Request By:
Mr. George T. Price
Executive Vice President
Bank of Somerset
P.O. Box 70
Somerset, Kentucky 42501
Opinion
Opinion By: Robert F. Stephens, Attorney General; Robert L. Chenoweth, Assistant Attorney General
You have asked the Office of the Attorney General to consider the legal effects of the Pulaski County Board of Education selecting the Bank of Somerset as its depository in view of the fact that a member of the board of directors for this bank also serves as a member of the Pulaski County Board of Education. You stated that a question has arisen as to whether the Bank of Somerset can act as the depository in view of the above noted situation. It is the opinion of this office that if the only transaction between a subject bank and the school board is the demand deposit of funds for the drawing of checks or the deposit of school monies in time deposits on which interest is paid by the bank to the school, there is no violation of KRS 160.180 when an officer, director or stockholder of the subject bank is also a member of the school board.
Several of our school laws must be considered relative to this matter. Our course must first be charted from the statute which describes the qualifications that must be met by one aspiring to be a member of a local board of education and also one already on a board of education, KRS 160.180. This statute, in pertinent part, provides as follows:
"(1) No person shall be eligible to membership on a board of education:
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(e) Who, at the time of his election, is directly or indirectly interested in the sale to the board of books, stationery or any other property, materials, supplies, equipment or services for which school funds are expended; or
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(2) If, after the election of any member of the board, he becomes interested in any contract or claims against the board, of the kind mentioned in paragraph (e) of subsection (1) of this section, . . . ."
Key language in this statute is "for which school funds are expended. " In Douglas v. Pittman, 239 Ky. 548, 39 S.W.2d 979, 981 (1931), it was said:
"These statutes were enacted as safeguards upon the spending of public funds and with the further view of throwing a wall of protection around the members of such bodies. Their duties as members could not thereby be influenced by selfish interests. The wisdom of such statutes is too apparent to need lengthy discussions." [Now KRS 160.180.]
See also Commonwealth v. Collins, Ky. 379 S.W.2d 436 (1964). It is quite evident that the prohibition goes to a school board member receiving school funds, irrespective of how small the amount may be or whether the amount is received directly or indirectly. In Commonwealth ex rel. Vincent, Attorney General v. Withers, 266 Ky. 29, 98 S.W.2d 24, 25-26 (1936), the opinion of the Kentucky Court of Appeals stated:
"It is a salutary doctrine that he who is entrusted with the business of others cannot be allowed to make such business an object of profit to himself. This is based upon principles of reason, of morality, and of public policy. These are principles of the common law and of equity which have been supplemented and made more emphatic by the foregoing and other statutory enactments. In their application and operation it is impossible to lay down any definite rules defining the nature of the interest of the officer, or indicating the line between that which is proper and that which is unlawful. In general, the disqualifying interest must be pecuniary or proprietary by which he stands to gain or lose something. . . .
However, the interest is not sufficient to disqualify the officer if the opportunity for self-benefit is a mere possibility or is so remote or collateral, such as being only a debtor, that it cannot be reasonably calculated to affect his judgment or conduct in the making of the contract or in its performance."
Against the above statute and its interpretations we are required in considering the question you have presented to turn to one of the mandated functions of each board of education. In KRS 160.570(1) the responsibility of each board of education is to appoint a depository for the board and this responsibility is spelled out as follows:
"(1) Each board of education shall appoint a bank or trust company to serve as its depository, and if its annual receipts from all sources exceed one hundred thousand dollars ($100,000) it may designate two (2) depositories. The depository may be designated for a period not to exceed two (2) years, and before entering upon its duties shall agree with the board as to the rate of interest to be paid on average daily or monthly balances."
The question you have presented as to whether selection by the local board of education of a bank for its depository when a member of the board of directors of this bank also serves as a member of a board of education will cause the banker-board of education member to become disqualified from holding the school board position and be subject to removal from that position through a quo warranto action authorized by the Attorney General under KRS 415.050, is hardly a question of first impression for this office. This office stated at one time that such a situation did create a conflict of interest, e.g., OAG 72-327, copy attached, but subsequently decided in OAG 73-71, copy attached, that "a board of education member is not disqualified for his office when the school board deposits money in an institution in which he is an officer, director, or stockholder. " Our reasoning for this conclusion was premised on the language of KRS 160.180 noted above, that being the transaction proscribed is one "for which school funds are expended, " and the depositing of money in a bank is not an expenditure of school funds. OAG 73-71, page 2. We noted that a depositing of money in a bank transaction created a creditor-debtor relationship, with the bank being the debtor and obligated to release the funds as directed by the school board.
While the above analysis principally disposes of the question you have presented, we feel compelled to discuss other banking relationships with a board of education when a school board member is also an officer, director or stockholder in the banking institution.
In OAG 75-481, copy attached, one of the questions this office was requested to respond to was:
"1. May a local board of education accept a bid from a bank for the payment of interest on deposits and for the charging of interest on loans when two members of the board of education are stockholders in that bank and one of them is a director of that bank?"
We replied:
"We believe that a formal agreement between a bank and the school board as to a special rate of interest to be paid on money deposited by the board and a special rate of interest to be charged on loans to the board constitutes a contract for services and therefore creates a conflict of interest involving board members who are stockholders of the bank."
In considering this question it appears sight was lost of the factor of the statute which creates the disqualifying act. That is, we must consider whether the transaction is one in which school funds are expended. We now believe we were wrong in concluding that a certificate of deposit transaction creates any conflict proscribed by KRS 160.180. We are correct, however, in concluding that an agreement between a board of education and a bank with which a school board member is associated, either as an officer, director or stockholder, as to the rate of interest to be charged and therefore paid by the board to the bank on a loan by the board from the bank, does definitely create a contract causing an expenditure of school funds and which would place the banker-board member in a disqualifying position under KRS 160.180.
This office concluded in OAG 75-481 that the deposit of school funds in a bank simply created a creditor-debtor relationship. However, we stated that as a mere depository the bank was not binding itself to pay a stated rate of interest. This is not so because KRS 160.570(1) says in part that before the designated depository commences its duties an agreement shall be reached with the board as to the rate of interest to be paid by the bank on average daily or monthly balances. This provision is mandatory. See OAG 60-554, copy attached. Thus, under KRS 160.570, the bank is to pay interest on the deposits and is to hold for the board of education all funds deposited, subject to withdrawal by the board at any time. See OAG 64-70, copy attached. This relationship does not cause the expenditure of school funds that can in any way find their way into the pocket of the board member who is also affiliated with the bank with which the board is doing business.
Certificates of deposit do not really generate any different relationship than does a demand deposit. With a certificate of deposit the bank also becomes a debtor to the creditor-depositor, who, in the situation we are discussing, is the school board. A certificate of deposit has been defined as "a written acknowledgement by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or to his order, whereby the relation of debtor and creditor between the bank and the depositor is created." 10 Am.Jur.2d Banks § 455. See 5B Michie on Banks and Banking, Section 313, and 6 Zollmann, Banks and Banking, Section 3992, for nearly identical definitional statements for a certificate of deposit. A certificate of deposit imports a personal liability of the maker bank to pay the holder of the certificate when it becomes due. Michie, supra, states that "a 'certificate of deposit' is, in effect, a loan to a bank by the depositor for an agreed period of time at a stated rate of interest. A certificate of deposit creates the relationship of a 'general deposit. ' The basic principles which govern other types of bank deposit are applicable to certificates of deposit. " See also OAG 64-70, supra.
Thus, the creditor-debtor relationship in either a demand deposit or a certificate of deposit transaction does not involve the expenditure of school funds although the banker-board member may receive some benefit from the relationship created. It is our opinion the statute does not proscribe such a possibility. Again see Withers, supra.
It is our opinion, in view of the above, that only those banking transactions with a board of education which causes the school board to expend school funds (for example, the borrowing of money from a bank for which an interest is charged) creates the disqualifying act prohibited under KRS 160.180 for the individual who serves on a local board of education and who also is an officer, director or stockholder of a banking institution with which the school board does business.
To the extent OAG 75-481 and OAG 75-553 or other opinions are in conflict with this opinion, they are hereby modified.