.   -




    Honorable M. 0. Flowrs
    Secretary of state
    Austin, Texas

    Ibar Sir:                             Attention;   bW. Will Mann Richardson

                                           Opinion No. O-2644
                                           Rer Admissibility of contract as
                                                property for payment of capital
                                                stock.

             This will acknowledge receipt of your letter of July 13, 1940, in
     which you seek an opinion of this department upon the question of whether
    or not ycu should approve an amendment to the oharter of Texas Guarantors,
    Incorporated, whereby the capital stock of such aompany is being increased
    from #26,000.00 to 10,000 shares of no par value class "A" stook and 2,500
    shares of class "B" stook of the par value of $10.00 per share. It appears
    that all the class "A" stock has been subscribed and that 6,000 shares
    thereof have been paid for at the rate of $10.00 per share. All class "B"
    stock has been previously subscribed and paid for.

             The amendment reflects that the $50,000.00 paid for the 5,000
    shares of class "A" stock is being paid for out of surplus. It further ep-
    pears that the assets of such company consist of $2,954.39 cash and an ae-
    signmsnt of the proceeds of en opsratjng contract upon which a value of
    $250,000.00 has been placed. The surplus, therefore, is represented by
    such assignment of the proceeds under the contract involved.

            The specific question submitted for cur consideration is whether
    or not the contract involved is of such character as to be admissible for
    the purpose'for which it is proposed to be used.

             As to the nature and character of the contract here involved, ws
    quote from the affidavit of the Board of Directors of Texas Guarantors,
    Incorporated, as followsr

             "The contract referred to in said financial statement is a
    contract whereby Texas Guarantors. Incorporated, has guaranteed to Texas
    Independence Life Insurance Company the performance by F. D. Glass, Jr. of
    his contractual obligations to said Texas Independence Life Insurance Com-
    pany as its President and bonded officer. That in consideration for such
    guarantee, said P. D. Glass, Jr. assigned and transferred to Texas Guaran-
    tors, Incorporated, all net profits, all net proceeds accruing to him as
    President of said Texas Independence Life Insurance Company. That under
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Honorable M. 0. Flowers, Page 2          O-2544



the law he, as such President, would be entitled to receive 4% of the
gross premium income, and such income, less operating expenses, is what is
assigned and transferred to Texas Guarantors. Incorporated, That for the
last 8 months of 1939 this 40% amounted to $42,580.28, and for the first 6
months of 1940 it amounted to $37,661.60 or a total of @30,241.86 for the
last 14 months and from this amount there would be deductable only the
operating expenses, Because this has been a period of expansion and ao-
quisiticn of other companies, the operating expenses have been somewhat
above what they would normally be, and it is estimated that these operat-
ing expenses hereafter will amount to approximately )2,300.1X per month.
Since this assignment was made in February, 1939, Texas Independence Life
Insurance Company has expanded its business to a great extent by the pur-
chase and merger of numerous other mutual life insurance ccmpanies, so
that now its gross monthly premium income is approximately $23.000.00.

        "That the three affiants are familiar with the manner of dealing
with the purchase and sale of mutual life insurance companies in Texas and
 know the prices paid for such companies, where the company is in a sound
condition as the Texas Independence Life Insurance Company is, and the
fair and reasonable market value for such a company is from ten to twelve
times its gross monthly premium income, and sales frequently are made on
that basis. That the above mentioned contract results in all net profits
from the operat on of Texas Independence Life Insurance Company passing to
Texas Guarantors, Incorporated, for its own use and benefit, and therefore
said contract itself has a value comparable with what would be the value
of the Texas Independence Life Insurance Company. and said contract not
being canoellable, but running for the life of the Texas Independence Life
Insurance Company, has a value of at least the amount of $26,000.00.
(That, as a matter of fact, one of the companies purchased and merged into
the Texas Independence Life Insurance Company and having a gross monthly
premium income of approximately $7,300,00 was purchased at a price of
$80,000,00)"

        We quote from a letter frcm Mr, James P. Markham, Jr., the at-
torney for Texas Guarantors. Incorporatadr

        "Texas Independence Life Insurance Company is operating as a state-
wide mutual life insurance company and is subject to Article 4859-f, On
February 10, 1939 Texas Guarantors, Incorporated entered into an agreement
with Texas Independence Life Insurance Ccmpany by which agreement the
former company guaranteed to the latter ccmpany that the President of the
latter company would faithfully and truly perform all his obligations to
Texas Independence Life Insurance Company. This agreement was in the fol-
lowing language:

"'State of Texas;
  County of Harris:   Know All Men 9y These Presents3

        "That the undersigned Texas Guarantors, Incorporated, acting here-
in by and through its duly authorized officers, and for a good and valuable
Honorable M. 0. Flowers, Page 3         o-2544



consideration this day received by it from F. D. Glass, Jr., and from
Texas Independence Life Insurance Company, receipt of which oonsiderations
is hereby acknowledged and confessed, does hereby guarantee to said Texas
Independence Life Insurance Company that F. D. Glass, Jr., will faithfully
and truly perform all his obligations to the said Texas Independence Life
Insurance Company arising out of his contract with said oompany in his
position as its President, and said Texas Guarantors, Incorporated, shall
be fully accountable to said Texas Independence Life Insurance Company for
any omission or breach by said F. D. Glass, Jr. of any of his said obliga-
tions to said Texas Independence Life Insurenoe Company.

          "'One of the considerations for this guarantee is a transfer by
the said F. D. Glass, Jr. unto said Texas Guarantors, Incorporated of all
his right, title and interest in and to any and all net profits, net rsv-
BXlUfZS, or net proceeds accruing or resulting to said F. D. Glass, Jr.,
by reason of his office as President of Texas Independence Life Insurance
Company and any rights or emoluments accruing tc him as such officer.

        "IIt is expressly understood that this contract of guarantee, as
well as the transfer of the above mentioned net profits, net revenues and
net proceeds, and any other emoluments, shall endure for the entire life
 of Texas Independence Life Insurance Company, and shall inure to the
benefit of and be enforceable against the heirs or suocessors in interest
of said F. D. Glass, Jr. and Texas Guarantors, Inoorporated, respectively,
during the entire life of the Texas Independence Life Insuranoe Company.

        "1 WIT?ZXSSthe corporate seal and signature of Texas Guarantors,
Inoorporated, at Houston, Texas, on this the 10th day of February.1939.'"

        The contract between F. D. Glass, Jr. and the Texas Independence
Life Insurance Company was made and entered into by virtue of tha aooept-
anae by the said Glass of the presidency of such aompany and under the
applicable portion of Artiole 2.6of the company's by-laws. Such Article
reads:

        "ARTICLZ XXVI: DUTIES Ji- .WYLCh'RS
        Section 1.
        PRUIDSW:   - The President shall preside at all meetings of the
Company, the Board of Directors, and the Executive Committee. He shall
sign ail membership certicicates or polioies, eontracts, and other written
undertakings entered into by the Company. He shall see that all lam and
regulations of the Company are faithfully and impartially executed. The
President shall own all office furniture, fixtures, supplies, and the gen-
eral agency contract of the Company, and in event of his death or removal
from office for cause, his interest shall revert to his estate. He shall
recejve and disburse all funds accumulating to the Expense Fund and it
shall be his duty to record accurately in the books of the Association all
receipts and disbursements of every chars&w   of the Expense Fund the same
as the Mortuary Fund. After all expenses have been paid, any excess in
the Expense Fund shall belong to the President and oan be used by him as
personal funds. The President shall be elaoted by the Board of Directors
for an unlimited time and shall oontinue in office until he is removed for
Honorable M. 0. Flowers, Page 4       O-2544



c*use*  He can be removed from office only for wilful negleat of duty,
misappropriation of funds or malfeasance of office. In case of his rsmov-
al from office, he shall be compensated for the good will and the assets
built up by him; the amount of said compensation to be determined by the
Board of Directors and/or Executive Committee."

        Reference has been made to our Opinion No. O-1625 previously arit-
ten to you in which we dealt with a somewhat similar situation. In stroh
opinion we considered the effect of Article 5064 of the Revised CivilStat-
utes upon the situation there presented, We think that suah opinion would
unquestionable control the present situation unless it oan be said that
Article 4859f, Section 19, of the Revised Civil Statutes relieves the pre-
sent company form the terms and provisions of Article 5064.

        The Texas Independence Life Insurance Company is operating as a
mutual insuranae company under the provisions of Chapter 8a, Title ,78, of
the Revised Civil Statutes., Article 4859f, Section 19 thereof, reads in
partr
        n . . . Except as herein expressly provided, no insurance law of
this state shall apply to any corporation operating under this act, and no
law hereafter enacted shall apply to them unless they be expressly desig-
nated therein."

        Your request does not oall on us to pass upon the question of
whether or not Artiale 5064, supra, is violated in the instant case and
for that reason me do not undertake to decide such question.

        Vieare here concerned with the sole question of whether or not the
property involved is property within the purview of the pertinent oonsti-
tutional provisions so as to be admissible for the payment of capital
stock.

        Section 6 of Article 12 of the Texas Constitution reads9

        "No corporation shall issue stock or bonds except for money paid,
 labor done or property actually reoeived, and all fictitious inorease of
stock or indebtedness shall be void."

        We think the correct test for the determination of whether or not
property is of such character as to be oapable of being accepted by a oor-
poration in payment of capital stook was set forth by Judge Phillips of
the Supreme Court in the case of Washer vs. Smyer, 211 S. PI.985, 4 A.L,R.
1320. The question involved in such case was whether or not a note was
property within the purview of the above quoted aonstitutional provision.
The court saidr

        "Undeniably, in the broad sense a note is property in the hands of
the payee* So, in a literal sense, is everything property which is capable
of ownership. All forms of chows in a&ion are property in the ssme sense
Honorable M. 0. i"lcwers,Fage 5      O-2544



--the right to racover a debt, the right to recover damages for breach of
a contract, unsatisfied judgments, and other similar kinds of actionable
demands. But the framers of the Constitution never intended that property
of that nature should constitute the capital of a corporation. The term
'property' was used in this section of the Constitution in no such sense.
It means property readily capable of being applied to the debts of the
corporation. As a rule, it should be property of the kind adapted to the
charter uses of the corporation and which it may legally acquire. There
ara some classes of property which are so staple in character and so
easily convertible into money as to be in actual commerce the ready
equivalent of money, and it is possible that a corporation in its form-
ative period would be authorized to receive such property in payment for
stock though not, in a strict sense, adapted to its purposes. The dif-
ferent forms of valuable property and the different purposes for which
corporations may be created, make it impossible to lay down other than gen-
eral rules upon the subject.

        "The integrity of a corporation and the interests of the public
demand, however, that the assets of a corporation consist of something more
than its stockholders' debts. Its capital cannot be thus constituted, and
therefore it cannot accept a stock subscriber's note in payment for his
stock. There is authority opposed to this holding, as there is authority
which support8 if. But it seems to us no authority is needed to estab-
lish it."

        Viewing the contract involved in the light of the foregoing well
established principles of law, we do not believe it constitutes property
tithin the purview of the Constitution and consequently the charter amend-
ment does not warrant your approval.

        There are other serious questions involved in connection with the
contract between Texas Independenoe Life Insuranoe Company and F. D.
Glass, Jr,, one of whioh is the right of the Board of Directors of such
company to bind the corporation by contract for the personal services of
Glass for a period of time longer than the term for which such directors
are elected, Such, however, are questions not necessary for us to deoide.

        The proposed amendment and supplemental affidavits are returned
herewith.

                                                 Very truly yours

                                              ATTORREY GEbERAi OF TEXAS


                                              By s/Lloyd Armstrong
                                                      Lloyd Armstrong
LA :jm/wc                                                   Assistant
Encl.
APPROVED Opinion Ccmmittee By s/R.W.F. Chairman
;i;,';;;dAug. 12, 1940   S/Grover Sellers   First Assistant Attorney
