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Issues Arising from Auctioning Official's Purchase of Property at Foreclosure
Saturday, May 24th, 2014
Robert Wechsler
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.
The Application of Ethics Laws to Foreclosure Purchases
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.
Louisiana has an unusual law that deals with this sort of transaction:
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.
It is common, although not advised, for ethics codes to prohibit conflicts of interest in a provision such as this:
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.
The City Ethics Model Code does not clearly cover this situation either, but could more easily be interpreted to:
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.
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.
The Involvement of a Government Attorney
The second issue involves the involvement of the sheriff's office attorney. According to a KATC-TV article yesterday, 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."
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.
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.
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.
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.
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.
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.
Timeliness
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.
Robert Wechsler
Director of Research-Retired, City Ethics
---
The Application of Ethics Laws to Foreclosure Purchases
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.
Louisiana has an unusual law that deals with this sort of transaction:
§1113. Prohibited contractual arrangementsOne 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.
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.
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.
It is common, although not advised, for ethics codes to prohibit conflicts of interest in a provision such as this:
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.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.
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.
The City Ethics Model Code does not clearly cover this situation either, but could more easily be interpreted to:
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 ...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?
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.
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.
The Involvement of a Government Attorney
The second issue involves the involvement of the sheriff's office attorney. According to a KATC-TV article yesterday, 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."
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.
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.
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.
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.
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.
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.
Timeliness
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.
Robert Wechsler
Director of Research-Retired, City Ethics
---
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