                                  Arre-.      T~BXAR     T@3'11
  JOEIN I.. a*ra.
Nl-roRNIy OMIPII.
                                            May   11, 1973


       The Honorable    James H. Whitcomb                 Opinion   No.   H-   38
       County Attorney,    Colorado County
       P, 0. Box 867                                      Re:   May Commissioners      Court
       Columbus,    Texas 78934                                 accept a bid as depository
                                                                bank either with an illegal
                                                                rate of interest or pro-
                                                                viding that the bank will
                                                                pay “the legal rate       of in-
                                                                terest” and related       ques -
       Dear   Mr.   Whitcomb:                                   tions.

             You have requested   an opinion on questions            regarding  applications
      submitted   under Article 2546, V. T. C. S., which            sets out the procedures
      for the selection of county depositories.   Article           2546 provides:

                          “It shall be the duty of the Commissioners              Court
                    at ten o’clock      a.m.   on the first day of each term at
                    which banks are to be selected             as county depositories,-
                    to consider      all applications     filed with the County Judg.e,
                    cause such. ap >lications        to be entered upon the minutes
                    of the Court and to select those applicants             that are
                    acceptable      and who offer the most favorable          terms and
                    conditions     for the handling of such funds’ and having
                    the power to reject those whose management                 or con-
                    dition in the opinion of the Court,           does not warrant
                    placing of county funds in their, possession.              The
                    County Commissioners            Court shall have the power
                    to determine       and designate     the character     and amount
                    of county funds which will be deposited             by it in said
                    depositories       that shall be ‘demand deposits,        ’ and
                    what character        and amount of funds shall be ‘time
                    deposits,    ’ and maycontract          with said depositories
                    in regard to the payment of interest             on ‘time deposits’
                    at such rate or rates as may be lawful under any Act
                    of the Congress        of the United States and any rule or




                                               p. 153
Honorable      James    H. Whitcomb,      page    2   (H-38)




          rerzulations    that may be promulgated         by the Board of
          Governors      of the Federal     Reserve    System and the Board
          of Directors      of the Federal     Deposit Insurance      Corpora-
          &        When the selection       of a depository    or    depositories     .
          has been made, the checks of those applicants                which
          have been rejected        shall be immediately       returned.     ‘The
          check or checks of the applicant          or applicants     whose,
          applications     are accepted      shall be returned when said
          depository     or depositories      enter into and file the bond
          required     by law and said bond has been approved             by
          the Commissioners          Court and the State Comptroller,
          and not until such bond is filed and approved.               The term
          ‘demand deposits’,        as used herein,      shall mean any
          deposit which is payable         on demand,     and the term
          ‘time deposits’,       as used herein,     shall mean any deposit
          with reference       to which there is in force a contract,
          that neither     the whole nor any part of such deposit may
          be withdrawn       by check or otherwise       prior to the ex-
          piration    of the period of notice which must be given in
          writing    in advance of withdrawals.        ‘I (Emphasis      added)

     According       to your   request,   only   two banks     submitted   applications    .
or bids.     The     application  from bank H contained   varying  interest   rates        ‘on
certificates    of    deposit of less than $100, 000, depending   on, t-he maturity
period of the        certificate:

          “We submit to you mr bid as your County Depository        for
          all funds as follows: We will pay interest on Certificates
          of Deposit on denominations  of less than $100, 000. 00 as
          follows:

            C.of D. with three month maturity        .4 l/2%
            C.of D. with six month maturity           5% interest   payable quarterly.
            C.of D. with twelve month maturity        5-l/2% interest   payablequarterly
            C.of D. with maturity    of twelve
            months or longer                          5-314% interest    payable quarterly
            C.of D. in denominations     of $100, 000. 00 or more issued for one year
            or longer                                 lO..lZ% interest  payable quarterly

     ’.     Enclosed    is our last published      statement   of the financial     condition
            of this bank.    Also enclosed    is    our Houston Exchange       in. the. amount.
            of $1, 000. 00 guaranteeing    that    this bank will make the required          bond
            according    to the law and ruling      of this Honorable    Court. ‘I

                                            p. 154
The Honorable       James   H.    Whitcomb,      page   3   (H-38)




    ~The maximum      allowable  interest    rate of certificates          set by the
Federal    Deposit  Insurance   Corporation     and the Federal           Reserve
System is 7 - l/2% per annum except that no maximum                      is prescribed
for certificates   of deposit maturing     in 30 to 89 days.

    The bid of bank C was:     “We will pay the legal rate of interest
on certificates of deposit according   to your request,  and/or wishes,
depending on maturities    during this two year contract  . ’. . . ”

    A deposit of $1,000 was submitted with each bid.    The Commissioners
Court has accepted   the bid of bank H but its bond has not been approved.

    Five    questions   have     been presented.        The first    two are:

               “(1) Does the Commissioners              Court   have   the
           authority to accept this bid? ‘I

                 “(2)  Assuming     the    Court does not have the
           authority    to accept   the    bid because of the unlawful
           rate in the written      bid,    would the entire bid be
           illegal,   or only the    one    provision?”

     Under Article     2564, the Commissioners      Court has considerable
discretion   in selecting   a depository.  Citizens   State Bank of Roby v.
McCain,    274 S. W. 2d 184 (Tex. Civ. App.,     1954, no writ).

    A contract   that violates    a valid statute is illegal.  Woolsey   v. Pan-
handle Refining    Co.,  116 S. W. 2d 675 (Tex. Sup. 1938) and Lewis       v. Davis3
199 S. W. 2d 146 (Tex. Sup. 1947).       The Commissioner     8. Court may not
enter into an illegal   contract.

    If the bid of bank H is construed      to be an offer to issue certificates
of deposit in amounts of $100,000 or more,          with maturities    of one year
or more,   and to pay 10.12% interest      on such certificates.     then the pro-
posed contract     would be clearly  illegal.   If, on the other hand, the bid
may be construed      to be an offer to issue certificates     of deposit,  with
maturities   of 30 to 89 days, but with the understanding         that suchamounts
of money would be held by the bank for periods          of one year or longer,
with the certificates    being renewed    from time to time within the year,       ,




                                             p. 155
The Honorable       James   H. Whitcomb,      page   4 (H-38)




then the offer     to pay 10.12% interest    for that period would not be illegal,       .
inasmuch as       interest   rates on 30 to 89 day notes are not regulated.     We
are informed       that performance    in this manner to avoid an illdgai rate
of interest  is    not uncommon.

     It is not possible    for us to determine,    from the bid itself,      which
of the above two alternatives        was intended by the bank.      It is significant
that in its bid, with regard to certificates       of deposit for less than
$100, 000, the bank consistently        used the word “maturity”      in conjunction
with the time periods       di,scussed.   However,    in connection    with the bid
for denominations       of $100, 000 or more,    the word “maturity”       is not
used, and the bank simply offered          to pay 10.12% on such certificates
“issued    for one year or longer”.        The term “issue”    is defined in 5 3.102
of the Business     and Commerce        Code, as follows:

             ” ‘Issue’ means the first        delivery   of an instrument
         to a holder or a remitter.”

    The term “maturity”,         on the other hand, means the date on which
a negotiable   instrument     is due and payable.   Vestal v. Texas Employers
Insurance    Association,     285 S. W. 1041 (Tex. Comm. App.,   1926).

     Without more info’rmation       than we have been provided   about the
intentions    of the parties  in this instance,  and without  any information
as to the past custom and usage of these parties,         we are unable to
resolve    the ambiguities   in bank H’s bid, and are unable to say whether
or not it is a valid bid.

     Inanswer       to the second question,      bank H’s application  was submitted
“as your County Depository           for al.1 funds. I’ There  is no provision
indicating     that the bid is for anything less than all items listed in the bid.
Fessman       v. Barnes,     108 S. W. 170 (Tex. Civ. App. ,* 1908, no writ);   If the
portion    is illegal,   it is a part of the entire bid and both it and the legal
portions     should be considered       as one and the entire bid should be rejected.

      The Texas rule     on “competitive      bidding”   has been   stated   in the
following   manner:




                                           p. 156
The   Honorable         James      H. Whitcomb,         page   5   (H-38)




             I’ ‘Competitive     bidding’ requires       due advertisement,
             giving opportunity       to bid, and contemplates        a bidding
            ‘on the same undertaking          upon each of the same material
             items covered      by the contract;      upon the same thing.        It
              requires    that all bidders     be placed upon the same plane
            ‘of equality    and that they each bid upon the same terms
             and conditions      involved    in all the items and parts of
             the contract     . . . . Its purpose      is to stimulate    compe-
             tition,   prevent    favoritism    . . . for the best interests
             and benefit of the taxpayers          . . . . “(emphasis     added).

Sterrett   v. Bell,  240 S. W. 2d 516, 520 (Tex. Civ.App.,   1951, no writ).
See also,    Texas Highway Commission      v. Texas Association    of Steel
Importers,     372 S. W. 2d 525 (Tex.Sup.,   1963).

    Until the bond is approved,   there is no final contract and the County
can withdraw   its approval.   The Citizens State Bank of Roby v. I&Cain,
supra.

      The    third     question    is:

            “Assuming    the court does not have the authority   to
            accept the bid because   of the unlawful rate in the
            written  bid, ran the county keep the $1, 000. 00
            submitted with the bid? ”

     The statute requires   the county to return the deposits      of all rejected
bidders when a successful     bidder is selected.     To construe    it to allow
the county to retain the deposit of a bidder who is selected        and then
rejected   would result in the unequal treatment      between   unsuccessful     bid-
ders and would have characteristics      of a forfeiture.    not favored   by the
law.    Manton v. City of San Antonio,    207 S. W. 951 (Tex. Civ. App. , 1918,
err. reftd. ) and Mogren   v. Goetze,   71 S. W. 2d 950 (Tex. Civ.App.,        1934,
err. dislm. ). It is, therefore,    our opinion that the County cannot keep
the deposit   submitted with the bid in question.

      The     fourth    question    presented     is:




                                                p. 157
The   Honorable   James    H. Whitcomb.       page   6   (H-38)




         “Once a Commissioners       Court has accepted   a bid
         as county depository,    subject to bond (or pledge   contracts)
         approval., would the county be subject to any liability     if
         the court rescinded   its order and selected   another bank? ‘I

     In the Citizens  State Bank case,   supra,  suit was brought by the ‘,
State bank selected    by the Commissioners     Court for damages   for loss
of profits  due to the depositing of county funds in a National   bank.   The
court specificaUy    stated:

         II . . . In the absence  of a showing that appellant’s
         bond or security    was approved,    there was no final
         contract   between the parties    and appellant  acquired
         no vested rights which would prevent        the Commissioners
         Court from rescinding     its prior order. ” (274 S. W. 2d at
         186).

See also,   Liquidation of People’s  Bank of Butler,              127 S. W. 2d 669 (Ma.
Sup.  1939).   We are of the opinion that the County              would have no liability
under the facts stated and the cases cited.

     The fifth  and remaining   question       is: “Would a bid based upon ‘the
legal rate of interest’ on Certificate8        of Deposit be a valid bid?                   ,‘.

     Article 2564, supra, allows the Commissioners       Court to contract
in regard to the payment of interest  on “time deposits”     at “such rate or
rates as may be lawful: under regulations     of the Federal   Reserve  System
and the Federal   Deposit Insurance  Corporation.

     If the bid in question    is a bid based upon the maximum            legal interest
rate, the bid would bind the applicant        to pay the maximum          rate on each
category    of certificates   of deposit.    However,     on certificates      for $100,000
or more for 30 to 89 days, there is no maximum                 interest  rate specified
by federal    law.    In this area,   the bid would be incomplete.           It sets no
rate for such certificates       of deposit and does not specify whether            the  ,
applicant   is bidding on every category       of certificate.




                                        p. 158
    .


.

        The   Honorable   James   H. Whitcomb,       page     7     (H-38)




                                     SUMMARY

                      Where a bank submits an application      to be the
                 county depository   under Article    2546, Vernon’s
                 Texas Civil Statutes,    and purports   to bid for all
                 funds, the bid must state a legal rate of interest
                 for time deposits   of all amounts and lengths of
                 time.   Resort. may be,had to custom and usage
                 to determine   the scope and terms of a bid.

                      When such a ‘bid is construed    to omit relevant
                 items,  or to call for illegal terms,    it cannot be
                 later corrected   and cannot be accepted.

                                              Very    truly       yours,




        DAVID M, KENDALL,          Chairman
        Opinion Committee




                                              p. 159
