      OFFICE   OF THE AlTORNEY    GENERAL    OF TEXAS

                         AUSTIN




Honorable 0. P. Lockhart, Chairman
Board of Insurance Commissioners
Austin, Texas

Dear Sir:




                                         requesting   the opin-
                                            d question reads as

                                     ty National Life In-
                                     rance Company, Dallas,




                     City of Dallas which is owned by
     another Texas corporation chartered through the of-
     fice of the Secretary of State and known as Texas
     Discount Company of Dallas, Texas.
         "The Texas Discount Compang has a capital stock
     of $lOO,OOO.OO divided into 10,COO sharss whose
     owners are as follows:
                                                           222

Honorable 0. P. Lockhart, Page 2


            YE. A. Strange - - - - - 10   shares
            Leo Johann- - - - - - - - 5   shares
            Jack Austin Titus - - - -10   shares
            Robt. Elton Titus - - - -10   shares
            E. W. Titus - - - - - 9965    shares
            "The directors of the Texas Discount Company
     are:
            "E. A. Strange
            Leo Johann
            E. W. Titus
            "The officers of Texas Discount Company are:
            "E. W. Titus, President
            Leo Johann, Vice President
            Pauline Michael, Secretary and Treasurer
        "The City National Life Insurance Company has
    a capital stock of qb25,OOO.OOdivided into 2500
    shares, The stockholders of this company are as
    follows:
            "D. L. Uayar - - - - - -100 shares
            Bob Titus - - - - - - -  25 shares
            Jack Titus - - - - - - - 25 shares
            Jack Andrews - - - - - -100 shares
            Fred Sheppard - - - - - 50 shares
            Andrew Allison - - - - -100 shares
            Nrrs.Wright Titus - - - -30 shares
            K. P. Gifford - - - - - 100 shares
            Vernon Singleton - - - - 1 share
            Bill Weidler - - - - - - 10 shares
            Wright Titus - - - - - - 10 shares
            Texas Discount Company-1796 shares
            A. H. Knepper - - - - - 2; ;",;;i;
            J. H. Hickerson - - - -
            Frank Cain - - - - - - - 10 shares
            Albert Couchman - - - - -35 shares
            J. P. Levigne - - - - - -10 shares
            J. M. Cumby - - - - - - -21 shares
            Tom Beckett - - - - - - -50 shares
H0noreble 0. P. Lockhart, Page 3


        "The directors of City National Life Insur-
    ance Company are as follows:
            "Wright Titus
             David L. Mayer
             Albert Couchman
             Frank Cain
             Lt. A. V. Allison
             Fred Sheppard
             K. P. Gifford
             James H. Hickerson
             Thomas Beckett
          "The officers of City National Life Insurance
    Company are as follows:
            "Wright Titus, Presidept
             David L. Mayer, Vice Yresident 8~Treasurer
             Frank Cain, Vice President
             James H. Hickerson, Secretary
             A. H. Knepper, Assistant Secretary
             tiion end Cain, General Counsel
             Dr. Ben R. Buford, Medical Director
             M. B. Gammill, Actuary
        *The City National Life Insurance Company
     does not now own any reel estate of any kind, end
     the properties sought to be acquired will be e
     building site, and office building for its eccom-
     modation in the transaction of its business end
     for lease end rental.
        "In view of the fact that PI.W. Titus (who
     is the seme person es Wright Titus) is en officer
     end a director of both the insurance company and
     the other corporation; and in view of-the fact
     that I&s, Wright Titus is the wife, end Jack Austin
     Titus end Robert Elton (Bob) Titus are the minor
     sons, of E. W. (Wright) Titus, and all re stock-
     holders in one or both corporations, we would appre:
     ciate having your opinion as to whether or not any
     violation of Article 4727 of the Oivil Statutes or
     Article 577 of the Penal Code, or of any other pro-
     visions of the civil or criminal laws of Texas ap-
     plicable to such transection, would necessarily be
     involved in anv acquisition, and more especially
     the outright purchase, by City National Life Insur-
     ance Company from Texas Discount Company of the
honorable 0. F. Lockhart, Page 4


    above mentioned Dallas reel estate for the purposes
    end in the circumstances mentioned; end.if so,
    wherein such violations would consist, end upon
    whose pert they would be violations; and whether
    such violations, if env, would make it unlawful for
    us to approve the acquisition of such reel estate
    by the insurance company for the ourposes end in
    the circumstances above mentioned.*
        Article 4727, Vernon's Annotated Civil Statutes
reeds es follows:
       "No director or officer of any insurance
    company transacting business in or organized un-
    derthe laws of this State, shall receive any
    money or valuable thing for negotiattng, procuring,
    recommending or aiding in any purchase or sale
    by such company of any property, or any loan from
    such company, nor be pecuniarily interested, either
    es principal, coprincipel, agent or beneficiary
    in any such purchase, sale or loan. Nothing in
    this article shell prevent a life insurance cor-
    poration from making a loan upon e policy held
    therein, by the borrower, not in excess of the
    reeerve value thereor.**
       Article 577, Vernon's Annotated Penal Code provides:
       "IGodirector or officer of any insurance
    company transacting business in this State, or
    organized under the lews of this State, shell
    receive any money or valuable thing for negotiat-
    iw, procuring, reconunendingor aiding in any
    purchase or sale by such company of any property
    or any loan from such company, nor be pecuniarily
    interested either as principal, co-principal,
    agent or beneficiary, in any such purchase, sale
    or loan. Nothihg contained in this article shell'
    prevent a life insurance corporation from making
    a loan upon e policy held therein, by the borrower
    not in excess of the reserve value thereof. Any
    person violating any provision of this article
    shall be fined not less then three hundred nor
    more than one thousand dollars."
Honorable 0. P. Lockhart, Page 5



        In construing the foregoing articles this depert-
ment said in opinion No. O-1889:
        "Article 4727 end Article 577, Penal Code,
     1925, have as their combined objective the pro-
     hibition end penalizing of a director end offi-
     cer or directors and officers of corporations
     in respect to certain personal acts. Both the
     prohibition and the penalty apply to individuels.
     They do not embrace the corporation itself as an
     entity. The language is clear, unambiguous end
     not subject to construction;
        n . . . ."

        It is further stated in said opinion (No. O-1889)
        "The fact that e part or all of the directors
     of one contracting corporation are directors of
     the other contracting corporation affords a ground
     for subjecting the contract into which they enter
     to the strictest scrutiny by courts of equity.
     2 THOMPSON ON CORPORATIONS 841; 10 TEX. JUR. 959.”
        The true rule in this State with respect to oon-
tracts between corporations having interlocking directors
or officers in common generally may be found enunciated in
the case of City National Bank v. Merchants and Farmers
National Rank, 105 S. W. 338, to the effect that:
       "It is not inherently wrong for two corpore-
    tions, having all or a part of their controlling
    officers in common, to contract with each other.
    Even where a majority or all of the contracting
    officers of two corporations are common to both,
    that fact alone does not make e contract between
    the two corporations, entered into by such contrect-
    ing officers, absolutely void end incapable of
    ratification. The current of modern authority
    holds that the most that cen.be said against such
    contracts is that thay will be subjected to cbse
    judicial scrutiny when questioned et the proper
    time, and will be set aside upon the appearance
    of unfairness. But if it should appear, upon in-
    vestigatioa, that the contract is fair and there
                                                             226

Honorable 0. F. Lockhart, Page 6


     has been no abuse of the trust relation, the con-
     tract will be pernitted to stand. . . . The sx-
     tent to which the courts will go in refusing to
     enforce contracts of this kind, es sho\;nby the
     adjudicated cases, depends in a great measure upon
     the facts of each particular case. No inftaxible
     rule has been established."
        It is stated in the case of Gaddes v. Anaconda
Copper Mining Company, 254 U. S. 590, 599, 41 S. Ct. 209,
45 L. Ed. /25;

        "The relation of directors to corporations
     is of such e fiduciary nature that transections
     between boards having common members are regarded
     as jealously by the law es are personal dealings
     between a director and his corporation, and where
     the fairness of such transections is challenged
     the burden is upon those who would mainM.n them
     to show their entire fairness end where a sale is
     involved the full adequacy Of the consideration.
     Ebpecially is this true where e common director
     is dominating in influence Or in character. This
     court has been consistently emphatic in the eppli-
     cation of this rule, which, it has declared, is
     founded in soundest morality, and we now add in
     the soundest business policy."
        This department held in OPiniOn No. O-1586   (Con-
ference Opinion No. 3097) that:
       "Article 4727, Revised civil Statutes of Texas,
    1925, end Article 577, Penal Code Or Texas, 1925,'
    do not prohibit a life insurance C0mpen.vfrom mek-
    ing e loan to another corporation if a director or
    or officer of the borrowing corporation, where the
    officer or director of the insurance company has
    no personal interest in the loan end recaives no
    money or valuable thing for negotiating, procuring,
    recommending, or aiding in the furtherance of the
    loan, either as principal, co-principal, agent or
    beneficiary in such loan."
Honorable G. P. Lockhart, Page 7



        What was said in the foregoing opinion with refer-
ence to a life insurance company making a loan to another
corporation where the same person was a director or officer
of both corporations Is equally applicable regarding the pur-
chase of real estate from one corporation by a life insurance
company where the same person is a director ordricer in
both corporations.
        It is our opinion that Article 4727, Vernon’s Anno-
tated Civil Statutes, and Article 577, Vernon’s Annotated
Penal Code, do not prohibit a life Insurance company from
purchasing real estate rrom another corporation if a director
or officer of the Insurance company is also a dire&or or
off’icerof the corporation selling the real estate, where
the officer or director of the insurance company, who is also
an officer or director of the corporation selling the real
estate, has no personal interest in such transaation and re-
ceives no money or valuable thing for pegotiating, procuring,
recommending, or aiding in the furtherance of the transaation,
either as principal, co-prlnoipal, agent or beneficiary therein.
        Article 4726, Vernon’s Annotated Civil Statutes sets
forth the purposes for which a life insurance oompnay may hold
real estate.
        With reference to the first paragraph in your let-
ter as quoted above It is not clear whether or nbt the real
estate in question oonstltutes a part of the capital stock of
the City National Life Insuranae Company or is to be used for
the purpose of paying such stock increase. If it is the pur-
pose of the city National Life Insurance Company to use the
real estate for the purpose of paying its capital stock in-
crease your attention is directed to our opinion No. 0-4556
addressed to you wherein it is stated:
       11   .by express statutory declaration, the
    Commissioners must rind, as a condition precedent
    to the issuance of a certificate of authority to
    do business, that all of the capital stock of the
    company has been fully paid up and is in the cus-
    tody 0r the officers, ‘either in cash or securities
    of the class in which such companies are authorized
    by this chapter to Invest or loan their funds’.
       “Article I+725lists the ‘securities’ in which
    a life insuranoe company organized under the laws
                                                               228

 Honorable 0. F. Lockhart, Fag8 8


      of this State may invest or upon which it may loan
      its funds.
           1’. . .
         “Of course, real estate acquired by the company
      under the circumstances and for the purpose pro-
      vided by Artiole 4726, is property which the oom-
      pany is authorized to own, just as it my own per-
      sonal property, such as furniture and fixtures and
      office equipment and supplies, necessary to the
      transaction of its business. But 'securities1 Is
      a term of more restricted meaning than ‘property’,
      and Article 4.720 expressly provides that the oer-
      tifioate of authority shall be issued only if it
      is round that the capital of the company is on hand
      in the form or cash or ‘ssourities* in which it is
      authorized to invest or loan its runds.
        N~Seourltlesl are evidenoes of obligation for
     the payment of money. See Words and Fhrases, Perm.
     Ed., Vol. 38, ‘Securities*. In no proper sense
     can real property, encumbered or unencumbered, owned
     by the corporation be classed as a ‘security’ under
     Artlole 4720.”
         It is noted in your letter, as above mentioned,
that the wife and children of Mr. Titus may be stockholders
of one or both of the corporations. Neither of the statutes
(Article 4727, Vernon’s Annotated Civil Statutes, or Article
577, Vernon’s Annotated Penal Code) refers to stockholders,
consequently, the fact that the wife and ohildren of Mr.
Titus are stockholders of one or both corporations Is imms-
terial.
         As all of the above mentioned opinions referred to
in this opinion have been addressed to the Chairman of the
Board of Insurance Commissioners we do not deem it necessary
to enclose copies of’ such opinions herewith.
                                    Yours very truly
APPROVED
Opinion                          ATTORNEY GENEBAL OF TEUS

                                 By (Signed)
                                          Ardell Williams
                                                Assistant
