               .   I




                           The Attorney        Gene,ral of Texas
                                        November     3, 1977
JOHN 1. HILL



                       Honorable Jerry Donaldson               Opinion No. H- 10134
                       Chairman - Committee on Financial
                         Institutions                          Re: Authority of Texas
                       House of Representatives                credit union to partici-
                       Austin, Texas                           pate in share draft. pro-
                                                               grams and application of
                                                               prohibition on branch
                       Dear Mr. Donaldson:                     banking thereto.

                            you have asked this office to determine the following
                       questions:

                                 1.. Whether State chartered credit unions
                                     in Texas are legally authorized to
                                     participate in share draft programs.

                                 2.   If State chartered credit unions can
                                      participate in share draft programs,
                                      can a credit union utilizing a share
                                      draft program engage in business in
                                      more than one place without violating
                                      Article 16, Section 16 of the Texas
                                      Constitution.

                            The share draft question is very complex, and there
                       are new developments almost daily.

                            At the present, approximately thirty-six state and
                       federally chartered credit unions in Texas are offering
                       their membership "quick-accounts" or "share drafts," a form
                       of third party remote withdrawal of funds dePosited with the
                       credit.union.  A share draft has been described as a finan-
                       cial instrument which enables a credit union member to with-
                       draw funds from his credit union share account without
                       going to the credit union. The draft can be used to obtain
                       cash, pay a bill, or make a purchase. A share draft is
                       payable through a bank which processes the withdrawal in a
                       manner similar to a check. Washington Financial Reports,




                                                   p. 4435
                                                         .      1




Honorable Jerry Donaldson.        - Page 2   (H-1084)



Number 41, Page A-24, October 11, 1976. The National Credit
Union Administration has defined "share draft" fin its proposed
rules governing share draft programs as follows:

          "Share draft" means a negotiable or non-
          negotiable draft or other order which is
          payable through a bank and is used to with-
          draw shares from a share draft account.

42 Fed. Reg. 11248 (1977).

     This controversy is neither peculiar nor limited to
the State of Texas;,rather, the'issue is receiving nationwide
attention. ,In addition, the Antitrust Division of the~United
States Department of Justice has urged the adoption of third'
party withdrawal powers for credit unions.

     To gain perspective on this matter, regulatory authorities
and trade association representatives among banking and credit
union groups in Texas , other states and on the national level
have been contacted; additionally, trade journals and period-
icals which are readily available tiere consulted and relevant
statutory and constitutional authorities have been reviewed.


                             I.

                       BACKGROUND

     In October of 1974, the National Credit Union Adminis-
tration (NCUA) gave initial'approval to share draft programs
on a pilot and experimental basis for three federally char-
tered~ credit unions in the states of California, Georgia
and Michigan.   The prototype share draft programs approved
by NCUA were developed by the Credit Union National Associat~ion
(CUNA) through its wholly owned subsidiary I.C.U. Services
Corporation.

     Subsequent to this initial approval, NCUA,.pursuant to
individual credit union application, has approved share draft
programs for federal credit unions in each of the fifty states
and the District of Columbia. The NCUA; in response to a Suit
by,the American Bankers Association, has elected to promulgate
new rules for the implementation of share draft accounts for
federally chartered credit unions. The proposed rules were
published in the Federal Register, 42 Fed. Reg. 11247 (1977).
The bankers have dismissed their suit against~ the NCUA, but
have indicated that a new action will be brought if the pro-
posed rules governing, share drafts are adopted. The rules
are being reviewed by the general counsel's office of the NCUA.



                             P- 4436
Honorable Jerry Donaldson         - Page 3   (H-1084)


     In addition, state chartered credit unions in approxi-
mately twenty-six states, including Texas, have initiated
similar programs, either with administrative approval,
legislative action, or upon independent initiative without
seeking any specific approval.   In several states, opinions
were sought from the State Attorney General. At present,
approximately 1000 credit unions across the country, roughly
half of them state chartered, are offering share draft
programs. In the month of October, 1976, some 61-l/2
million dollars of share drafts were issued by these credit
unions; this represents 1,208,402 share drafts paid during
October with an average amount per draft of $50.61; this
indicates an annualized amount of share draft volume of 3/4
billion dollars. Credit union industry spokesmen claim that
the number, of credit union participants and the volume of'
share drafts issued is increasing at a rapid rate.


                            II.

            DEVELOPMENTS IN OTHER JURISDICTIONS

     As was noted above, the credit union share draft program
has raised issues having a national import. In a number of
states, state regulatory authorities have become directly
involved in legal questions concerning this matter. In most
instances, local banking associations have sought through
administrative procedures or direct court action to prohibit
the participation of credit unions in such programs.

A.   Litigation

     1. Federal. The American Bankers Association and a
small New York state chartered bank, the Tioga State Bank,
filed a petition in Federal District Court in Washington, D.C.,
styled American Bankers Ass'n v. Montgomery, Civil Action No.
76-1661, against the National Credit Union Administration,
alleging, inter *,    that in approving the pilot program,
the NCUA failed to comply with various provisions of the
Federal Administrative Procedures Act; that commercial banks
had been damaged and would continue to be damaged by the
unlawful action of NCUA in approving the share draft programs,
and that, further, various federal statutes concerned with
banks should be interpreted to exclude all financial institu-
tions other than chartered banks from participating in third
party funds withdrawal systems. The case was subsequently
dismissed by the bank and the American Bankers Association
when the NCUA agreed not to expand the pilot program until new
rules had been adopted. The rules are under consideration by
the NCUA at the present time.



                            p. 4437
                                                           .




Honorable Jerry Donaldson        - Page 4   (H-1084)



     2. Iowa. The Iowa Department of Banking determined
that state credit unions could not issue share drafts. The
district court in Cause No. CE6-3152, Iowa Credit Union
League v. Iowa Dep't~of Banking (Iowa D.Ct. Polk Co., 5/24/77),
relying on statutes similar to those of Texas, rejected the
State Banking Department's contention that credit-unions
could not participate in share draft programs. The Court
noted that there was nothing in the Iowa law that specifi-
cally prohibited share drafts, that the use of share drafts
does not constitute an unauthorized banking business, and
that share drafts are not checks.

      3. Michigan.  The Michigan Financial Institutions
Bureau entered an administrative order which held that state
chartered credit unions could engage in share draft programs.
The Michigan Bankers Association has challenged this order
in State court in Michigan Bankers' Ass'n v. Comm'r of Financial
Institutions Bureau, Cause No. 77-20045~AA (Ingham Co. Cir.
Ct.).

      4. Oklahoma. On November 5, 1976, an Oklahoma District
Court dismissed an action brought by the Oklahoma Bankers
Association against various Oklahoma credit unions and the
estate Credit Union Board, styled Cause No. CD-76-988, Oklahoma
Bankers Ass'n v. Oklahoma State Credit Union Board. The
Oklahoma Bankers Association's action was dismissed on the
ground that the bankers had failed to exhaust their adminis-
trative remedies before the Credit Union Board prior to bringing
its lawsuit. An administrative appeal was taken and the State
Credit Union Board held that the credit unions could engage
in share draft programs. The bankers have filed suit in
Cause No. CD-77-623, Oklahoma Bankers Ass'n v.,Oklahoma State
Credit Union Board.

B.   Attorney General Opinions

     The following state attorneys general have issued
opinions concerning the legality of share draft accounts
for state chartered savings and loan associations:

     1. Arkansas.   In 1976, the Attorney General of Arkansas
issued an opinion in which he determined that a credit
union's issuance of share drafts would violate a section of
the Arkansas Credit Union Code which provides:

           "No credit union shall carry on a banking
           business, or carry any demands, commercial
           or.checking accounts."




                            P. 4438
Honorable Jerry Donaldson     - Page 5   (H-1084)



Opinion No. 76-111 (1976) at 2. The Attorney General recom-
mended the credit unions attempt to enact remedial legislation
to permit such programs. -Id. at 3.

      2. North Carolina. On October 28, 1975, the Attorney
General of North Carolina issued an opinion in which he
determined that share draft programs are lawful under the
statutes of that state. The statutory language therein
construed is similar to the language contained in the Texas
Credit Union Act. The North Carolina opinion holds that a
share draft is not a check because it is not drawn on a bank,
and this finding is based upon the North Carolina version of
the Uniform Commercial Code, codified as N.C. Gen. Stat.
5 25-3-104(Z) (b). This is identical to Section 3.104(b) (2)
of the Texas Business and Commerce Code (the Texas Uniform
Commercial Code) and provides that "'[alwriting which complies
with the requirements of 'this section his . . . a 'check' if it
is a draft drawn on a bank.and payable on demand. . . .I The
North Carolina opinion states that credit union statutes pro-
vide that shares in deposit shall be transferred in such a
manner as the Board of Directors through the by-laws prescribed,
with the approval of the Credit Union administration.    This can
be compared to the Texas Credit Union Code which provides
analogous authority and uses the same language with respect to
withdrawals and transfer of shares by the adoption of by-laws
with the approval of the Commissioner for that purpose.

     3., Ohio. On August 2, 1976, the Attorney General of
Ohio issuxn    opinion in which he determined that share
drafts are,lawful under Ohio law.

     4. Utah. In an opinion issued September 10, 1975, the
Attorney General of Utah has determined that share drafts are
lawful under Utah law. The Utah opinion follows the same
rationale as that of the North Carolina opinion, including
the Uniform Commercial Code argument.

     5. Was;inqton:   The Attorney General of Washington
has expresse an opinion that share draft programs are
not lawful in that state. AGLO 1977 No. 28. The Washington
Share Draft Program did not follow the 1-C-U. prototype and
was rather unique. A second share draft program similar  to
the traditional I.C.U. prototype was approved on September 29,
1977. AGLO 1977, No. 40.

C.   Legislation

     1. Georgia. Section 41A-3101(a) of thenAnnotated Code
of Georgia has been interpreted by the Georgia Supervisor~of
Credit Unions as prohibiting share drafts.




                            p. 4439
Honorable Jerry Donaldson     - Page 6   (H-1084)



     2. Idaho. Prior to August 1, 1977, Idaho did not have
a specific statute authorizing share accounts. A new credit
union act became effective on August 1, 1977, and specifically
provides forshare draft type accounts. Section 26-2108(t) of
the Idaho Code specifically grants to credit unions the
power to "[plrovide for their members, share and deposit
accounts from which the member may withdraw funds by the use
of a negotiable instrument."

     3. Massachusetts.   Chapter 167, Section 16A, of the
Annotated Laws of Massachusetts, specifically authorizes
credit unions to set up negotiable withdrawal order accounts
subject to regulations promulgated by the Commissioner.

      4. Minnesota.   In Minnesota, specific statutory author-
 ity allows State-chartered credit unions to engage in share
'draft programs without prior approval from~the Commissioner
 of banks; no regulations have been promulgated under this
 statute. It should be noted, however, that the statute although
 permitting share withdrawals does not authorize the establish-
 ment of "demand deposits". Subsection 11 of Section 52.04 of
 the Minnesota statutes provides:

          Upon written authorization from a member,
          retained'at the credit union, to make
          payments to third parties by withdrawals
          from the member's share or deposit accounts
          or' through proceeds of loans made to such
          member,  or by permitting the credit union
          to make such payments from the member's
          funds prior to deposit; to permit draft
          withdrawals from member accounts: however,
          this clause does not permit a credit union
          to establish demand deposit (checking
          accounts) for its members....”

     5. Montana. Section 14-613 (16) of the Montana Credit
Union Act, Mont. Rev. Codes Ann. g 14-601 et seq., now contains
a specific prohibition against credit unios providing "checking
account services.' Previously, Montana law was interpreted to
permit the issuance of share drafts.

     6. Nebraska. As of September 1, 1977, Nebraska Credit
Union laws were amended, and pursuant to Section Zl-1773,of
the Revised Statutes of Nebraska, a credit union may engage
in electronic funa transfer programs.   (Most share draft
systems utilize some form of electronic fund transfer.)




                            p. 4440
Honorable Jerry Donaldson         - Paw   7   (H-1084)



     7. Nevada. Section 678.470 of the Nevada Credit Union
Laws, Nev. Rev. Stat. 8 678.010 -
                                et seq., specifically provides:

           A credit union may, subject to the requ-
           lations or approval of the commissioner:

           (1) Receive from its members or from the
           members of another credit union deposits
           which are payable on demand and to honor
           request for withdrawals in the form of
           checks or drafts.

D.   Administrative   action

     1. Informal approval:   In several states, state
chartered credit unions have initiated share draft proorams
with the knowledge of the regulatory authority charged-with
the supervision of credit unions. In these instances, the
regulatory authority has allowed the programs to be initiated
and continue without requiring notification or application
of any sort; neither has the regulatory authority adopted any
rules or regulations with respect to share draft programs.
These states are:

           a.   Alabama    (Alabama Banking Department);

           b.   Colorado    (Colorado State Bank Commissioner);

           C.   Indiana (Department of Financial Institutions).

     2. Formal approval:   In a number of jurisdictions,
the state regulatory authority does require some form of
notification or application and in some instances has
adopted rules, regulations or specifications with respect
to share draft programs.

          a. California.   The California Department of
Corporations requires a written application from each credit
union desiring to participate in a pilot share draft program.
Currently, the department limits each participating credit
union to a maximum of 200 share draft accounts, approves the
pilot program for an additional 3 month period with the option
of extensions thereafter. Additionally, the department
requires the credit union to maintain liquidity reserves
in a back-up line of credit against share draft balances.

          b. Connecticut.   The State Banking Department
on April 18, 1976, approved the written request of two state
chartered credit unions by advisory letter. Connecticut has




                                p. 4441
Honorable Jerry Donaldson      - Page 8   (H-1084)



no formal regulations for procedures and exercises no author-
ity with respect to specifications or share draft programs.

          c.. Florida. Although the State Comptroller ordered
state credit unions to cease share draft programs, the credit
unions perfected an administrative appeal. The credit unions
prevailed in Case No. 76-2091, Leon County Teachers Credit
Union v. Dep't of Banking and Finance. The administrative
judge held that the law was silent as to whether share drafts
could be used by credit unions, and therefore a specific rule
must be promulgated to eliminate them.

                         A hearing was held on November 1,
1977, on ad-  =Y=* regulation of The Commissioners of Banking
           propose
to authorize a share draft program.

          e. Illinois. The Illinois Department of Financial
Institutions has agreed to approve several State chartered
credit unions for experimental share draft programs; the state
has adopted guidelines for approval of share draft programs
and requires that a written request be submitted to the depart-
ment prior to the initiation of the program.  It should be
noted that the Illinois Credit Union Law in Section 496.10
specifically prohibits a credit union "from engaging in the
banking business."  Ill. Ann. Stat. ch. 32, § 496.10.

          f. Indiana. The Indiana department has not
adopted any share draft procedures or regulations.  However,
several Indiana State chartered credit unions are conducting
share draft programs, even though they have not sought formal
approval from the Department of Financial Institutions.  Par-
ticipating credit unions have notified the Department of their
activities.

          4. Michigan.   The Michigan department has autho-
rized credit unions to engage in share draft activities.
The question is presently under litigation.

          h. Missouri. The Missouri division of credit
unions requires notification and application and has recommended
that state chartered credit unions adhere to the specifications
contained'in the I.C.U. prototype.

          1. Pennsylvania.   The Pennsylvania Department of
Banking has by letter notified the Pennsylvania Credit Union
League that it will approve share draft programs conducted
according to specifications prepared by the Department of
Banking. The Pennsylvania statute is silent as to the mechanisms




                            p. 4442
Honorable Jerry Donaldson        - Page 9    (H-1084)



by which members may withdraw from their accounts, and there-
fore the Pennsylvania Banking Department has determined that
as there is no prohibition against the use of a share draft
account, such accounts are permissible for state chartered
credit unions.

          j. Virginia. Although no specific statute autho-
rizes share accounts, the Department of Business Regulation,
Banking Division, State of Virginia, has approved a share draft
program for credit unions.

          k. Wisconsin.   The Wisconsin Supervisor of the
Division of Savings and Loans for the State of Wisconsin has
authorized the use of share draft accounts for credit unions.


                              III.

                    THE SITUATION IN TEXAS

     At present, approximately thirty-six credit unions, both
federally and state chartered, are offering share draft pro-
grams in Texas. The exact number of State chartered credit
unions offering such programs is not known because none have
sought the approval of the Credit Union Commission before
implementing share drafts. The Credit Union Commission has
not required prior approval, relying upon provisions of the
Texas credit union statutes and the uniform by-laws for
credit unions adopted by the Commission pursuant to its
statutory authority.

     Article 2461-6.02(a) of the credit union statutes, V.T.C.S.
art. 2461-1, et
             - seq., provides:
          Share accounts consist of payments made
          by members on shares, all of which are
          common shares of one class, subscribe, paid
          for, and transferred in the manner prescribed
          by the by-laws.

(Emphasis added).     Article 2461-11.07(a) provides:

          The commissioner, with the approval of
          the commission, shall promulgate general
          rules and regulations pursuant to this
          Act. . . . The rules and regulations shall
          apply to all credit unions organized under
          this Act.




                               P- 4443
Honorable Jerry Donaldson      - Page 10   (H-1084)



Article 2461-2.03(c) vests in the Commissioner the authority to
investigate inter alia, the by-laws of a credit union to deter-
mine whether=     conform with the Act; Article 2461-Z-06
allows for amendment of the by-laws upon application to and
approval by the Commissioner.  Pursuant to this statutory author-
ity, the Commissioner with the approval of the Commission promul-
gated as a part of the standard by-laws, Section 6.02(3), which
provides in pertinent part:

           "[Tlhe board of directors shall have the
           right at any time to prescribe rules
           regarding remote withdrawal of shares
           and/or deposits in accordance with
           regulations promulgated by the Credit
           Union Commissioner."

(Emphasis added). To date, the Credit Union Commission has
promulgated no rules or regulations with respect to the with-
drawal of shares, believing that such are not necessary, The
Commission did adopt a resolution on December 14, 1977, re-
affirming their position and instructed the Credit Union
Conrmissioner to explore the need for new regulations for the
orderly development of fund transfer systems.

A.   The Credit Unions' Position

     The credit unions have taken the position that share
drafts are permitted under State law. Through the Texas
Credit Union League they have filed a very detailed brief in
support of their position.  They base their position on the
general authority granted to credit unions under the Texas
Credit Union Act, especially Article 2461-4.01 and Article
2461-4.02, V.T.C.S.  These Articles relate to general powers
possessed by the credit unions including the power to make
contracts; receive payments from members; to collect, receive
and disburse money; and to have such incidental powers as
are necessary for the conduct of its business.

     The credit unions concede that there is no specific
authority for the issuance of share drafts, but also point
out that there is no specific prohibition against the issuance
of share drafts either. The credit unions point out that
a bank is not expressly authorized under State law to accept
checks.
     The credit unions have relied on their authority to
disburse funds as provided by the board of directors through
by-laws. Such authority has been approved by the Credit
Union Commission in approving section 2.06 of the standard
by-laws.



                            p. 4444
Honorable Jerry Donaldson      - Page l1   (I-1-1084)




     In further support of this position, the credit unions
have relied upon the approval in February of 1968 by then
Banking Commissioner of Texas, (the approval was by the Credit
Union Supervisor, then an employee of the Banking Department)
of an amendment to the credit union by-laws of the Humble
Employees Credit Union of Baytown, Texas, providing for remote
withdrawal of credit union shares by members through the use
of share drafts. That amendment as then approved
                                          __      provided in
pertinent part:

           Money paid in on shares, or installments
           of shares in excess of $200.00 or on deposit
           shares provided the member has $200.00 or more
           in on shares, may be withdrawn by members who,
           from time to time, are designated by the Credit
           Conrmittee, by the drawing of drafts by such
           member, on the credit union as drawee upon draft
           forms approved by the Bo,ard of Directors and
           supplied to the member.

B.   The Banker's Position

     In its letter of November 8, 1976, addressed to Commis-
sioner Parsons, Commissioner Stewart,,and Attorney General Hill,
the Texas Bankers Association (TBA) asserted that "it goes with-
out argument that both our Constitution and our statutes contem-
plate that there should be distinct differences between the
legal functions of commercial banks and the so-called thrift
institutions."   (Emphasis added). Further, the TBA asserts
that "very significant statutory differences" exist among
banks and other "thrift institutions", including capital
requirements, chartering procedures, and tax liabilities.   The
credit union share draft program, the bankers maintain,
"is purposely designed to eliminate this distinction."   In
addition to urging that credit unions do not have lawful
authority to participate in share draft programs, and in the
alternative, the TBA takes the position that if credit unions
have the authority to initiate and continue share draft pro-
grams, then they are subject to article 16, section 16 of the
Texas Constitution prohibiting corporate bodies from exercising
banking and discount privileges in more than one place, i.e.
the prohibition of branch banking. Specifically in this con-
text, the TBA complains of the operation by Government
Hmployees Credit Union of automated teller machines at various
locations in San Antonio.




                             P. 4445
Honorable Jerry Donaldson      - Page 12   (H-1084)




     In support of its position and its alternative position,
the TBA provided this office with a memorandum of law entitled
"Memorandum Discussion Bearing Upon the Authority of State
Chartered Credit Unions to Issue Share Drafts", prepared for
the board of directors of the Texas Bankers Association.   Briefly,
the contentions made therein are as follows:

     (i)   Relying upon the Texas Credit Union Act and the
           specific purposes stated therein for the existence
           of credit unions, the TBA memorandum emphasizes
           that the primary purpose of credit unions is to be
           a savings or thrift institution; and this tradi-
           tional definition, the TBA contends, precludes
           expansion of, or any legislative intent to allow
           the expansion of, credit unions into the area of
           share draft programs.  "The terms saving and
           spending are wholly incompatible. When credit
           union activity shifts in the direction of encouraq-
           ing spending, this represents a radical departure
           from the traditional concepts."   (Page 9, TBA
           Memorandum of Law).

    (ii)   The TBA memorandum asserts that "[tlhe legislative
           scheme into which each type of financial institution
           must find its prescribed niche is both complex and
           delicate. Unilateral alteration of any one niche
           without regard for the impact of such change upon
           the structure as a whole could create a dangerous
           imbalance. Banks, credit unions, and savings and
           loan associations have been created by legislative
           action and their respective powers have been defined
           by the legislature.    (Page 10, TBA Memorandum of Law).
           Consequently, TBA claims that the institution of
           share draft programs exceeds any authority hereto-
           fore vested in credit unions by the legislature and
           is so radical a departure from historical and tradi-
           tional concepts that only the "express sanction of
           the legislature" could make such programs lawful
           in this State;

   (iii)   Citing to a number of court opinions from Federal,
           Texas, and other state jurisdictions, the TBA asserts
           that the taking of deposits is an essential defini-
           tion of a "banking business'; "[tlhis principle
           [is] reaffirmed by the court as late as 1963, in the




                                P. 4446
.




    Honorable Jerry Donaldson     - Page 13    (H-1084)




              case of U.S. v. Philadelphia National Bank, et al.,
              374 U.S. 321, as follows:

                   'Commercial banks are unique among financial
                   institutions in that they alone are permitted
                   by law to accept demand deposits."'  (Page 11,
                   TBA, Memorandum of law).

    The thrust of the argument in the TBA Memorandum of Law with
    respect to what constitutes banking, the business of banking
    or the exercise of banking privileges is that integral to
    any definition of banking is the concept of the acceptance
    of demand deposits and the issuance of checks. Because
    banking privileges should be restricted to banks, the TBA
    argues that the credit union should not exercise them: if,
    however, credit unions may exercise such traditional and
    historical prerogatives of banking, then the TBA argument is
    that such credit unions should become subject to all laws
    pertaining to banking, including the Texas constitutional
    prohibition against branch banking contained in article 16,
    section 16 of the Texas Constitution.


                                 IV.

                     DISCUSSION OF TEXAS LAW

         A. The Legal Status of Credit Union Share Drafts
    In Texas.

         You have raised the question of whether a state chartered
    credit union can participate in share draft programs in Texas.
    There is no specific provision in the Credit Union Act or any
    other state statute which specifically authorizes a credit
    union to engage in share draft activities.

         The National Credit Union Administration   has given the
    following definition:

              'Share draft' means a negotiable or non-
              negotiable draft or other order which is
              payable through a bank and is used to
              withdraw shares from a share draft account.

    42 Fed. Reg. 11248 (1977).




                                 p. 4447
Honorable Jerry Donaldson     - Page 14   (H-1084)



     Section 3.104 of the Texas Business and Commerce Code
(Uniform Commercial Code) describes what are negotiable
instruments and defines the various types of negotiable
instruments.  Section 3.104 provides:

          (a) Any writing to be a negotiable instrument
          within this chapter must

             (1) be signed by the maker or drawer; and

             (2) contain an unconditional promise or
                 order to pay a sum certain in money
                 and no other promise, order, obligation
                 or power given by the maker or drawer
                 except as authorized by this chapter;
                 and

             (3) be payable on demand or at a definite
                .time; and

             (4) be payable to order or to bearer.

          (b) A writing which complies with the re-
          quirements of this section is

              (1) a "draft" ("bill of exchange") if
                  it is an order;

              (2) a "check" if it is a draft drawn
                  on a bank and payable on demand;

              (3) a "certificate of deposit" if it is an
                  acknowledgement by a bank of receipt
                  of money with an engagement to repay it;

              (4) a "note" if it is a promise other than
                  a certificate of deposit.

          (c) As used in other chapters of this title, and
          as the context may require, the terms  "draft",
          "check", "certificate of deposit" and "note"
          may reefer to instruments which are not negotiable
          within this chapter as well as to instruments
          which are so negotiable.

     Clearly a share draft can be a negotiable instrument,
but it would not be a check according to Section 3.104(b) (2)
because it only is a 'check' if it is a draft drawn on a bank




                            p. 4448
.




    Honorable Jerry Donaldson               - Page 15   (H-1084)



    and payable on demand." This share draft is not drawn on a
    bank and may or may not be paid on demand.

         The Texas Credit Union Act is codified as Article 2461-
    4.01, -.-
          et seq., V.T.C.S. Article 2461-4.01 contains general
    powers given to credit unions and pursuant to that provision,
    the credit union may:

              (1)         make contracts;

              .   .   .    .

              (6) receive from its members payments on
              shares or deposits to conduct Christmas
              clubs, vacation clubs, and other thrift
              programs for the membership;

              . . . .

              (18) collect, receive, and disburse money   '
              in connection with the sale of travelers
              checks, money orders, and similar instruments,
              and for other purposes that may provide
              benefit or convenience for its members, and
              for those purposes, levy incident charges.

         Article 2461-4.02, V.T.C.S., grants credit unions the
    following incidental powers:

                A credit union may exercise all powers
              necessary or appropriate to accomplish
              the purposes for which the credit union
              is organized. A credit union may exercise
              the powers granted corporations organized
              under the laws of this state, including
              those powers necessary or requisite to
              enable the credit union to promote and
              carry on most effectively its purposes.

         The Credit Union Act does not specify the manner in
    which credit union members may withdraw~funds from deposit
    accounts, but leaves that matter up to the individual credit
    union to determine. Article 2461-6.03 provides:

                Deposit accounts, if any, are operated
              in accordance with the policies and
              conditions prescribed by the board of
              directors.




                                            p- 4449
                                                             .   .




Honorable Jerry Donaldson     - PaLIe   16   (H-1084)



As noted
       _ before,
          -      the act is silent as to the question of
share drafts, but the act grants credit unions broad powers
which may possibly be construed to permit the use of share
draft accounts.

     The Texas Banking Code codified as Article 342-101, et
seq., V.T.C.S., does not contain a specific prohibition  -
to prevent a credit union from providing share draft accounts.
Article 342-902, V.T.C.S., is the unauthorized banking
statute which provides in part:

          Unauthorized Banking-Advertising-Private      Banks-
          Penalty.

          It shall be unlawful for any person, corporation,
          firm, partnership, association or common law
          trust:

          (1) To conduct a banking or trust business or
          to hold out to the public that it is conducting
          a banking or trust business: or

          (2) To use in its name, stationery or advertising,
          the term "bank," "bank and trust," "savings bank,"
          "certificate of deposit," "trust" or any other
          term or word calculated to deceive the public
          into the belief that such person, corporation,
          firm, partnership, association, common law trust,
          or other group of persons is engaged in the
          banking or trust business.

            Provided, however, that this Article shall not
          apply to (1) national banks: (2) state banks;
          (3) other corporations heretofore or hereafter
          organized under the laws of this state or of
          the'united States to the extent that such
          corporations are authorized under their
          charter or the laws of this state or of the
          United States to conduct such business or to
          use such term: and (4) private banks which
          were actually and lawfully conducting a banking
          business on the effective date of this Act so
          long as the owners of such bank, their successors
          or assigns, shall continuously conduct a banking
          business in the city or town where such private
          bank was domiciled on the effective date of
          this Act; provided, however, that such private
          banks shall include the word "Unincorporated"




                               p. 4450
.       ,




    Honorable Jerry Donaldson     - Page 17   (H-1084)



              in their firm or business names and such word
              shall be prominently set out upon the stationery
              and in all the advertising of such private banks."

    (Emphasis added).

         State chartered credit unions are organized under the
    laws of Texas and are authorized to enter into contracts
    and enter into certain commercial paper transactions.  It
    would appear that the Legislature has exempted credit unions
    from the prohibition contained in Article 342-902, V.T.C.S.

         Additional support for the credit union's position is
    present in Article 2461-6.02, V.T.C.S., which provides in part:

              (a) Share accounts consist of payments
             made by members on shares, all of which are
             common shares of one class, subscribed, paid
             for, and transferred in a manner prescribed
             by the bylaws.

    Article 2461-2.03(c) vests in the Commissionerthe  authority to
    investigate inter alia; the by-laws of a credit union to
    determine whether such conform with the Act; article 2461-2.06
    allows for amendment of the by-laws upon application to and
    approval by the Commissioner.  Pursuant to this statutory
    authority, the Commissioner with the approval of the Commission
    promulgated as a part of the standard by-laws, section 6.02(3),
    which provides in pertinent part:

              [Tlhe board of directors shall have the
              risht at anv time to prescribe rUleS
              regarding remote withdrawal of shares
              and/or deposits in accordance with
              regulations promulgated by the Credit
              Union Commissioner.

    (Emphasis added).

         Utilizing similar authority, the Attorney General of
    North Carolina issued an opinion on October 28, 1975, in
    which he stated:
              Our conclusion that share drafts are
              permissible in North Carolina is based
              on the power granted to credit unions
              to provide for the transfer and with-
              drawal of shares in such manner as the
              by-laws prescribe. A share draft is a
              method of transferring or withdrawing



                                p. 4451
Honorable Jerry Donaldson       - Page 18   (H-1084)



           shares. Further, share drafts would
           serve to facilitate the purchase of goods
           and services by the members by making
           their funds, represented by shares, more
           readily accessible. Share drafts, therefore,
           would be permissible under G.S. 54-109.3
           and 54-109.21.

     The Attorney General of North Carolina relied on the
Uniform Commercial Code provision which distinguishes a check
from a draft and relied on the provision of the North Carolina
Credit Union Act which provided that by-laws would contain
manner-by which shares could be transferred. The Attorney
General of Utah has also issued a similar opinion, dated
September~lO; 1975.

     8.   Article~l6, Section 16, Texas   Constitution.

     You have also raised the question that if share drafts are
permissible under Texas law, does the use of a share draft
program subject the credit union to the provisions of article
16, section 16 of the Texas Constitution.  Article 16, section
16 provides:~

             The Legislature shall by general laws, author-
           ize the incorporation of corporate bodies with
           banking and discounting privileges, and shall pro-
           vide for a system of State supervision, regulation
           and control of such bodies which will adequately
           protect and secure the depositors and creditors
           thereof.

             No such corporate body shall be chartered
           until all of the authorized capital stock has
           been subscribed and paid for in full in cash.
           Such body corporate shall not be authorized to
           engage in business at more than one place which
           shall be designated in its charter.

             No foreign corporation, other than the national
           banks of the United States, shall be permitted
           to exercise banking or discounting privileges
           in this State.

      To accomplish the constitutional mandate, the Legislature
enacted the Texas Banking Code of 1943, codified as Article 342-
101,; et seq., V.T.C.S. Article 342-903 of the Banking Code
contai?is a prohibition against branch banking. In Texas




                              p. 4452
Honorable Jerry Donaldson        - Page 19   (H-1084)



Attorney General Opinion No. WW-838-A (1961). it was held
that Article 342-903 does not prohibit credit unions from
establishing branch offices. The opinion states:

            While it is immediately apparent from the
          above provisions that credit unions exercise
          two of the most important functions of banking,
          the receiving of deposits and the lending of
          money, it must be recognized that credit unions
          or associations are not "banks" as that term is
          defined in the Texas Banking Code of 1943 (Arti-
          cle 342-101 et seq., V.C.S.) or as that term
          is commonly used and understood. Furthermore,
          the operat,ions of a credit union in receiving
          deposits or lending money are substantially
          different from the corresponding operations of
          a commercial bank, and in fact, the functions
          and underlying concept of a credit union are
          basically different from those of a commercial
          bank.                     So
                                 pi           ,,
            . . . .

            We therefore conclude that the basic differences
          in the business transacted by a commercial bank
         .and a credit union make inapplicable,to credit
          un,ions that portion of the Banking Code prohibit-
          ing a State bank from engaging in business in
          more than one place.

Id. at 2-3.
-
     Furthermore, it should be noted that the Legislature in
enacting Article 2461-2.08, V.T.C.S., expressly authorized
branch offices. Article 2461-2.08 provides:

            A credit union shall maintain a principal
          place of business and shall file with the
          commissioner a statement specifying the post
          office address of its principal place of busi-
          ness. If a credit union gives the commissioner
          prior written notifications, a credit union may
          establish at locations other than its principal
         'place of business additional offices that are
         reasonably necessary to furnish services to its
          members.

     Article 16, Section 16 of the Texas Constitution applies
only to "corporate bodies with banking and discounting privileges"
which have been chartered after "all of the authorized capital



                            n.    AA’=,‘.
                                                           .   .




Honorable Jerry Donaldson     - Page   20   (~-1084)



stock has been subscribed and paid for in full in cash."
Article 16, Section 16 should not be construed to apply to
credit unions because credit unions are not "corporate
bodies with banking and discounting privileges" and because
credit unions do not have "authorized capital stock."

     In a similar situation, the Supreme Court of Texas
determined that as there was no prohibition against, a savings
and loan association having a branch office, as was the case
with banks, savings and loan associations could branch.
Southwestern Savings & Loan Association of Houston v. Faulkner,
331 S.W.2d 917 (Tex. 1960).

     As to the "authorized capital stock" provision of Article
16, Section 16, Texas credit unions, unlike banks, do not
have a stated authorized capital stock. See V.T.C.S. art.
2461-6.01. In essence;a credit union isBnon-profit     corpor-
ation with a limited membership.

     The following comparison was made in Texas Attorney
General Opinion WW-838-A (1961):

            The statutes and the nature of the business
          conducted by commercial banks and credit
          unions respectively, clearly contemplate that
          a commercial bank will conduct its functions
          in a specific structure, its banking house,
          and indeed in everyday language the word "bank"
          brings to mind the massive columns, granite
          or marble facade and austere dignity of the
          buildings favored in previous years or the glass
          and aluminum, the drive-in windows and contem-
          porary atmosphere of more recent design. A
          credit union, on the other hand, ordinarily
          serves its members from an office or space
          rented or set aside in the plant or public
          building housing its members.

            .   .   .   .

            It is easy to imagine that a credit union
          sponsored by a company with more than one
          plant would have difficulty serving its members
          if it could not maintain some type of facility,
          or transact business at the various plants
          where a part of the members work. It is diffi-
          cult to conceive of any such activity on the




                              p. 4454
.     . .




    Honorable Jerry Donaldson          - Page 21   (H-1084)



                part of credit unions resulting in the
                concentration of financial power which the pro-
                vision against branch banking contained in
                Article 16, Sec. 16 of our Constitution was
                apparently designed to guard against.

    Id. at 3.
    -
                             CONCLUSION

         We believe that the question of whether a state-
    chartered credit union may lawfully engage in share draft
    programs is very close. The problem is that both the Credit
    Union Act and the State Banking Code are silent on this
    issue. The Uniform Commercial Code indicates that a share
    draft is not a check. This coupled with the absence of any
    specific prohibition in state law and the substantial authority
    from other states leads us to believe thatthe Texas courts
    will probably conclude that state-chartered credit unions
    may engage in share-draft programs.

         The constitutional branching question does not appear
    to present a "valid" issue. As pointed out above, the legal
    requirements for the establishment of a credit union differ
    from that of a bank. The specific requirements contained in
    Article 16, Section 16, do not fit the basic structure of
    a credit union.

                             SUMMARY

                Texas courts will probably conclude the
                use of share draft programs by credit unions
                is permissible under present Texas law.

                                       Very truly yours,




                                       Attorney General of Texas
                              /,
    APPROVED:




    DAVID M. KENDALL, First Assistant




                                   p. 4455
Honorable Jerry Donaldson   - Page   22   (H-1084)




C. ROBERT HEATH, Chairman
Opinion Committee

jst




                            p. 4456
