an eight-member board of directors (the "Board"). [Footnote 1: Request Letter at 1, 2 n.1 (available at http://www.texasattorneygeneral.gov); see also Act of May 30, 1993, 73rd Leg., R.S., ch. 626, art. 2, 1993 Tex. Gen. Laws 2350, 2370 (validating District's creation, boundaries, and powers).] Members of the Board are subject to chapter 171 of the Local Government Code. Request Letter at 1; TEX. WATER CODE ANN. § 36.058 (West 2008). Chapter 171, which generally governs pecuniary conflicts of interest, requires a local public official to disclose the official's interest in a business entity or real property and abstain from participating in a vote or decision involving that entity or real property under certain circumstances. See TEX. LOC. GOV'T CODE ANN. §§ 171.002-.004, .007(a) (West 2008). Because members of the public have raised the issue, you ask whether chapter 171 required two Board members to file affidavits disclosing their respective interests in a business entity and real property and abstain from voting to approve a District rule under the particular facts presented. See Request Letter at 4-5.

I. Facts Presented

The facts, as you present them, are as follows: In February 2009, a proposed revision to a District rule sought to codify the District's interpretation of its existing 2002 rule regarding groundwater production. See Request Letter at 1-2. The proposed revision permitted water withdrawal from a well or well system used for irrigation purposes at a maximum of "two and one half . . . acre feet [Footnote 2: "An acre-foot is the amount of water that would cover an acre of land to one foot, approximately 325,850 gallons." Barshop v. Medina Cnty. Underground Water Conservation Dist., 925 S.W.2d 618, 624 n.1 (Tex. 1996).] per irrigated acre per year, regardless of which formation or aquifer is the source of the groundwater" taking into "account any groundwater withdrawal rights granted by any permitting authority associated with the tract, regardless of whether those rights have been conveyed." Id. "The context and rationale for the proposed rule related to a prior decision of the Board on three pending applications [(the "Applications")] for . . . permits from the District." Id. at 2. These applicants "already held groundwater irrigation rights from the Edwards Aquifer Authority [for two acre feet per acre] to irrigate the same tract of land for which they were seeking irrigation withdrawal rights from the District [for two-and-a-half acre feet per acre]." Id. In accordance with the District's interpretation of its 2002 rule "as limiting groundwater production rights to 2.5 acre feet cumulative, regardless of the aquifer from which the water was withdrawn or the permitting authority," the District denied the applicants any allocation in excess of two-and-a-half acre feet of water per acre. Id.

In March 2009, the Board voted to delete the proposed limiting language requiring that the two-and-a-half acre feet per acre be cumulative of withdrawal permits granted with respect to another aquifer and by another permitting authority. See id. You tell us that "Board Member A made the motion to amend the rule prior to adoption and Board [member] B seconded the motion." Id. at 3. The more expansive version of the rule (the "Rule") allowing cumulative withdrawal to exceed two-and-one-half acre feet passed, with four Board members (including Board members A and B) voting for and three against it. See id. at 2. When the Board took this March 2009 action, a motion for a rehearing was pending on the three Applications. Id. at 3. Following adoption of the Rule, the Board granted the motion for rehearing, reversed its prior decision, and granted the applicants the full water allocation they had requested, "so that applicants would now hold 4.5 acre feet per year of irrigation water rights instead of being limited to 2.5 acre feet under the prior ruling." Id. With respect to consideration of the Applications, you tell us, "Board member A had filed an affidavit disclosing his business interest in one of the applicants" (the "Applicant") and "abstained from participating in the consideration or deliberations on the applications." Id. You do not raise any issues with respect to the Board's consideration of the Applications.

II. Chapter 171

With this factual context, we look at the relevant provisions of chapter 171 of the Local Government Code. Under section 171.004, a local public official must disclose a "substantial interest" in a business entity or real property prior to a vote or decision involving the business entity or real property and abstain from further participation in the matter 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 special economic effect on the value of the property, distinguishable from its effect on the public.

TEX. LOC. GOV'T CODE ANN. § 171.004(a) (West 2008). But see id. § 171.004(c) (providing that a local official who files an affidavit is not required to abstain "if a majority of the members of the governmental entity . . . is composed of persons who are likewise required to file and who do file affidavits of similar interests"). Section 171.003 makes it an offense for a public official to knowingly violate section 171.004. See id. § 171.003(a)(1). In addition to the criminal penalty, an action taken in violation of section 171.004, among others in chapter 171, renders the action voidable if "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" provision. Id. § 171.006.

III. Analysis

Based on the facts presented, Board members A and B each have the requisite "substantial interest" for the purposes of section 171.004. See id. § 171.002 (defining "substantial interest"). Board member A, you inform us, has a substantial interest in a business entity because "he is an employee of one of the two partners who are the applicants" for water permits and "derives more than 10% of his gross income from that employment." Request Letter at 3; TEX. LOC. GOV'T CODE ANN. § 171.002(a)(2) (West 2008); id. § 171.001(2) (defining "Business entity"). Board member B, you tell us, has a substantial interest in real property because he owns land in the District valued at over $2,500. See Request Letter at 3-4; TEX. LOC. GOV'T CODE ANN. § 171.002(b) (West 2008). That Board members A and B have substantial interests in the business entity and in the real property at issue is not, based on the facts presented, in dispute. See Request Letter at 3-4. Accordingly, we assume for the purposes of this opinion that each member has the requisite substantial interest for the purposes of chapter 171.

As your questions indicate, the issue here is the participation of Board members A and B in the March 2009 vote on the Rule and whether that action had a "special economic effect." See Request Letter at 4-5. With respect to Board member A, the test under section 171.004 is whether his vote on the Rule would have had "a special economic effect on the business entity," i.e., the Applicant in which he has a substantial interest, "distinguishable from the effect on the public." TEX. LOC. GOV'T CODE ANN. § 171.004(a)(1) (West 2008). With respect to Board member B, the test is whether it was "reasonably foreseeable" that his vote on the Rule would have a special economic effect on the value of his real property in which he has a substantial interest distinguishable from the effect on the public. Id. § 171.004(a)(2).

Generally, this office "cannot decide in the opinion process whether a governmental entity's action will have a special economic effect on a business entity or the value of real property distinguishable from its effect on the public, because this decision requires the investigation and resolution of fact questions." Tex. Att'y Gen. Op. No. GA-0337 (2005) at 5. This office has answered the question as a matter of law based on the facts provided only in the context of the purchase or sale of goods or services. For instance, this office determined that if a governmental entity considers purchasing goods or services from a business entity in which a local public official has a substantial interest, "the decision will, as a matter of law, 'have a special economic effect on the [business] that is distinguishable from the effect on the public.'" Tex. Att'y Gen. Op. No. GA-0136 (2004) at 3; see Tex. Att'y Gen. Op. No. DM-279 (1993) at 7; see also Walk v. State, 841 S.W.2d 430, 435 (Tex. App.—Corpus Christi 1992, pet. ref'd). Based on case law, the question could also be answered as a matter of law, depending on the facts provided, in the context of the purchase or sale of an interest in real property. See Dallas Cnty. Flood Control Dist. No. 1 v. Cross, 815 S.W.2d 271, 281-82 (Tex. App.—Dallas 1991, writ denied).

Instead of the purchase of (1) goods or services or (2) a real property interest the effect of which can be more readily determined as a matter of law, we are confronted here with the effect of the adoption of a rule on a business entity and on the value of real property. You tell us that following the March 2009 Board action, the District granted the pending motion for rehearing of the business entity in which Board member A has a substantial interest, i.e., the Applicant, and awarded permits for the maximum two-and-a-half acre feet of water per acre in addition to the two acre feet per acre granted by the Edwards Aquifer Authority ("EAA") for a total of four-and-a-half acre feet per acre. See Request Letter at 3. It is suggested that the four-and-a-half acre feet per acre water request would not, or could not, have been granted under the District's interpretation of the pre-2009 rule. See id. at 2. Thus, with respect to Board member A, members of the public have alleged that the March 2009 "modification to the proposed rule paved the way for the Board's initial decision to be reversed and the permits to be granted [to the business entity in which Board Member A has a substantial interest] as requested on rehearing." Id. at 3. With respect to Board member B, members of the public have alleged that because he owns land in Uvalde County and holds permits issued by the EAA and the District, the March 2009 action "would allow him up to 4.5 acre feet of water per acre, not the 2.5 acre feet had the February . . . version [of the rule] been adopted." Id. at 4.

Neither section 171.004 nor a court decision that we find provides guidance in regard to the adoption of a rule. In Attorney General Opinion GA-0337, which addressed the general regulatory authority of a water district, our office observed "that it seems unlikely that a broadly applicable [conservation and reclamation district] action would have a 'special economic effect' on a particular business entity distinguishable from its effect on the general public if its only effect on the business entity is generally to encourage (or to limit) property development within the [d]istrict's boundaries." Tex. Att'y Gen. Op. No. GA-0337 (2005) at 6. In the absence of legislative or judicial guidance, this observation articulates a practical and reasonable standard, that regulatory actions broadly applicable to, or generally effecting, persons or property in a water district will ordinarily not have a "special economic effect" on a particular business entity as to invoke the disclosure and abstention requirements of chapter 171.

However, based on the facts provided, it is not clear that the Board's March 2009 action was broadly applicable. Nor is it clear that its effect on the business entity (in which Board member A has a substantial interest) and on the real property (in which Board member B has a substantial interest) is one shared generally by other property owners in the District. In other words, it is not clear that the Board's adoption of the Rule is the type of regulation with general application or effect that, under the Attorney General Opinion GA-0337 standard, fails as a matter of law to trigger the filing and abstention requirements of section 171.004(a).

First, the March 2009 Board action arguably affected a limited class of real property and real property owners, those subject to permitting by both the District and the EAA, that specifically included the property owned or held by the business entity in which Board member A has a substantial interest and the property owned by Board member B. See Request Letter at 2; id. at 3-4. Attorney General Opinion DM-130 suggests that regulatory actions affecting a limited class of real property and their owners, in certain circumstances, can have a "special economic effect." Tex. Att'y Gen. Op. No. DM-130 (1992) at 2 ("[S]ection 171.004 would, in certain circumstances, bar a city council member's voting on a zoning matter affecting territory in which the member's residence is located."). Here, while we are informed that the class of property and owners affected by the Board's adoption of the Rule is limited, we do not know the exact numbers. Second, the link between the March 2009 action and its particular economic effect on the business entity in which Board member A has a substantial interest and on Board member B's real property was, arguably, direct and apparent at the time of the action. The special economic effect of the March 2009 action on the business entity and the value of the described property was reasonably foreseeable when the Board voted to adopt a rule that would allow such property owners and property more water access. Cf. Cross, 815 S.W.2d at 278.

In sum, based on the facts presented, a court could find that the March 2009 action had a special economic effect on the business entity in which Board member A has a substantial interest, that was distinguishable from the effect on the public, and on the value of Board member B's real property, which was reasonably foreseeable at that time. Given the inherently factual nature of the inquiry and absence of judicial precedent, we cannot conclude that a court would find that the March 2009 action had a special economic effect or that it was reasonably foreseeable that it would have such an effect as to require Board members A and B to file affidavits disclosing their interests and abstain from participating in the March 2009 vote.

SUMMARY

Chapter 171 of the Local Government Code generally governs a local public official's pecuniary conflicts of interest. Section 171.004 requires a local public official to file an affidavit disclosing the official's interest in a business entity or real property and abstain from participating in a vote or decision involving that entity or real property when the vote or decision will have a special economic effect on the business entity or the value of the real property.

In March 2009, the board of directors (the "Board") of the Uvalde County Underground Water Conservation District (the "District") voted to approve a District rule permitting withdrawal of groundwater for agricultural use without certain limitations previously proposed. Based on the facts presented, a court could find that the March 2009 action had a special economic effect on an applicant for a water permit in which a Board member has a substantial interest and on the value of real property owned by another Board member, which was reasonably foreseeable. Given the inherently factual nature of the inquiry and absence of judicial precedent, this office cannot conclude that a court would find that the March 2009 action had a special economic effect, or that it was reasonably foreseeable that the action would have such an effect as to require the two Board members to file affidavits disclosing their interests and abstain from participating in the March 2009 vote.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Sheela Rai
Assistant Attorney General, Opinion Committee