Issues Arising from Auctioning Official's Purchase of Property at Foreclosure

There are three interesting issues in this one minor matter,
involving a Louisiana sheriff's purchase of a house at a foreclosure
sale handled by the sheriff's office.<br>
<br>
<b>The Application of Ethics Laws to Foreclosure Purchases</b><br>
The first issue involves the transaction itself, the particular law
in Louisiana, and how more common conflict laws may be interpreted
in such a situation.<br>
<br>
Louisiana has an unusual law that deals with this sort of
transaction:<blockquote>

§1113. Prohibited contractual arrangements<br>
A.(1) No public servant ... or member of such a public servant's
immediate family, or legal entity in which he has a controlling
interest shall bid on or enter into any contract, subcontract, or
other transaction that is under the supervision or jurisdiction of
the agency of such public servant.</blockquote>

One of the especially good aspects of this language is that it is
not limited to situations where an official was personally involved
in a transaction. The rule
acknowledges that, to the public, it doesn't matter if the sheriff's
deputy had handled the auction. What matters is that it was the
sheriff's office. Similarly, a deputy should not be allowed to
purchase property at an auction run by the sheriff or by another
deputy.<br>
<br>

Many ethics codes prohibit officials from entering into a contract
with their agency or with any part of their government. But they do
not deal with other sorts of transactions, especially those
involving an agency as go-between. This can be problematic not only
with respect to foreclosure sales, but also with respect to grants that come
from the state or federal government, but are handed out by a local
agency. Often the local agency takes the position that it is only a
go-between and, therefore, it can hand the money to a qualifying
official. Fortunately, many state and federal agencies have their
own conflict of interest laws that prohibit local officials and
their families from benefiting from such a grant.<br>
<br>
It is common, although not advised, for ethics codes to prohibit
conflicts of interest in a provision such as this:<blockquote>

No person subject to this code shall have any interest, financial or
otherwise, or
engage in any business, employment, transaction or professional
activity, or incur
any obligation of any nature, which is in substantial conflict with
the proper
discharge of his or her public duties or employment.</blockquote>

There are two problems here:  one is that it prohibits
conflicts rather than requiring conflicts to be dealt with
responsibly. But it also prohibits engaging in new business that
would give rise to a conflict, which is good. As new business, the foreclosure situation might be covered by the good part of such a provision.<br>
<br>
The second problem,
however, is that its definition of "conflict" is very vague: 
something that is "in substantial conflict with the proper discharge
of ... public duties or employment." Would this definition (or the other popular phrase, "impairment of
judgment") prohibit a purchase at foreclosure? One could interpret the language to cover the situation by saying that
a sheriff who plans to bid on a property might not act fairly to let
others see or value the property or bid on it, or would not be seen
as acting fairly. Therefore, he would not properly discharge his
public duties. As long as it was clear that the sheriff would need
to seek independent ethics advice before acting, and the ethics adviser interpreted the language in this way, this kind of vague
language might be acceptable. But otherwise, it provides
insufficient guidance and would lead many ethics advisers to allow a sheriff to purchase the foreclosed property.<br>
<br>
The City Ethics Model Code does not clearly cover this situation either, but could more easily be interpreted to:<blockquote>

An official or employee may not use his or her official position or
office, or take or fail to take any action, or influence others to
take or fail to take any action, in a manner which he or she knows,
or has reason to believe, may result in a personal or financial
benefit ...</blockquote>

The sheriff had reason to believe that his purchase of the property
would benefit him. Otherwise, he would not have bid on it. But did
he use his position to make the bid, or did he act or fail to act in
a way that would benefit him?<br>
<br>
The problem here is that he did not use his position to make the
bid, but he could have used his position, or been seen as using his
position (and the knowledge that comes with it), to do things that
would give him an advantage over others in the bidding process. If
the sheriff were to come to me in a jurisdiction that had this
provision, I would interpret the language in this way and tell him
that it would be inappropriate and illegal to be seen using his
position to give himself an advantage by bidding on a property his
office was selling.<br>
<br>
However, not all ethics advisers would interpret the language in this manner. Therefore, it is better to have a rule that more clearly
covers this situation, like the one in Louisiana. Although it
appears that the sheriff was only facilitating the transaction, he
actually played a fiduciary role as auctioneer in addition to the
usual fiduciary role of a government official. This makes it that
much more important that it be made clear that, as a fiduciary, the
sheriff should not have participated, directly or indirectly, in any
other way in the transaction.<br>
<br>
<b>The Involvement of a Government Attorney</b><br>
The second issue involves the involvement of the sheriff's office
attorney. According to <a href="http://www.katc.com/news/corruption-accusation-over-sheriff-s-new-home-…; target="”_blank”">a
KATC-TV article yesterday</a>, the attorney told the reporter,
"The transaction is between, in my opinion, the mortgage company and
the highest bidder. The sheriff's department is merely acting as an
agent."<br>
<br>
This attorney is wrong in three ways. One, an auctioneer is not an
agent. Who would he be an agent for? The bank, the homeowner, the purchaser? He
is supposed to be neutral, a neutral fiduciary, not an agent for anyone involved.<br>
<br>
Two, there is a state law that clearly covers this situation, and as
the article astutely notes (complete with links), there have been an
advisory opinion and a decision that have applied the law to this
sort of situation. It is irresponsible for a government attorney to
provide a legal opinion without first checking the law as well as opinions and decisions based on it, all of which are easily available.<br>
<br>
Three, this attorney does not appear to have been representing the
government, but instead the sheriff. The sheriff is quoted as
referring to him as "my attorney." The attorney came to the interview with the
sheriff, which is what private attorneys do. He made an argument in
defense of the sheriff's action that a private attorney might make,
but not a government attorney. Government attorneys are not supposed to automatically defend
an official's actions when the official's personal
interest is involved.<br>
<br>
Most local government ethics programs begin and end with the city or
county attorney. One can see from this situation the problems
involved with this approach. Unlike ethics commissions, government
attorneys generally do not create a set of written advisory opinions
and decisions to provide both guidance and precedents to follow in
the future. Therefore, they can interpret the law in favor of the
personal interest of officials and against the public interest, and
no one will know. They can also favor certain officials and disfavor
others with their opinions and decisions, and no one will know. If
their opinions do become public, it could create a serious scandal.<br>
<br>
Unlike ethics commissions, government attorneys are in a conflicted
position with respect to officials to whom they provide ethics advice, because they are
answerable to these individuals and they represent these individuals
in their public capacity as if they were their attorneys. This
becomes inappropriate when the officials' personal interests are
involved. A government ethics program based on the inappropriate
conduct of a conflicted individual is not a government ethics
program at all.<br>
<br>
Finally, government attorneys rarely have much expertise in
government ethics. Winging interpretations of laws they don't
understand in favor of conflicted officials with whom they have
professional, personal, and political relationships is not good for
anyone but the attorney and the official. And if it all comes out, not for the official, either.<br>
<br>
<b>Timeliness</b><br>
The third issue is the timeliness of the matter. Foreclosure is
always a terrible thing, but the last few years have been
exceptional in the frequency of foreclosures and the level of fraud
that led buyers to enter into mortgages inappropriate for their
wealth and income (according to the KATC-TV article, the payment on
the house foreclosed upon went suddenly from $350 to $700 a month).
At a time like this, the appearance of impropriety is especially
strong and, therefore, government officials involved with
foreclosures should be extra careful to act not only within the law,
but also so as not to appear to be personally profiting in any way from such
foreclosures. They should not purchase foreclosed properties,
even if the auction is handled by a different government office. At the very least, they should seek
ethics advice from an independent ethics adviser, and ask that the advice not be limited to a narrow interpretation of the law.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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