Glazer v. Com'n on Ethics for Pub. EmployeesGlazer v. Com'n on Ethics for Pub. Employees
The principal issue in this governmental ethics case is whether a public official can avoid an unlawful conflict of interest by using his wholly-owned and controlled corporation to do what the official is clearly prohibited from doing himself. The Commission on Ethics for Public Employees found a conflict of interest, ordered the public official to resign, and barred him from future public service in that capacity for four years. The court of appeal reversed the commission‘s order, holding that Sections 1111(C)(2)(d) and 1112(B)(5) of the governmental ethics code do not prohibit business dealings between state mineral lessees and legal entities wholly-owned, controlled and operated by a Mineral Board member. 417 So.2d 456. We reverse. Separate corporate identity is a privilege conferred by law to further important underlying policies, such as the promotion of commerce and industrial growth. Consequently, the privilege may not be asserted for a purpose which does not further these objectives in order to override other significant public interests which the state seeks to protect through legislation or regulation.
Mr. Jerome S. Glazer has been a member of the State Mineral Board since 1972. The State Mineral Board administers the state‘s proprietary interest in minerals, and has authority to lease for the development and production of minerals, oil, and gas, any lands belonging to the state, or the title to which is in the public.
Mr. Glazer is also the sole stockholder, chief administrative officer, president, and chairman of the board of Glazer Steel Corporation. His son, Bradford Glazer, a salaried employee, Morris Klein, and an attorney, Warren Goldstein, are the only other members of the board of Glazer Steel. From April 1, 1980 to March 31, 1981, Glazer Steel Corporation made sales on a non-bid negotiated basis to seven companies which held mineral leases with the State of Louisiana for a total sales volume of $458,639.85.1 After an investigation by the Commission began, Glazer Steel received notification from three of its larger oil company customers—Exxon, Texaco and Shell Oil Company—that purchases from Glazer Steel Corporation would be discontinued to avoid possible violations of the conflicts of interest provisions of the Code of Ethics, though Glazer Steel continued to solicit business from these three companies. Up to this time and during Mr. Glazer‘s tenure on the Mineral Board, Glazer Steel Corporation had sold $4,173,423.87 worth of industrial steel products to these three companies.
The Commission on Ethics for Public Employees found that Mr. Glazer, by permitting his wholly-owned and controlled corporation to sell steel to state mineral lessees during his tenure as a State Mineral Board Commissioner, had engaged in conduct constituting a conflict of interest below the ethical standards established for public servants under
The court of appeal reversed, holding that the activities of Mr. Glazer‘s wholly-owned and controlled corporation could not be attributed to him personally for purposes of the Code of Ethics for Governmental Employees.
The Code is not a criminal statute whose aim is the apprehension and punishment of persons guilty of public wrongdoing. Instead, the primary objective of the
The prohibited conflict of interest situation involved in this case is one in which the public servant receives private compensation from persons having business with his public agency for services rendered by the servant to that person outside the servant‘s regular government employment. The danger in the conflict, of course, is that the public servant‘s official dealings with the person may be unduly influenced contrary to the public interest by the public servant‘s receipt of private compensation from the same person. The danger exists even if the public servant actually performs bonafide services for his outside income. Accordingly, The Code of Ethics for Governmental Employees specifically prohibits any public servant from receiving anything of economic value for or in consideration of services rendered to or for any person if such public servant knows or reasonably should know that such person has or is seeking to obtain contractual or other business or financial relationships with the public servant‘s agency.
There is no doubt that if Mr. Glazer during his tenure on the Mineral Board had personally sold steel products to the state mineral lessees, he would have violated the conflict of interest prohibition embodied in
Corporate identity is separate and distinct from the identity of its shareholders.
It is not unusual for a court in this country to disregard the corporate entity, or in synonymous terms “pierce the corporate veil,” when corporate form has been used to “defeat public convenience, justify wrong, protect fraud, or defend crime.” United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (E.D.Wis.1905); See generally 1 Fletcher, Corporations §§ 41-48 (Perm.Ed.1974). A court might pierce the corporate veil when the established norm of corporateness has been so abused in conducting a business that the venture‘s status as a separate entity has not been preserved. Union Local 1476 of Amalgamated Meatcutters v. Union Citizens Club of Terrebonne, 408 So.2d 371 (La.App. 1st Cir.1981); Smith-Hearron v. Frazier, Inc., supra. There has also been a tendency to disregard the entity in situations in which adherence to the fiction would clearly result in inequity. Watson v. Big T Timber Co., 382 So.2d 258 (La.App. 3rd Cir.1980); Liberto v. Villard, supra; Smith v. Moore, 347 So.2d 316 (La.App. 4th Cir.1977). These two approaches are frequently referred to as the “two pronged” test of formalities and fairness, but courts have applied the rule in a tremendously diverse manner. See Barber, supra, at p. 616-620. Often the courts pierce the corporate veil by saying simply that the corporation is the “instrumentality” or “alter ego” of the individual shareholder, without adequately explaining the real basis upon which this metaphorical language rests. See Cataldo, Limited Liability With One-Man Companies and Subsidiary Corporations, 18 Law & Contemp.Prob. 473, 497-98 (1953). All of these doctrines have been applied in Louisiana in one form or another, but in many instances, it is difficult to distinguish among them. Comment, Theory of the corporate Entity and The One-Man Corporation In Louisiana 38 Tul. L.Rev. 738, 741 (1964). See Kingsman Enterprises, Inc. v. Bakerfield Elec. Co., Inc., 339 So.2d 1280 (La.App. 1st Cir.1976).
We agree with Professor Ballentine, however, that the problems involved are to be solved not by “disregarding” the corporate personality, but by a study of the just and reasonable limitations upon the exercise of the privilege of separate capacity under particular circumstances in view of its proper use and functions. Ballentine, Corporations, § 122 (Rev.Ed.1946), p. 292. The policies behind recognition of a separate corporate existence must be balanced against the policies justifying piercing. Mull v. Colt Co., 31 F.R.D. 154, 166 (S.D.N.Y.1962). Comment, Piercing The Corporate Veil in Louisiana, supra, at 1002-17. For example, if the corporation‘s separate identity is to be disregarded for the purpose of imposing individual liability upon its shareholders, the strong social interest in encouraging capital investment would require that the separate identity be respected absent conduct on the part of the shareholders constituting waiver of the privilege of insulation, such as their own disregard for the corporate form, or their use of the corporate form to perpetrate fraud. Henn, Law of Corporations § 146 (2nd Ed.1970) p. 253. On the other hand, if the separate corporate capacity is asserted to evade a statutory restriction or regulation, abridgement, rather than abrogation, of the corporate entity privilege may be called for to prevent frustration of an important public regulatory policy without thwarting the basic goals of
As Sanborn, J., said in a much quoted federal case,
If any general rule can be laid down in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.
United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (E.D.Wisc.1905). See also Haynes v. Champagne Tile Corp., 228 F.Supp. 157 (E.D.La.1964) and cases cited therein.
Applying these precepts, we conclude that the separate corporate entity privilege is not without limits and does not permit a public official such as Mr. Glazer to use his wholly-owned and controlled corporation to do that which the Code of Ethics for Governmental Employees expressly commands he shall not do. Recognition of the corporate identity of Glazer Steel Corporation separate from Mr. Glazer for purposes of governmental ethics would be a misuse of the privilege of separate capacity and further none of its proper functions and objectives, viz., limited liability of shareholders; corporate capacity to hold property, enter contracts, sue and be sued, and to enjoy continued existence. Henn, supra, at p. 241. Additionally, recognition of a separate identity between Mr. Glazer and Glazer Steel Corporation would thwart the policy of the legislature embodied in the Code of Ethics, impair public confidence in the integrity of government, unfairly penalize persons who resigned from public service because of similar conflicts, and have a corruptive influence on officials who forgo personally profitable activities inconsonant with their public duties. Under the facts of the present case, there is no doubt that Mr. Glazer, as chief operating officer, chairman of a board composed entirely of himself, his son, a salaried corporate employee, and an attorney, and as one hundred percent owner of his corporation, caused services to be performed for persons doing business with his agency and received something of economic value from them through his corporation. Because of Mr. Glazer‘s complete dominance of his corporation he received economic benefits and incurred risks of wrongdoing as much as if he had personally transacted business with the state mineral lessees.
The Code of Ethics expressly forbids a public official to receive anything of economic value for or in consideration of services rendered to any person who does business with his government agency. It would be truly anomalous if we were to adopt respondent‘s suggestion that an entity so completely identified with him and controlled by him operates to remove him from the coverage of the ethics statute. We do not believe that this was the aim of the legislature in enacting either the separate corporate entity privilege of the civil code or the prohibition against public officials’ conflicts of interests in the governmental ethics code.3 Cf. Perkins, supra at 1130-34.
Respondent raised several additional arguments before the court of appeal. These arguments were rejected by our appellate brethren, and we find no error in their disposition.
The terms “services” and “things of economic value” used in
(22) Thing of economic value means money or any other thing having economic value, except food, drink, or refreshments consumed by a public servant, including reasonable transportation and entertainment incident thereto, while the personal guest of some person, and includes but is not limited to:
(a) Any loan, except a bonafide loan made by a duly licensed lending institution at the normal rate of interest, any property interest, interest in a contract, merchandise, service, and any employment or other arrangement involving a right to compensation.
(b) Any option to obtain a thing of economic value, irrespective of the conditions to the exercise of such option.
(c) Any promise or undertaking for the present or future delivery or procurement of a thing of economic value.
In the case of an option, promise, or undertaking, the time of receipt of the thing of economic value shall be deemed to be, respectively, the time the right to the option becomes fixed, regardless of the conditions to its exercise, and the time when the promise or undertaking is made, regardless of the conditions to its performance.
Things of economic value shall not include salary and related benefits of the public employee due to his public employment or salary and other emoluments of the office held by the elected official.
* * * * * *
(24) `Service’ means the performance of work, duties or responsibilities, or the leasing, rental, or sale of movable or immovable property.
We do not find these definitions vague, particularly since the Code of Ethics is not penal in nature and is therefore subject to a less strict standard of specificity than a criminal law.4 See Jordan v. Acacia Mutual Life Ins. Co., 409 F.2d 1141, 1144-45 (D.C. Cir.1969), cert. denied, 395 U.S. 959, 89 S.Ct. 2101, 23 L.Ed.2d 746; State v. Wershow, 343 So.2d 605, 610 n. 1 (Fla.1977); Anderson v. Board of Civil Service Commissioners, 227 Iowa 1164, 290 N.W. 493, 495 (Iowa 1940). See also Trop v. Dulles, 356 U.S. 86, 78 S.Ct. 590, 2 L.Ed.2d 630 (1958) (a statute has been considered nonpenal if it imposes a disability, not to punish, but to accomplish some other legitimate governmental purpose); State v. Page, 332 So.2d 427 (La. 1976) (deterrence of wrongful criminal conduct, through liability, while often an object
The respondent has cited Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972); Kennedy v. Mendoza-Martinez, 372 U.S. 144, 83 S.Ct. 554, 9 L.Ed.2d 644 (1963) and Connick v. Lucky Pierre‘s, 331 So.2d 431 (La.1976) as requiring us to adopt a “strict construction” of the Code of Ethics for Governmental Employees. We do not find these cases persuasive or controlling. Broadly stated, all three of the cases stand for the proposition that if a person‘s liberty, property or reputation is at stake because of what the government is doing to him, notice and an opportunity to be heard is essential. None of the cases involves a code of ethics violation or strict construction of a statute, and because Mr. Glazer was afforded notice and full hearing, the cases are clearly inapposite. More instructive, but not cited by either party, is the United States Supreme Court‘s decision in United States v. Mississippi Valley Generating Co., supra. Even though the federal conflict of interest statute is a criminal law, and therefore clearly a penal statute, the high court nevertheless refused to give it a narrow construction. Although the statute did not specifically provide for the invalidation of contracts made in violation of the statutory prohibition, the court construed it to authorize the disaffirmation of a tainted contract because the policy expressed in the conflict of interest statute, which makes it an offense for an officer of a corporation or other business entity, or a person interested in the pecuniary profits or contracts of such entity, to act as an agent of the United States for the transaction of business with such entity, leaves no room for equitable consideration; “if that policy is to be narrowed or limited by exceptions,” said the court, “it is the function of Congress, and not of the courts, to spell out such limitations and exceptions.” 364 U.S. at 565, 81 S.Ct. at 317, 5 L.Ed.2d at 297.
We need not address the contention that the phrase “interests which may be substantially affected by” found in
Likewise, we need not decide the question of whether
Respondent has argued that
Finally, Mr. Glazer raises several arguments not addressed by the court of appeal. He contends that the orders issued by the Commission were beyond the scope of its discretion because they were unnecessarily severe and excessive, and that the orders were beyond the scope of its authority in that they required his removal from the Mineral Board with no possibility of reappointment for at least four years, and that
In brief, Glazer argues that the orders of the Commission calling for his removal from the Mineral Board are excessive because the Commission failed in its opinion to articulate reasons why less severe remedies would be inappropriate and because the Commission failed to consider the following factors:
(a) There was no evidence of specific intent to violate the Code of Ethics;
(b) There was no evidence that Glazer Steel‘s sale of industrial products to state mineral lessees in any way affected the regulation of those companies by the Mineral Board;
(c) There was no evidence that Glazer or Glazer Steel sought to conceal the transactions at issue;
(d) The evidence was undisputed that all of the transactions between Glazer Steel and state mineral lessees were conducted at arm‘s length;
(e) Such conduct have not previously been determined to be illegal by the Commission or the courts;
(f) There was no evidence that Glazer had ever provided preferential treatment to any state mineral lessees, that he ever attempted to use his position as a member of the Mineral Board to secure a competitive advantage for Glazer Steel or that he abused or misused his authority as a Mineral Board member in connection with any state mineral leases; and
(g) There was no evidence that the Mineral Board had taken any regulatory action with respect to leases held by companies with which Glazer Steel has transacted business during Glazer‘s tenure.
We find some merit in this contention, but from the record made and the opinion of the Commission, we are unable to evaluate whether the order requiring removal is an abuse of the broad discretion which is exclusively the province of the Commission. The record is devoid, for example, of any explanation as to why suspension from the Mineral Board, with reinstatement conditioned upon elimination of the conflict of interest prohibited by
We also find merit in respondent‘s argument that the Code does not authorize the Commission to impose sanctions of both removal from office and prohibition of appointment and service during a future term. In order for the Commission to carry out its mission it must have the power to remove an official from his position for the remainder of his current term of office and to require the elimination of the conflict which was the basis of his removal before he may be appointed to a future term. The statute does not bestow upon the Commission, however, the virtually unlimited power to bar a person from all future public service, unless he refused to divest himself of the cause of his conflict of interest. Suspension is a lesser sanction which likewise affects only the incumbent‘s current term, and not his eligibility for appointment to a conflict-free future term. Accordingly, suspension from office is included within and cannot be cumulated with removal. See
The notification to state mineral lessees is authorized by
DECREE
The decision of the court of appeal is reversed. The Louisiana Commission on Ethics for Public Employees’ finding of a violation of
COURT OF APPEAL JUDGMENT REVERSED. COMMISSION DETERMINATION OF VIOLATION OF
MARCUS and BLANCHE, JJ., dissent and assign reasons.
CALOGERO, J., dissents for reasons assigned by BLANCHE, J.
MARCUS, Justice (dissenting).
I dissent for the reasons assigned by the court of appeal and Justice Blanche in his dissenting opinion. I consider the matter addresses itself to the legislature.
BLANCHE, Justice (dissenting).
I respectfully dissent. The decision in this case turns on the construction of
LEMMON, Justice, concurring in denial of rehearing.
While I am inclined on reconsideration to agree with Justice Blanche‘s dissenting reasons, as amplified by respondent‘s argument in rehearing application, I concur in the denial in this case, in which respondent has now resigned and his resignation has been accepted.
Notes
[2] La.R.S. 42:1111(C)(2)(d) provides as follows:
§ 1111 Payments from nonpublic sources
C. Payments for nonpublic service. (2) No public servant shall receive anything of economic value for or in consideration of services rendered, or to be rendered, to or for any person during his public service unless such services are:
(d) Neither performed for nor compensated by any person from whom such public servant would be prohibited by R.S. 42:1115 from receiving a gift.
La.R.S. 1115(A) provides as follows:
§ 1115 Gifts
A. No public servant shall solicit or accept, directly or indirectly, anything of economic value as a gift or gratuity from any person or from any officer, director, agent or employee of such person, if such public servant knows or reasonably should know that such person has or is seeking to obtain contractual or other business or financial relationships with the public servant‘s agency.