.




                                              December         1 , 1958



    Honorable     Zollie   Steakley                          Opinion     No.    WW-527
    secretary     of state
    Capitol   Station                                        Re:    Is the proposed          purpose       “to
    Austin,   Texas                                          operate     under     the Small       Business
                                                             Investment      Act of 1958 a fully             stated
                                                             purpose     under Article          2.OlA     of the
                                                             Business      Corporation         Act?”      May
                                                             the Secretary        of State accept          and
                                                             file articles      of incorporation           reclt-
                                                             lng that the corporation              is to have
                                                             all the powers         specified       in the Small
                                                             Business      Investment         Act,    including
                                                             the power      “to act as depositary               or
                                                             fiscal   agent    of the United          States    when
                                                             so designated        by the Secretary             of the
    Dear    Sir:                                             Treasury”       and related        questions?

                   You have requested             our opinion        concerning       your    authority     to
    accept     and file articles           of incorporation        of proposed        corporations        being
    formed      for the primary            purpose      of operating        under   the Small       Business
    Investment         Act of 1958 (Public           Law 85-699,         85th Congress,          S. 3651, August
    21, 1958).       Your     first   question      is whether       or not @the proposed            purpose     to
    operate      under     the Small        Business      Investment        Act of 1958 is a fully         stated
    purpose      under      the requirements            of Article      2.Ol.A of the Business           Corpora-
    tion Act.’        Your      second     question     relates     to your     authority      to file a charter
    which     recites,      that ‘?he corporation            shall have and exer,cise             all the powers
    specified       in the ‘Small         Business      Investment        Act of 1958 . . .Clause          (i).
    To act as depositary              or fiscal      agent of the United          States   when so designated
    by the Secretary             of the Treasury.”           Your     third question,       to be answered
    only if we conclude             that the power         to act as such a depositary               or fiscal
    agent    is a banking          or trust     company      power,       concerns     your     authority     to act
     in situations       where      such language         is qualified       by the words        “without     bank-
     fug and discounting            privileges.”

                 Article    2.OlA   of the Business    Corporation       Act provides        that
    corporations        for profit  may be organized        for any lawful      purpose     or purposes,
    “which    purposes       shall be fully  stated  in the articles      of incorporation.”        It
    will be noted       that this language    is somewhat       more   restrictive       than that
    contained     in the old corporation       law (Article      1304 V.C.S.)      which   merely
    provided     that ‘A charter       must be prepared        setting  forth    . . . the purposes
    for which     it 1s formed.”       Yet even under      the prior   enactment        it had been
Hon.   Zollie      Steakley,     page   2 (WW-527)




well   settled    that the charter        must state   the proposed     purpose   with partlcular-
ity.  Many     have been struck           down for vagueness      by previous   attorney   general
opinions.      See, for example,          o-5960,   0-435~5,  V.yl@‘?8-&d    .WWXMU.“~~The    disciple
underlying      this requirement           is given in 1OB Tex.    Jur. 87, Corporations,
41:

                       “The    requirement       that the purpose       of    the corporation        be
                stated    in its articles     is for the orotectlon           of the incoroorators
                and stockholders,         and the publli,      in order       that they may be
                advised      as to the character        of the corporate          activities,   and to
                enable     the state,   through     its proper    officers,        to collect   filing
                fees   and franchise       taxes,    and to-supervise          and control     the use
                and to punish       the non-use       of the corporate         franchlse.“(Emphasls
                supplied.)       See also Johnston        v. Townsend         (Sup. Ct. 1910) 103 Tex.
                122, 1245 S.W. 417.

              As stated      in the speech      of the Honorable         Wright       Patman      in the
Unfted     States    House     of Representatives,        August      21, 1958, which         incorporates
a report      by the Small       Business     Committee       explaining        the provisions        of the
bill;  the purpose       of a Small      Business     Investment       Company         is ‘to help SIMII
business      concerns      raise    capital.   . .by making       loans directly,          or by purchas-
ing the debentures          of the small      business     concern.”         Yet this ultimate         pur-
pose    cannot     be gleaned     from     the charter     provision       in your     first   question
without     reference      to the act itself.       We have concluded             therefore,      that the
proposed       purpose     contained      in your first    question      violates      the provisions
of Article      2.OlA.

             Your     second     question      presents      a much more        difficult    problem.
Since   the passage        of the Texas        Business       Corporation      Act,    corporations
for profit    may be formed           for any lawful        purpose      or purposes.        (Art.   2.OlA)
At this point ‘we must refer             to our opinion        WW-440       addressed       to you on
May 30, 1958. As was pointed                  out therein      many     of the lawful      purposes     for
.which corporations           could be formed         prior    to the Business         Corporation       Act
contained     restrictive       provisions       or words       of limitation.       These    were    pro-
vided   in order     .to “limit    the purposes         for which       a corporation       might    legal~ly
do business      -within this state        so that it could not transact             business      which
 was properly       being    transacted       by other      corporations       which were       under
strict   regulatory       and supervisory          limitations       imposed    by law, and which
were   administered          by state    officers     or agencies.*

            It was one of the conclusSons             of that opinion      that ‘in enacting         the
Business     Corporation      Act the Legislature          manifestly      did not intend       to
remove    the restrictive       provisions     or words       of limitation      which   qualified
the l,awfu,l purposes      granted     by it.   (Art,   9.15B)*      Another     conclusion       of
this opinion,    as well    as of Opinion      WW-77       and WW-503,         is that corporations
organized     under    the Business       Corporation      Act may perform           some    of the
functions   normally      carried     on by banking       Institutions     as long as they are

                                               -2-
Hon.   Zollie    Steakley,      page     3 (WW-527)




performed       without   the exercise    of banking    or discounting      privileges.      For
convenience,       throughout    the remainder     of the opinion     these    prohibited
privileges      ~111 be denominated     *banking     functions    , or ‘prohibited        banking
functions.’

           Therefore,     the answer     to your   second     question    depends     upon
whether   or not, once a Small       Btrsiness    Corporation       has been organized
and destgnated     a depositary    or fiscal    agent   of the United      States   by the
Secretary    of the Treasury,     it will be performing         a prohibited      banking
function.   This   in turn involves     both a discussion        of prohibited     banking
fnnctions  as we11 as a discussion         of the duties    of a United     States   depositary
or fiscal  agent.

                                        BANXING          FUNCTIONS

              According     to Volume       1 of Michie,     on Banks    and Banking,      Section
2, page 6,      *the  chief  function    of  a  ‘bank’   involves   the   receipt    of deposits
from    the general      public,   repayable      to the depositors      on demand       or at a
fixed   time,     and the use of deposit        funds for secured       loans,    and the relation-
ship of debtor       and creditor,     between      the bank and depositor.‘(Emphasis
hupplied).

               The opinion       written    by Chief    Justice     Cureton,    while    Assistant
Attorney       General,      in the Report      and Opinions       of Attorneys      General       of
Texas,      (1912-1914),      page 342, is an exhaustive           study    of prohibited      banking
functions       in connection      with corporations         seeking     to organize      under what
was then Subdivision             29 of Article      1121, which    authorized     the formation         of
corporations         for Ythe accumulation           and loan of money;         but these      subdivisions
shall   not permit       corporations        with banking      or discounting       privileges.-        He
states    that ‘the ordinary           and usnal powers        exercised      by banks.      . . are to
discount      notes    and receive       deposits.*      With regard       to the meaning         of ‘dis-
count”     the opinion       concludes,      that in order     for a transactton        to become        a
discounting        transaction      within    the technical     and banking      meaning        of the
word ‘dis cormto’, two facts mnst exist.

                    (I).     &Less     than   the face     value   of the   note   must   be   paid   for   it.*

                    (2).     “The     party  offering     the note to the bank must be liable
                               upon the note either         as a maker,   endorser,    or guarantor.
                               In the absence       of either   of these two requisits    the trans-
                               action    is not a discounting      one such as is inhibited    by
                               the statnte    under    examination.Y

Cureton   then proceeds              to discuss    the question      of the receipts       of deposits       as
a banking   function.           .

                                                  -3-
eon.   zouie      steakley,     page    4 (WW-52-I’)




                     “Having    shown      that the receiving     of deposits     is the exerc,ise
               of a banking     privilege,     and therefore     inhlbited    to corporations
               chartered     under     the statute   we are dfscussing,        it next devolves
               upon us to determine          the nature    of the relation     created    between
               a depositor     and the bank.       It is elementary       that a general     deposit
               of money     in a bank creates        a debt from     the bank to the depositor.              0s

                       “We take it as well      settled    then that generally         when we refer
               to the receipt     of deposits     by a bank we refer          to the creation       of the
               relation    of debtor   and creditor        as between      the bank and fts depostt-
               ors,    and not to the creation        of the relation      of bailee,     although    in a
               case of special      deposits    the relation       of batlee    may sometimes          be
               created.      However,     in the general       and ordinary       sense     of the terms
               as used in the business         of banking       ‘we would    say that the receiving
               of deposits     as a banking     privilege      is the receiving        of general    de-
               posits    or special   deposits     which     create    the relation      of debtor    and
               creditor     and not the relation        of trustee    and cestui      qui trust    or of
               bail,ee   and bailor   or of principal        and agent.*

                       “From      thls opinion     (Merch.antlle     National     Bank of New York
               v, Mayor,       etc of New York,         1.21 LJ. S. 138) it is clear      that the re-
               ceipt    of money      by a corporation        as bailee     or as agent for the
               purpose      of in;es&nent        and not as a deposit         in which    the relation
               of debtor      and creditor       is created,     would    not be the exercise        of a
               banking      privilege    i for it 1s seen from         the deflnitlon     of the busi-
               ness of banking         as given     by the Supreme         Court    of the United
               States     in th,is case,     that the receipt      of deposits     as a banking
               [~:wivil~ege generally        is the ‘receiving       of deposits      payable   on
               ii< irLand.”

                                DEPOSITARY          AND     FISCAL      AGENTS

              Authorities     are few which     are definitive    as to just’what   a United
States   depositar-:      or fiscal   agent  is or does.     In Thomas    Branch,   et al v.
Th-    United    States,    12 Ct. Cls. 281, affirmed      100 U.S. 673, 25 L-Ed.     (59,
??., court.    in %u,ssing        the status   of a national    bank as a deposttary,     had
the following       to say:

                       ‘Designating       a national    bank as a depositary         of public
               money       under    this provision     does not change        the character
               of its organization,          or convert    its managers        into public
               officers,      or give    to the Government        any addltlonal       control
               over     the institution,      or render    the United     States    Liable for
               any of the acts,         contracts,    or obligations     of the bank.       Nor
               does     It constitute     the bank a general.      financial     agent of the
               Government,          but when after      such designation        it is required
               by law or by direction            of the Secretary      of the Treasury         to

                                              -4-
Hon.   Zollie      Steakley,     page    5 (W.W-527)




                perform   any financial duties    for the United   States,               it then becomes
                a special  agent for the particular     purpose  required,                 with no power
                to bind the Government    beyond     the special authority                 conferred  upon
                it. . .*

                       *But when public        money     is deposited       with a destgnated-deposlt-
                ary nat~ional bank,       it is not there      retained      in kind as the special
                property     of the United      States,    of which      the bank is made         the custo-
                dian, bat it becomes         at once the property           of the bank, is mingled
                with its other funds,        is loaned     or otherwise        employed       in the ordinary
                business     of the corporation,        and the bank, instead           of being     the c~us-
                todian   of public    money,     becomes       a debtor      to the United      States    pre-
                cisely   as it does    to other     depositors        on receipt     of individual     deposits
                . . . The Government          has the same         rights   and remedies         against     the
                bank as other      creditors      have.     If the bank fails,       the United      States
                resort    to the collateral      security,      if any, given      to secure      the de-
                posits   of public    money     to the extent       of the proceeds       thereof.      . .”
                (Emphasis      supplied).

          The General   Counsel  of the United    States Treasury,      in an opinion
dated May 9, 1941, had the following    to say concerning     the duties    devolving
upon a particular  bank subsequent    to its designation   as ‘financial     agent    of
the Government”:

                       -As you are aware,           the Federal     Reserve      Bank of New York
                has been called        upon, pursuant        to this provision,       to perform     a
                wide variety      of functions       for the Government,          Lncluding    the as-
                sisting    in carrying      out the Foreign       Funds     program      (in this it
                shared     its duties    with other Federal         reserve      banks),    the purchase
                and sale of gold for the United             States,   the purchase        and sale of
                currencies      under    stabilization      agreements,        the purchase      of for-
                eign silver     under     the Silver     Purchase     Act of 1934, the carrying
                of accounts     for the UNNRA,           and the carrying        of an account     for
                Saudi Arabia.’

            Certain   sections   of the Code of Federal                   Regulations      are pertinent
to an inquiry    as to the duties   of a depositary   or               fiscal   agent,    particularly
the following    from   Title  31, Money  and Finances’                  Treasury.

                General     Provisions       and Definitions:

  :&ion    202.1
             (e)    General   depositarfesj     definition    of.    The         term   ‘general     deposit-
             aries.    as used in this part means          depositaries             and financial     agents
             of the Government         that have been authorized                 to maintain      on their

                                                   -5-
Hon.      collie      Steakley,        page   6 (WW-527)




                   books   an~account        In the name         of the Treasurer         of the United       States.
                   General     depositaries         are designated        and maintained         only at points
                   where    depositary        is needed       to receive     deposits     from    depositors
                   of public    monies      for credit       to the account        of the Treasurer         of the
                   United    States    or to render         other    essential     Banking     services      auth-
                   orized    by the Secretary           of the Treasury.           The balances       maintained
                   wfth general       depositaries        to the credit-of        the Treasurer         of the
                   United    States    are fixed       in proportion       to the volume       and character
                   of the Government            business       transacted      by such depositaries           and
                   are adjusted       periodically        upon that basis;          General    depositaries,
                   when so authorized            by the Secretary          of the Treasury,        may also
                   accept    deposits     for credit       in the official       checking    accounts      of
                   other   Government          officers     with such depositaries.”

                   (f).  LLmited      depositaries;       definition     of.    *The     term     ‘limited     de-
                   positaries’      means     depositaries        and financial       agents     of the govern-
                   ment that have been designated                 by the Secretary          of the Treasury
                   for the sole purpose          of recetving,        up to specified        maximum         amour&
                   deposits      made    by capitalized       government         officers     for credit       in
                   their   official    checking     accounts      wlth such depositaries.                Limited
                   depositaries       are not authorized           to accept     deposits      for credit       to the
                   account      of the Treasurer        of the United        States.”

Section       202.4       Deposits     by Government              officers      with    general    and limited
                          depositaries     for credtt            m their     official     checking    accounts
                          with such deposItaries.

                   *It is the responsibility              of government        officers       to maintain       the
                   balances       (including      the outstanding       drafts)     in their      official  check-
                   ing accounts          with general       and limited      depositaries           within  the
                   authorized         limits,    flxed    by the Secretary         of the Treasury.            If a
                   government           officer     determines      that the balance           in his official
                   checking        account      will exceed      the authorized         limit     of the deposit-
                   ary in which          the account:is.m&intained,             he shall        immediately
                   advise     the Secretary           of the Treasury        throughhis~administrative
                   office   and the TreasKry              ~111 take action       to obtain       additional      col-
                   lateral     from      the depositary        and will    increase        its authority      ac-
                   cordingly.        . .*

                           FOR     SPECIAL         ATTENTION            OF    GENERAL          DEPOSITARIES

Section       202.15         Glasses      of General       depositaries.

                   “There      are two classes         of general   depositaries,      namely,    ‘active
                   general      depositaries’       and ‘inactive   general     depositartes’.      An
                   ‘active     general     depositary*     is a depositary      which   Is authorized

                                                           -6-
Hon.    Zoiiie      Steakley,         page       7 (WW-527)




                 to maintain    on its books     an account     in the name     of the Treasury          of
                 the United    States   and is authorized      to accept    deposits     from     gwern-
                 ment officers      for credit   in that account.      An ‘inactive       general    deposit-
                 ary’ is a depositary       that is authorized      to maintain     on its books       an ac-
                 count in the name       of the Treasury      of the United     States,     but does not
                 have authority      to accept   deposits   from     government      officers     for credit
                 in that account.”

           Perhaps      the case most directly      ln point on this question       in Texas     is
Brenham     Production      Credit   Association   v. Zeiss,    264 S.W.2d     95 (Sup. Ct. 1953)
153 Tex.   152 wherein      the Gitv of Brenham      was seeking      to tax the Brenham
Production    Credit    Association     on the theory    that it was a banking      corporation
as contemplated       by Article    7166 V4.C.S.      The Court     concluded    that it was not
such~ a banking     corporation.      The opinion   will   be quoted    at some   length   below
inasmuch    as it has a bearing       not only on the answer       to your   second   question,
but on the third as well.

                         ‘A production         credit   association       is to be distinguished      from     a
                 joint    stock    land bank in a number             of respects.     The latter   is specl-
                 fically     designated       as a bank.      It has authority      to Issue bonds based
                  upon the mortgages             taken by it, and is designated           as a depository
                  of public     money.       Its borrowers        are not required       to become      stock-
                 holders.       Its offerings        of capital    stock    are open to the public.’
                  (Emphasis        supplied.)

                        ‘Its     loans are restricted        to farmers      for general       agricultural
                 purposes         and borrowers        are requlred      to purchase       stock    in the
                 association         up to five per cent of the desired             Loan.    The association
                 is empowered            to issue    no bonds.     It serves     as a depositary        for no
                 funds,      either    public    or private,    and rather      carries     its own funds      in
                 three     separate       banks,    the greater     part of same       being    on deposit   ln
                 two banks         outside    the City of Brenham.*

             The Court              quotes       the following     from     Warren     v.   Shook,   91 U. S. 704,
23 L.    Ed. 421.

                        cs
                            having
                          . .   .  a place  of business   where    deposits                      are       received
                 and paid out on checks,   and where    money   is loaned                       upon       security
                 is the substance  of the business   of a banker:”

                        “While,      of course,      the lending     of money    is one of the principal
                 functions      of a bank, nevertheless            there  are many agencies      authorized
                 by both State and Federal               governments      to lend money,    which are not
                 banks nor considered             as such.      Artlcies    1302a and 1303b expressly
                 authorize       the chartering        of corporations      to lend and borrow     money,
                 but without       ‘banking     privileges’.      . .*

                        “The        activities      of this   association     are    limited    by   law     to making

                                                       -7-
Hon.     Zollie      Steakley,     page     8 (WW-527)




                  short-term      loans   to farmers      for agricultural       purposes      and only
                  to those who purchase          stock   in the association.         To carry     out
                  such functionit      was authorized        to borrow     from,    and rediscount
                  paper    with, Federal     Intermediate       Credit    Banks     and could deal
                  in that respect     with no other       bank or agency        except    with the ap-
                  proval    of the Governor       of the Farm      Credit     Administration.       . .
                  It cannot    deal in exchange       or purchase      notes    and is not under
                  the supervision       of the national     or state   banking      authorities.’

              It will be noted       that one of the elements             looked ID by the Court         in           c
distinguishing        the Association,       which     was not a bank, from            a joint   stock
land bank, which          is, is the fact that the latter            is designated      as a depositary.
A close     study of the Federal           Regulations        set out above       and their    interpreta-
tion by the General           Counsel     of the Treasury          shows,     without   question,      that
some     of the duties       which    might   be imposed         upon depositaries         and fiscal
agents     by the Treasurer,          subsequent       to their     designation      as such,     involve
the performance           of banking     functions.       In the light of the foregoing,            we,
therefore,       conclude      that you would be without            authority      to accept    and file
articles     of incorporation        which,     without     limitation,      purport    to authorize
the corporation         to’act    as a depositary        or fiscal      agent for the United         States.

                  In answering       your    third   question    we   must    again    refer    to our   Opinion
ww-77:

                         “A corporation       may be formed         under      the Texas      Business       Corpr-
                  ration    Act with a purpose         clause    authorizing       the corporation         to en-
                  gage    in the business       of accumulating        and loaning       money;     selling     and
                  dealing     in notes,    bonds and securities~          to subscribe       for,   purchase,
                  invest    in, hold,   own, assign,       pledge,    and otherwise         deal in and dis-
                  pose of shares        of capital    stock,    bonds,    mortgages,        debentures,
                  notes,    and other     securities     or obligations       , contracts      and evidences
                  of indebtedness        of foreign     and domestic        corporations        not competing
                  with each other        in the same      line of business;         to borrow      money      or
                  issue    debentures      for carrying       out any or all of the purposes              above
                  enumerated;        but without     banking     or insurance        prLvileges.”        Opinion
                  ww-77.

             As pointed      out above,  the primary      purpose    of a Small  Business
Investment       Complny      is to help small   business     concerns    raise capital   by
making     loans   directly,    or by purchasing     the debentures      of the small   business
concern.

              After     studying     the Small      Business      Investment      Act LtseIf,     the explan-
atory    speech     of Representative          Patmaa,       together     with the proposed          imple-
menting      regulations       promulgated       by the Small         Business     Administrator,         we
are of the opinion          and so hold that a Small             Business     Investment      Company        can
be chartered        and operate        in Texas      under    articles     of incorporation        the pur-
pose    clause     of which      contains    the restrictive         phrase”without       banking      or
discounting       privileges.’        This    conclusion       is reenforced       by comparLng         the
opinion     in the Zeiss       case,    supra,    with the way in which           the Small     Business
Investment        Company       will   operate     under    the Act in question.          Among       other
                                                -8-
   .


                                                                                                     , .~..)~,
Hon.     Zollie      Steakbay,     page   9 (WW-527),           ‘:




things,    a Small    Business     Investment      Company’s       loans will be restricted         to
 “incorporated      and unincorporated         small    business     concerns.*       (In the Zeiss
case    the Association’s      loans were       only to farmers        for agricultural      purposes);
borrowers      are required       to purchase      stock    in an amount     between      two’ per
cent and five per cent of the capital             provided,      as in the case of borrowers
from     the Brenham      Production      Credit    Association.

              By limiting     the purpose        *to act as depositary         or fiscal    agent   of
the Unlted      States    when so designated         by the Secretary         of the Treasury”         with
the phrase       =but without     banking    and discounting        privileges“       the company
would    be authorized       to perform       those functions      lawfully     required      by the
Secretary       of the Treasury       which     do not infringe     on banking       functions.       At
the same      time,    it would   be effectively       prohibited     from     performing       those
duties    of depositaries       or fiscal    agents    which    are considered         prohibited
banking     functions,

                                               SUMMARY

                        The proposed        purpose     “to operate     under    the Small
                  Business     Investment        Act of 1958* is not a fully          stated
                  purpose     under Article        2.01 of the Texas       Business       Cor-
                  poration    Act.     The Secretary        of State is not authorized
                  to accept    and file articles        of incorporation       reciting
                  that the corporation          is to have all the powers           specified
                  in the Small      Business      Investment      Act of 1958 including
                  the power     ‘to act as such a depositary              or fiscal     agent
                  of the United      States    whenever      designated     by the Secretary
                  of the Treasury.’          The foregoing        phrase,    when limited
                  by the words       “- . .but without      banking     or discounting
                  privileges”      is acceptable.

                                                         Very        truly   yours,

                                                         WILL     WILSON
                                                         Attornev    General          of Texas   .




RVL:jg




                                                -9-
 I..   :~I   ,^j        7

                   .,




Hon.               Zollie       Steakley,        page     10 (WW-527)




APPROVED:

OPINION                       COMMITTEE:

Geo.               P.       Blackburn,      Chairman

Houghton    Brownlee,                           Jr.
Elmer    McVey
Jay Howell

REVIEWED                         FOR      THE         ATTORNEY     GENERAL
BY:
      W. V.                     Ceppert
