Honorable 0. P. Lockhart, Chairman          Opinion No. O-6036
Board of Insurance Commiesionere            Re: Whether debentures created by
Austin, Texas                               the authority   of indentures or trust
                                            agreements which contain any of the
                                            several provisions   for additional
                                            indebtedness,   mentioned herein, are
                                            eligible  for investment under Art.
                                            4725, Vernon's Annotated Civil Stat-
Dear Sir:                                   utes.

             Your letter of May 17, 1944, requesting the opinion of this
department    regarding the matters stated therein,  is in part, as follows:

              "Please see the amendment by the Forty-eight          Legislature   to
Article     4725 as follows:
           " . . . I find that the greater portion of indentures or trust
agreement authorizing     issuance of debentures for sale to the investing
public contain provisions      to the effect that if liens are subsequently
created againat the properties      covered by the debentures, the latter shall
become equally and ratably secured with the subsequent obligations       and
that the terms of the indentures may be amended with the consent of more
than two-thirds   in value of outstanding debentures.      Attached you will
please see copied excerpts from statements Included in Moody's report
on industrial   securities,    which may be accepted for the purpose of thi6
inquiry as an accurate statement of the terms of the indentures.

            "Will you please advise me whether debentures created by au-
thority  of indentures or trust agreements which contain any of the sev-
eral provisions   for additional    indebtedness as set out on the enclosed
copied excerpts are eligible     for investment under Article  4725 as amended."

              Art.   4725, Vernon's   Annotated Civil   Statutes,    provides:

              "A life insurance company organized under the laws of this State
may invest     in or loan upon the following  securities, and none others, viz:

            "1. It may invest any of its funds and accumulations in the
bonds of the United States or of any state,      county, or city of the United
States;  or in any bonds, or interest-bearing     warrants issued by authority
of law by any county, city, town, school district       or other municipality
or sub-division  or by any educational   institution    of the State of Texas
which is now or hereafter may be constituted      or organized under the laws
                                                                                          ..




Hon. 0. P. Lockhart,    page 2 (o-6036)



of this state, and is authorized to issue ruch bonds and warrants under
the Constitution   and laws of this state, provided legal provision            has been
made by a tax to meet raid obligations,         or in the bonds and warrants of
any educational   institution      of the State of Texas, or any municipally
owned water system or aewer nyrtem when speclal.revenues           to meet the prin-
cipal and interest payments as they accrue upon such obligationr              Ehall
have been appropriated,       pledged or otherwise provided by ouch municipality
or educational   institution;      or in any paving certificatee     iesued by any
city in the State of Texae and secured by a firet lien on real eatate;
or in bonds issued under and by virtue of the Federal Farm Loan Act ap-
proved July 17, 1916, when such bonds are issued against and eecured by
promiseory notea or obligationa,        the payment of which ie secured by mort-
gage, deed of trust or other valid lien upon unencumbered real eetate
situated in this state3 or in first mortgage bonds on real or personal
property of any solvent corporation,        and which hae not at any time within
a period of five (5) years defaulted in the payment of any of its debta;
or, in the debenturee of any such corporation          with a capital    stock of not
lesl than Five Million      ($5,000,000.00)    Dollare where no lien eXiEtE, or
under the provisions     of the indenture providing for the iseuance of such
debenturee, can be created against the real or personal property owned
by such corporation     at the time the debentures were issued; but in no event
shall the amount of such investment in the bonds or debentures of any
one such corporation     exceed (5%) per cent of the admitted assets of the
insurance company making the investment; or in interest-bearing              notes or
bonda of the CniverEity of TexaE issued under and by virtue of Chapter
40, Actr of the 43rd Legislature,        Second Called Seseion.

           “2.  It may loan any of its funds and accumulationa,        taking
aE security therefor   ouch collateral     as under the previous subdivision
it may invest in.    It may also make loans upon firrrt lienr upon real es-
tate, the title  to which in valid and the value of which is forty (40$)
per cent more than the amount loaned thereon, or upon first        liens upon
learhold ertates in real property and improvements, eltuated thereon,
the title  to which IE valid,   and the leasehold has not less than thirty
(30) years to run before expiration;       provided that the duration of any
loan upon such leasehold estateE shall not exceed a period of ten (10)
yearn; or upon sny obligations     secured collaterally   by any such first     liens.
If any part of the value of such real estate is in buildinge,         such buildings
shall be ineured against loae by fire for at 1eaEt fifty        (56) per cent
of the value thereof with loos clause payable to such company. It may
aleo make losne upon the Eecurity of or purchalre of its own policier.
No loan on any policy ehall exceed the reserve value thereof.          No inveat-
ment or loan, except policy loane, ahall be made by any such ineurance
company, unless the same shall first have been authorized by the Board
of Directors or by a committee charged with the duty of supervising           such
investmenta or loans.    Bo such company shall subscribe to, or participate
in, any underwriting of the purchane or aale of securities        or property,
or enter into any such transaction      for such purpose, or Eel1 on account
of much company jointly   with any other person, firm or corporation;        nor
Eon. 0. P. Lockhart,    page 3 (0-6036)



shall any such company enter into any agreement to withhold from sale
any of it@ property,    but the dirporition  of itr property   rhall be at all
timer within the control of itr Board of Dlrectorri      provided that the
provlrionr   of this rub-division   as to the value of the real ertate cow
pared to the amount loaned thereon and as to the duration of ouch loan
shall not apply to loam secured by real estate which are insured under
the provlrlona   of Title II of the “IVational Housing Act”, enacted by the
Congreos of the United States and approved by the President June 27, 1934.
            “-
             3. Any life insurance company of the state,        for the purpose
of investing   its capital and surplus or any part thereof,        over and above
the amount of its reserves,      may purchase and held as collateral       security,
or otherwise,   and sell and convey the capital      stock, bonds, bills     of ex-
change or other commercial notes or bills       and securities    of any solvent
dividend paying corporation which has not defaulted         in the payment of
any of its obligations    for a period of five (5) years, the current market
value of which such stock, bonds, bills       of exchange or o?her commercial
notes or bills    and securities   shall be at all times during the continu-
ance of such loan at least fifty      (50%) per cent more than the sum loaned
thereon; provided that no such company shall loan or invest in its own
stock, nor more than five (5%) per cent of the amount of its capital and
surplus in the stock of any corporation,       and provided further that no
such company shall invest any of its funds in any stock on account of
which the holders or owners thereof may in any eve.nt, be CT become liable
to any assessment except for taxes, nor in the stock of any oily company
or manufacturing company unless such corporation         has capital   stock of not
less than Five Million ($5,000,000.00)       Dollars and unless such corporation
has paid dividends for a period of five (5) years and has not defaulted
in the payment of any of its debts for a period cf five (51 years.

             'That in any case in which a life insurance company organized
under the laws of this state, shall reinsure the business and take over
the assets of another life insurance company, either domestic or foreign,
all investments of such re-insured      company that were authorized,  when
made, by the laws of the state in which it was organized,       as proper se-
curities   for investment of the funds of a life     insurance compsny, and which
are taken over by such re-insuring      company, shall be considered as valid
securities     of such re-insurl.ng company under the laws of this state, pro-
vided such investments are approved by the Board of Insurance Commissioners
of this state, and same are taken over on terms satisfactory       to said Board;
and upon the condition that the Board of Insurance Commissioners shall
have the power to require the re-insuring      company to dispose of such in-
vestments upon such notice as it may deem reasonable."

           Hon. Lewis T. Carpenter, Vice President and General Counsel
of Southland Life Insurance Company, Dallas, Texas, and Hon. Chas. Franc is,
of the law firm of Vinson, Elkins, Weems & Francis,   of Houstcn, Texas,
have presented briefs regarding the matters under consideration    which
have materially  aided us in passing upon the questions presented.    We
thank these gentlemen for these briefs.
Eon. 0. P. Lockhart,     page 4 (o-6036)



          Art. 4725, supra, was amended by the 48th Legislature,      Regular
Session, 1943, p. 192, Chapter 11, and it la apparent that it was the
intent of the Legislature   to enlarge the investment field of life insur-
ance companies to include debentures of large corporations.       We believe
that the netting of a $5,000,000.00      capitalbzation leads to the conclu-
sion that the Legislature   desired to place its EtaZUp of approval on de-
benturea of large corporations     in control of large amount of assets re-
quiring $5,000,000.00   in capital   stock.

          Referring to the term "debentures",          it   is stated   In Corpus Juris
Secundum, Vol. 25, page 1301:

            "It has been said that there is not any precise legal defini-
tion of the term, and it is not in either law or commerce a'strictly               techni-
cal term, or what is called a term of art.           It has, however, been used by
lawyera frequently     with reference to instruments under certain statutes;
and a debenture, although never legally defined,           is included under one
or three descriptions;      firat,  as a simple acknowledgment under seal of
the debt, Second, an instrument acknowledging the debt and charging the
property of the company with repayment. Third, an instrument acknowledg-
ing the debt, charging the property of the company with repayment and fur-
ther restricting     the company from giving any prior charge.          Having in
mind this claseification,       the term may be said to signify a debt; an ac-
knowledgment of a debt, in the nature of a bond or bill,            etc.;   a promise
to pay a fixed EWI of money; a security or promise to pay, for a loan of
money 166ued by a public company, usually creating a charge on the whole
or a pert of the compeny’e stock and property, althcugh not necessarily
 in the form of e mortgagei an agreement by which 8 right in equity to a
 charge or security on personal chattels as conferred;           an instrument, gen-
erally under real, for the repayment of money lent, usually,              if not ex-
 clunively,   used for obligation6     of corporations    or large monied co-part-
nerehlps,   issued in e form convenient to be bought and sold as investments;
an instrument importing an obligation        or covenant to pay, in most cases
aa the present day accompanied by some charge or security,             although es
has been raid, the word doeE not neceseerily           imply a secured debt or claim,
but, from the context,      it may be construed as doing ao, the nature of
the obligation    following    the terms of agreement or plan under which it was
 iseued; an instrument in the nature of a mortgage to secure a certain sum
 of money, with interest,      to which coupons are attached, making the interest
 payable, the term debenture including the entire instrument of obligation,
 consisting   in the body wherein is set forth the obligation          as to repay-
 ment of the principal     sum, together with coupons attached thereto.          . ."

           In the case of Lorimer vs. McGreevy, 84 S. W. 2d 667, (Kansas
City Court of Appeals, MO.) quoting from the work entitled  “Green Brice’s
Ultra Vires” (2d Am. Ed.) page 230, it is said that:

          “Debentures may be defined as instruments            under seal, creat.ing
a charge according to their wording upon the assets            specified  therein
Hon. 0. P. Lockhart,   page 5 (0-6036)



of the corporation,    and, to that extent, conferring upon the grantees
e priority  over other subsequent creditors      or existing     creditors not pos-
reared of ouch a charge.     Under this term, houever, are often included
two other varietler    of lnmtrumentr which do not anewer thie definition
strictly.   There em consequently three varieties        of debenturer:      1.
Instruments which do not confer a charge, and which are nothing more nor
less than ordinary bonds end ought to be so styled.          II.    Debentures in
the true and proper sense.     III.     In&rums&o which contain more than a
mere charge, which are mortgages in fact, and which, from possession            in
addition thereto,   the characteristics     of debenturea, may be for convenience,
and often are celled mortgage debentures."

            In the ceae of Masonic Temple Corporation     vs.   Harris,   242 Ill.
App. 296,   it ie said:

             “A debenture is a debt; an acknowledgment of a debt, In nature
of a bond or bill;      a writing acknowledging a debt; a document which either
creates e debt or acknowledges it; an instrument which shows that party
owes and is bound to pay; an instrument generally under seal, for the
repayment of money lent; the word being usually used of obligations          of
corporations     or large monied copartnerships,   issued in form convenient
to be bought and sold as investment; an investment importing an obligation
or covenant to pay, in most cases now accompanied by some charge or security;
an agreement by which a right in equity to charge or secure on personal
chattels    conferred;   an instrument In nature of mortgage to secure a certain
sum of money, with interest,       to which coupons are attached...   0 they may
be simple acknowledgments or promises to pay, like promissory notes; they
differ   from a mortgage in not conferring legal title      or any ordinary right
of ownership, and are at most only equitable mortgages, conferring          only
equitable    rights;   . . ."

           The foregoing  definitions  and statements regarding the term
"debentures" are stated merely for the purpose of showing how such term
is ordinarily   used and understood.   Ye must assume that the Legislature
used the term "debentures"    in Art. 4725 as that term is ordinarily  used
and understood.

            The term "debentures"  as used in Art. 4725, supra, means, we
believe,  an obligation   which is not secured by a first mortgage on the
real or personal property of the corporation    of the kind described in
said statute.    Apparently,  the Legislature intended to permit the purchase
of such unsecured debentures where: no lien exists;     or where none "can
be created against the real or personal property owned by such corpora-
tion at the time the debentures were issued."      It is apparent that at
the time of the execution of the indentures or trust agreements for said
debentures,   it must be presumed that there is no lien or other secured
debt owed by the corporation.     Thus with the issuance of the debentures,
all property of the corporation,    both real and personal,  becomes subject
to the payment of the debts created by such debentures.      As long as no
Hon. 0. P. Lockhart,   page 6 (0-6036)



lien exists,   or, as provided by said statute,      nons can be created against
the real or pareonal property owned by such corporation at the time the
debentures were isrued, there would be no question whatsoever but that
such investments am perfectly      valid   and legal under Art,. 4725, rupra.
However, when a lien is created rubrequent to the issuance of the debenturea,
then the status of these debenturea becomes Important to the Board of
Inrurance Commissioner1 as to the legality        of neme an invertmenta and
the security offered thereby.     We believe that no greater protection        could
be afforded to the holders of these debentures than a specific         provision
contained in the debenture8 or trust agreements creating Bald debenturea
inhibiting   the creation of any further lien without these debentures equally
and ratably becoming secured.      If under an indenture, a corporation       can
subsequently issue bonds and give security for those bonds without ratably
securing the outstanding debentures, then Such types of debentures are
not eligible   for purchase.   If, however, outstanding debentures con be
made into first mortgage bonds, by reservations        contained in the indenture
or trust agreements creating debentures,        such type of debentures are eli-
gible for purchase because they conform to the requirement of the act
because no lien exists when the debentures are issued and hence the owner
hae the protection    of unmortgaged assets.      When under the reservations
of the indenture, or trust agreement, a lien is given which ratably se-
cures such debentures, they become first mortgage bonds and hence are
eligible   under the statute as it read prior to the 1943 amendment. The
reservations   in the indentures,   or trust agreements, do not permit a cor-
poration to deprive the debenture holder of his rights against corporate
property as it existed at the time the debentures were issued.          The cor-
poration can strengthen such rights by giving a specific        and ratable lien.
When this is done, the unsecured debentures become first mortgage bonds,
and in either event, are eligible       for investment by life insurance com-
panies.

           We do not deem it necessary to quote the excerpts accompanying
your request as we believe that the following   statement is sufficient   to
anewer your request.   In other words, if the debentures mentioned meet
the requirements hereinafter   stated, then they are eligible for invest-
ment, if they do not meet the requirements, they are not eligible     for
inveetment under Art. 4725, supra.

           It is our opinion that debentures created by authority of in-
dentures or trust agreements are eligible     for investment under Art. 4725,
supra, where no lien exists or where none can be created against the real
or personal property owned by such corporation       at the time the debentures
were issued and when the lien is created subsequently to the issuance of
the debentures,  such debentures are eligible     for investment under said
Statute when they are equally and ratably secured.        In other words, Such
debentures are eligible   for an investment under Art. 4725, a8 above stated,
where no lien exists,   or where none can be created against the real or
personal property owned by such corporation      at the time the debentures
were issued, or when a lien is created subsequently to the issuance of
Hon. 0. P. Lockhart,   page 7 (o-6036)



such debentures,  if such debentures are equally      and ratably       secured,
then they also are eligible  for investment.

                                                Very truly      yourr

                                          ATPORNEXGENFULOFTEXAS


                                          By   /s/   Ardell    Williams
                                                     Ardell    Williams
                                                              ABSiBtant

AU:rt:lm


           APPROVED
                  JUN 27,     1944

           /B/   Geo. P. Blackburn

           (ACTING) ATTORNEYGFXWAL OFTEXAS



                                           APPROVED
                                           OPINION
                                          COMMITmE
                                          BY Is/ AIM
                                      .     CHAIRMAN
