                               AUSTIN ii,T~xas




     Hon. J. M. Falkner. C.ommissioner
     State Department of Banking
     Austin, Texas                     Opinion No. V-1489

                                           RS:   Applicability of Section 7.
                                                 Article 1524a. V.C.S..~re-
                                                 quiring collateralization of
                                                 Texas obligations. of lend-
                                                 ing corporations, to the,sub-
                                                 mitted short&rm      notes of
                                                 General Motors Acceptance
     ,Dear Sir: ..~                              Corporation.

               Your request for, the opinion of this office is in part asfol-
     lows:

               “We de.sirs the opinion of your office upon the ques-
          tia as to whether. or not the issuance of notes by corpora-
          tions organized pursuant to the provisions of either of Sub-
          sections 48, 49 and 50 of Article 1302, or Article 1303b.
          Vernon’s Texas Annotated Statutes; evidencing an obliga-
          tion for money borrowed .by s,uch corporations for use in
          the course of the corporations’ business, constitutes the
          sale of such notes within the meaning of the words ‘sold’
          or ‘sale’, as referred to in Section 7 of the Loan and Bro-
          kerage Companies Act, .(Article 1524a. Vernon’s Texas
          Annotated Statutes) and requiring the deposit of securities.

                “This question has arisen by virtues of the operation
           of the General Motors Acceptance Corporation, a foreign
           corporation with permit to do business in the state of Tex-
           as‘ under the provisions~ of Subsection 49, Article 1302,
          ,whereby said corporation issues its short-term notes
           for borrowing purposes to dealers of General Motors,
           banks, and any other firm, institution or corporation, and
           in some cases, falling into the hands of individuals by pur-
           chase of such notes through banks.”

               We adopt the folJowing:statement conta$ned in the letter at-
     tached to your request, which sets forth the methods adopted by the
_-   corporation in negotiating its loans, to evidence which the promissory
     notes of the corporation are,issued:
Hon. J. M. Falkner, page 2 (V-1489)



         “GMAC raises a substantial portion of the funds it
    uses in conducting its business by what is called its short-
    term borrowing. It does such borrowing extensively and
    on a large scale, under promissory notes issued by it to
    bearer, with a maturity date ranging up to 270 days, and
    evidencing GMAC’s obligation to pay the face amount
    which includes interest on the principal amount borrowed.

         “In Texas as elsewhere, GMAC’s short-term borrow-
   ing is from its account banks and from other banks, com-
   mercial firms and persons who see fit to place their funds
   with GMAC, at the interest rate then currently offered by
   it, under its short-term notes; some, but not all, of those
   firms or parsons might be dealers in GM automobiles.
                                       .
   was far as the nature of the borrowmg andthe form or terms
   of the note are conc~erned. there is no differencebetween
   the issuance of the short-term notes to GMAC’s account
   banks and the issuance of those notes to others.

         “Except in certain more or less scattered instances,
    GMAC deals directly and privately with those to whom it
    issues its notes, whether they volunteer to place their
    funds with GMAC for such notes or GMAC solicits and
    otherwise stimulates their interest in the investment of
    their funds in the notes under which it accomplishes its
    short-term borrowing. The exception just referred to in-
    volves the occasional case where, at the request of a bank
    acting for one of its customers, GMAC issues and delivers
    a note to the bank for the account of its customer against
    remittance of the latter’s funds to GMAC. In no case does
    GMAC employ any agent or broker or pay any brokerage
    or other fee.

           “Notwithstanding that the notes are in form and in a
    legal sense fully and freely negotiable, it has been the prac-
    tice of the account banks and others to whom GMAC issues
    its notes to hold them until maturity; in the event that it
    were necessary or advisable for any of those holders to
    sell any note for the purpose of raising cash funds, GMAC
    prefers and makes it a fixed practice to prepay it and thus
    avoid negotiation of the note by the holder to someone else.
          *
    . . .

         Section 7. Article   1524a. V.C.S..   is in part as follows:

         “All bonds, notes, certificates, debentures, or other
    obliga=s    soldmxas       by any corporatron* affected by
                                                                        -.
    *Emphases    throughout are supplied.
     Hon. J. M. Falkner, page 3 (V-1489)



         a provision of this Act shall be secured by securities
         of the reasonable market value, equaling at least at
         all times the face value ofsuch bonds;‘notes, certifi-
         cates, debentures or other obligations. . . .”

             ~Section 12, Article 1524a. V.C.S..   is as follows:

               “Sec. 12. None of the Rrovisions of this’Act,‘ex-
         cept that portion of Section 4 requiring’the filing of
         financial statements, shall apply to sales made by any
         corporation affected by’this Act, exceptsales    by such
         corporation,s of bonds, notes, certificatesbentures,
         or other obligations issued by and that are direct ob-
         ligations of the corporation selling or offering the same
         for sale. The words ‘bonds’. ‘notes’, ‘certificates’.
          ‘debentures’, and ‘other obligations’. as used inthis
         Act, shall n~otbe construed to cover’or    mclude’notes
         executed by corporations to banks and other fmancral
         rnsttutrons for money borrowed by such corporatrons
         for use~rn the usual course of Its busmess.*

     The promissory notes issued by,GMAC are in the customary form
     of negotiable promissory notes executed to evidence a debt, except
     that the notes are made payable to “beare?     instead of the name of
     the lender 0 These notes are short-term notes, the maturity date
     thereof in no case exceeding 270 days from the date of issuance,
     and therefore fall within the exemptive provisions of Section 23(h),
     Article 6OOa, V.%.S., (The Texas Securities Act), which refer to
     “negotiable ‘promissory notes or commercial paper issued in good
     faith and in the ‘usual course of carrying on and conducting the busi-
     ness of the issuer. provided that such notes are commercial paper
     maturing fin not more than twelve (12) months from date of issue;’

              The fact that these evidences of short-term indebtedness
     all mature in less than one year from date of issue excludes them
     from the legislative definition of “borrowed capitalR employed by
     the corporation which is subject to taxation under the provisions of
     Article 7084, V.C.S. (the Franchise Tax Statute). In Southern Realty
     Corporation v. McCallum. 65 F.2d 934, 936 (5th Cir.m3,      cert. den.
            S 692) 9 the court held in part as follows:
     290 U ov
               ”0 . a With respect to the novel inclusion in the
          measure of the tax of longtime indebtedness, it is
          here made to appear that corporations bad resorted
          to the device of issuing an insignificant amount of
          capital stock but a large amount of bonds; thus ar-
          ranging for a permanent capital which would not in-
.-        crease the tax under the former laws. The Legisla-
          ture deemed that such capital, equally with that raised
Hon. J. M. Falkner, page 4   (V-1489)                                     -




    by common or preferred stock, was employed in the
    corporate business and tended to increase it and make
    it profitable, and equally required protection at the
    hands of the state; and so ought equally to enter into
    the measure of the tax. This conclusion expressed in
    the statute of 1939 is not arbitrary and is within le,gis-
    lative power. The exclusion of short-time loans, &at
    is, those for less ~thana year, is also not arbitrary.
    If such are actually repaid within the year, they have
    not been capital employed durmg the whole tax period.
    If renewed throughout the year, they may serve to pro-
    vide working capital just as though originally for a year,
    but in truth they are no permanent capital, but the indul-
    gence is at the will of the creditor and generally pur-
    chased by a high rate of interest. A line of cleavage was
    proper to be made at some point, and one year, the period
    which the tax is to cover, was not an unreasonable place
    tofixit.   . ..”

          Based upon the foregoing statutes, it seems clear that short-
term indebtedness maturing in less than one year evidenced by nego -
tiable promissory notes of the issuing corporation is considered by
the Legislature to be money borrowed by the corporation for use in        -.
the usual course of its business.

          As to whether the issuance and delivery of a promissory
note by a borrower corporation to a lender of the money borrowed
by the corporation constitutes a “sale” of such note by the corpora-
tion is answered by the holding of the U.S. Circuit Court of Appeals
in Helvering v. Stein, 115 F.Zd 468, 471 (4th Cir. 1940). as follows:

         “The decisions ~ofour courts seem to hold pretty
    uniformly that the original negotration of commercial
    paper is a loan and not a sale. Schermerhom v. Tal-
    man, 14 N.Y. 93; Stlrlmg v. Ggebic Lumber Co., 165
    Mich. 498. 131 N.W. 109, 35 L.R.A. N.S.. 1106; Bank of
    Ashland v. Jones, 16 Ohio St. 145; McLean v. Lafayette
    Bank, 16 Fed. Cas. page 264~. No. 8,888.   The rationale
    of these decisions seems to be that a promissory under-
    taking to pay money is not property in the hands of the
    person who makes the piomise     or agreement; for ob-
    viously a person has not, and cannot have, a valid legal
    claim against himself in the same legal capacity. The
    negotiation of such paper creates for the first time7
    legal claim agamst the negotiator, so that thus trans-
    actlon IS a negotlatmn and not a sale. After such a’
    negotratlon, however, a subsequent transfer of the
    paper may very well be, and usually is, a sale. The
    original negotiator here did not transfer a claim which
.-   Hon. J. M. Falkner, page 5 (V-1489)



         he already had; rather did he, by the negotiation..
         create a claim.for the first time.”

               It also seems clear .that the,negotiation by GMAC of the
     promissory notes in question to its borrowers in the manner de-
     scribed above does not constitute the “sale” of a “debenture”
     within the meaning of Sertion 7 of the Act. In General Motors
     Acceptance Corporation v. Higgins, 161 F.2d 593 595 (2nd Cir.
     n47, cert. den. 332 U.S. 810),, the opinion of the kourt dealt with
     promissory notes issued by GMAC similar in form to the notes
     referred to in your request,, except that “the principal was payable
     on various maturity dates none of which were less than four and
     one-half.nor more than five, years from the date of issue.’ The
     question was whether such promissory notes were debentures and
     therefore taxable under the’Revenue Act of 1926 (26 U.S.C.A., hit.
     Rev. Code, Sec.. 1801). The stamp tax on promissory notes was re-
     pealed in the Revenue Act of 1924, and in discussing the provision
     of the revenue Act prior to the repeal of the tax on promissory
     notes, the court held:
              u . D 0 but promissory notes were never included
         in the paragraph taxing bonds. debentures, and certif-
         icates of indebtedness. This treatment of promissory
         notes indicates that what was repealed when the tax on
         such notes was eliminated was taxation which covered
         the notes used customarily in day to day commercial
         transactions of a short time credit character and not
         instruments, whether called notes or something else.
         by which a corporation obtained capital for a substan-
         tial period of time from investors for general use in
         its business just as it might by the sale of its bonds,
         debentures or similar securities.    . e 0pI

     See also Commercial Credit Company v. Hoffervert,         93 F.Supp.
     562, 565 (D. Md. 1950). defining a “debenture.”

               It is the opinion of #is office that the negotiation of the prom-
     issory notes by General Motors Acceptance Corporation in the manner
     described above constitutes the borrowing of money by GMAC for use
     in the usual course of its business and that the promissory notes ex-
     ecuted and issued by the corporation as evidence of such borrowed
     money are not ‘sold” within the meaning of Section 7. Article 1524a.
     V.C.S.

                                    SUMMARY

               The negotiation of promissory notes executed by
          a corporation to evidence short-term indebtedness
Hon. J. M. Falkner, page 6 (V-1489)



    of the corporation for money borrowed for its use in the
    usual course of its business is not a ‘sale* of such notes
    ,which requires the deposit of collateral security under
    the provisions of Sec. 7, Art. 1524a. V.C.S.

                                             Yours very truly,

                                              PRICE DANIEL
APPROVED:                                    Attorney General
                                                           A
E. Jacobson
Reviewing Assistant

Charles D. Mathews
First Assistant                                     Assistant

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