                           October 1, 1987




Honorable John R. Hale                   Opinion No. JM-802
Clmmlissioner
Credit Union Department                  Re:    Conditions under which a
914 East Anderson Lane                   a credit union may make certain
Austin, Texas 78752-1699                 loans to insiders

Dear Commissioner Hale:

     You request an opinion on the application of a provision in the
Texas Credit Union Act to certain situations that may arise in the
day-to-day operation of a credit union subject to supervision by your
department. Specifically, you cite section 7.02 of the Act which
provides:

            No credit union may make a loan or aggregate of
         loans to any one member, including loans to the
         member's business interests, in an amount greater
         than 10 percent of the credit union's total assets
         or a lesser amount established by commission rule.

V.T.C.S. art. 2461-7.02. This provision is sometimes referred to as
the "ten percent loan limit" or simply "the loan limit." You describe
your understanding of the purpose and effect of the provision as
follows:

         The limitation is significant in the early
         development of a credit union and diminishes as
         assets increase. An average size credit union now
         has assets of about $7 million; therefore, the 10%
         limit is seldom a factor in credit decisions
         because very few credit unions would loan $700,000
         (assuming assets of $7 million) to any one member,
         because of obvious risks, availability of funds,
         and perhaps natural caution and inexperience in
         considering a transaction of that magnitude. The
         limitation rarely is violated, particularly in
         larger,credit unions.

          It is assumed that the legislative intent was to
          protect a credit union from abuse by insiders
          during early development and sufficient safeguards



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Honorable John R. Hale - Page 2   (Jl+802)




         wouid evolve as the credit union grows. It is
         also assumed that a 10% limitation on a credit
         union of $100 million in assets was never intended
         to provide a legal opportunity for a single member
         to borrow $10 million.

         Bowever. circumstances could arise where the 10%
         limitation is indirectly exceeded. For example, a
         member of a $1 million credit union may be loaned
         $70,000 to finance a home. Soon thereafter the
         member may cosign a loan for $50,000 to another
         member.   In this situation the borrower is
         directly indebted for $70,000 with a contingent
         liability of $50,000, the aggregate $120,000
         exceeding 10X of assets.

          In another case, in a $1 million credit union, two
          members may want to borrow $120,000 and secure the
          indebtedness with real property of sufficient
          collateral value.    Since neither member could
          borrow more than $100,000 without exceeding the
          10% limitation, each may seek to borrow $60,000
          and use the same property to secure both loans.
          Each borrower could limit his liability by
          obligating himself for only $60,000, or they could
          cosign each other's loan and become contingently
          liable for $120.000.

          Using the same figures from the preceding example,
          they may seek to form a partnership and borrow the
          full $120.000 through the partnership (assuming
          the partnership entity is a credit union member).
          In this instance, they may seek to limit personal
          liability for a set amount, e.g. $60,000 for each
          of the two partners, or they could assume full
          joint   and   several    liability.    There   are
          innumerable variations to these examples.

     This office has previously considered the application of article
2461-7.02 to another factual situation. In Attorney General Opinion
MW-524 (19821, we noted that article 2461-7.02 is subject to the
specific statutory authority of the credit union commissioner. We
stated that it was a matter for the credit union commissioner to
determine whether a particular loan practice violates the provision:

             The credit union commissioner has specific
          statutory authority to determine whether a partic-
          ular practice by a credit union violates the
          Credit Union Act. V.T.C.S. art. 2461-5.09(a)(l).




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         (2).  This power to find violations necessarily
         implies the power to decide whether a particular
         practice is, in fact, violating the act, and con-
         sequently involves interpretation of      the act
         itself. As with all administrative adjudications,
         the commissioner's decision as to whether article
         2461-7.02 is violated involves interpretation of
         the scope of that article. Therefore. it falls
         under the primary jurisdiction of the commissioner
         to determine whether, under applicable standards
         of law. an aggregation of loans to a member and a
         corporation controlled by that member violates
         article 2461-7.02.

Attorney General Opinion MW-524 (1982). Thus, your office has the
responsibility for issuing interpretations of the loan limit rule. We
are prepared to discuss some of the factors which you may wish to
consider in formulating regulations to enforce the prohibition in
article 2461-7.02.' We note that answers to the hypothetical questions
you pose may turn on precise factual determinations which may vary
from case-to-case. Accordingly, our discussions must be taken to be
only tentative: You must, as a part of the duties of your office,
decide how to deal ultimately with the application of article
2461-7.02 to the many situations which are likely to confront any
credit union.

     We will set out each of the questions you pose to us, and follow
it immediately with a discussion of some of the points of law which
may be relevant to your consideration of any necessary rules or
regulations.

Question One: May a credit union loan six percent of its assets to a
member and six percent of its assets to the member's spouse who Is
also a member?

Discussion: The answer to this question will depend on a number of
factors, none of which can be assumed in advance. Specifically, in
any given situation, reference will have to be made to the principles
of marital property law, a sometimes arcane, and always complex,
subject. The Texas Family Code, at sections 5.01-5.87, contains an
extensive set of provisions that needs to be consulted, along with
pertinent judicial interpretations, before the effects of a particular
transaction can be gauged with certainty. For example. section 5.61
provides

             (a) A spouse's separate property is not subject
          to liabilities of the other spouse unless both
          spouses are liable by other rules of law.




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Honorable John R. Hale - Page 4    (JM-802)




             (b) Unless both spouses are liable by other
          rules of law, the community property subject to a
          spouse's sole management, control, and disposition
          is not subject to:

                (1) any liabilities that the other spouse
             incurred before marriage;

                (2) any nontortious liabilities that    the
             other spouse incurs during marriage.

             (4 l-h.2 community property subject to a
          spouse's sole or joint management, control, and
          disposition is subject to the liabilities incurred
          by him or her before or during marriage.

             (d) All the community property is subject to
          tortious liability of either spouse incurred
          during marriage.

Family Code C5.61.l Suffice it to say, in some circumstances. a
spouse may be liable, by operation of law, for a debt contracted for
by another spouse. See generally Cockerham v. Cockerham, 527 S.W.2d
162, 171 (Tex. 1985) (debts contracted during marriage are presumed to
be the credit of the community and thus are joint community
obligations, unless it is shown that the. creditor agreed to look
solely to the separate estate       of the contracting spouse for
satisfaction); Anderson v. Royce, 624 S.W.2d 621, 623 (Tex. App. -
Houston [14th Dist.] 1981, writ ref'd n.r.e. (debts undertaken during
marriage are presumed to be community debts). See also Note, The
Equal Credit Opportunity Act and Texas Community Property Laws: When
May a Creditor Require a Spouse's Signature on Credit Instruments?, 24
S.Tex. L.J. 273 (1983); McKnight; Family Law: Husband and Wife, 23
S.W.L.J. 115, 129-38 (1981); DeFuniak and Vaughn, Liabilities of
Spouses for Postnuptial Contractual Obligations, 13 S. Tex. L.J. 33
(1971); McKnight. Matrimonial Property, 22 S.W.L.J. 129, 143-45
(1968). Again, this is an especially complex area of the law which
will require the special expertise of your office, along with careful
consideration based on actual knowledge and experience of a myriad of
factors, in order to formulate sound guidance for credit unions. In
advance of a particular case, we cannot provide a definitive
resolution of any hypothetical question.



   1. Effective November 1, 1987, the language of section 5.61(b)
will be slightly modified. -See Acts 1987, 70th Leg., 2d C.S., ch. 50.
58, at 319, 325.




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Honorable John R. Hale - Page 5   (JM-802)




Question Two: May a credit union legally loan tvelve percent of its
assets to a member if the member's spouse (also a member) co-signs the
loan?

Discussion: A co-signer obviously holds a contingent liability for
the full amount of the loan. We understand that in common lending
practice, if the principal debtor cannot pay, then the co-signer must.
The limitation in article 2461-7.02 could easily be defeated if the
arrangement you describe were held to create two wholly separate debts
for the purpose of applying the ten percent loan limit.

Question Three: May the credit union legally loan six percent of its
assets to partner A and six percent to partner B in "A-B Partnership"
when no other indebtedness to the credit union by the partners exists?

Discussion: We are not certain, given the way that the.facts in your
question are posited, how the existence of the partnership is of any
legal consequence, because you do not describe it as a debtor. The
Texas Uniform Partnership Act, article 6132b, V.T.C.S.. governs all
aspects of partnership law. The act provides for no principle which
would treat the separately acquired debts of partners as debts of the
partnership. The partnership is a legal entity different from the
partners in the partnership. See V.T.C.S. art. 6132b. official
comments to sec. 1. Id. 58 and official comments thereto (definitions
and a discussion of?he      notion of partnership property); Note,
Partnership Creditors v. Creditors of the Individual Partners, 24
Baylor L. Rev. 557 (1972).

Question Four: May the credit union loan twelve percent of its assets
to "A-B Partnership" if the partnership is a member (assume both
partners as members)?

Discussion: Obviously, you may determine that a loan of more than ten
percent of the assets to a legal entity, such as a partnership, is
forbidden by article 2461-7.02. -See our discussion of the previous
question.

Question Five: May a credit union legally loan twelve percent of its
assets to "A-B Partnership" if partners A and B limit their liability
to six percent each?

Discussion: All partners are liable jointly and severally for all
debts and obligations of the partnership. V.T.C.S. art. 6132b, 515.
They may not disclaim that liability. The liability of parttiersfor
partnership debts is in addition to the liability of the partnership,
which may be enforced against the partnership assets.        Sections
18(l)(b) and 34 of the Uniform Partnership Act give a partner the
right to an indemnity or contribution from his co-partners when he




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Bromberg. The Proposed Texas Uniform Partnership Act, 14 S.W.L.J. 437.
445 n. 27 (1960). Only in the case of a "limited partnership"
organized according to the Texas Uniform Limited Partnership Act,
article 6132a. V.T.C.S., or the Texas Revised Limited Partnership Act,
article 6132a-1. V.T.C.S.. may a "limited partner" be laden with less
than joint and several liability for all of the debts of the
partnership. V.T.C.S. art. 6132a, 068, 23; art. 6132a-1, P3.03. A
"limited partnership" consists of both general partners who conduct
the business and are personally liable to creditors as in an ordinary
partnership and limited partners who do not participate in management
and whose liability genefally is limited to the amount of their
contributions. See generally Texas Uniform Limited Partnership Act,
V.T.C.S. art. 6132a. I8; Texas Revised Limited Partnership Act,
V.T.C.S. art. 6132a-1, 53.03.

$uestion Six: May a credit union loan twelve percent of its assets to
 A-B Partnership" if partners A and B each agree to full liability,
jointly and severally?

Discussion: Refer to our discussion of the question above.

guestion Seven: May a credit union loan six percent of its assets to
a member and six percent to a business in which the member has an
interest (assume a ten percent minority interest)?

Discussion: We assume that the business mentioned in your question is
a properly organized coporation. that is, an entity owned by share-
holders who in the normal course of business are not liable either
jointly or severally, as individuals, for the debts of the corpora-
tion. Shareholders place at risk, for the satisfaction of the corp-
oration's creditors, only the value of their investment in the
company, which is represented by the paid-in capital of the
corporation, and, perhaps, a portion of its capital surplus. See
generally Manning, Legal Capital (2d ed. 1981). The rule is that
shareholders have only limited liability: disregarding the corporate
entity to impose individual liability, either joint or several, on a
shareholder for the corporation's debt is the exception, and an
equitable doctrine to be invoked to protect public policy concerns,
and not merely the interest of creditors.     wex,     Inc. v. Langson
Brothers Construction Co., Inc., 585 S.W.Zd~768. :171 (Tex. Civ. App. -
Houston [Ist Dist.] 1979, writ ref'd n.t.e.); Pacific Ame&an
Gasoline Co. v. Miller, 76 S.W.Zd 833, 851 (Tex. Civ. App. - Amarillo
1934, writ ref'd).

             Among the reasons justifying the application of
          this doctrine is frustration of a statute's
          purpose. Particularly with regulatory statutes,
          whenever the use of a corporation circumvents the
          statutory purposes, it is proper to disregard the




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Honorable John R. Hale - Page 7   (JM-802)




         statutory purposes, it is proper to disregard the
         corporate entity in enforcing the statute.
         Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543,
         546 (Tex. 1975); Sapphire Homes, Inc. v. Gilbert,
         426 S.W.2d 278. 283 (Tex. Civ. App. - Dallas 1968,
         writ ref'd n.r.e.1; Beneficial Finance Company V.
         Miskell, 424 S.W.Zd 482, 484 (Tex. Civ. App. -
         Austin   1968. writ ref'd n.r.e.1. . . . See
         generally Hamilton, The Corporate Entity, 49 TK
         L. Rev. 979, 997-98 (1971).

Attorney General Opinion MW-524    (1982).   As we also said in that
opinion:

         It would be proper to disregard a corporation's
         existence if it was determined that use of the
         corporate entity resulted in circumvention of the
         purposes of the ten percent loan limit of article
         2461-7.02. One of the primary purposes of that
         article is to insure credit union solvency and
         viability by prohibiting e concentration of loans
         in a single entity.       Due to the inherent
         limitations on capital infusion available to
         credit unions, it is important to minimize lending
         risks by diversifying loans among borrowers. A
         high level~of concentration of loans in a single
         responsible entity could have severe financial
         consequences to a credit union should that entity
         go into default.

             .   .   .   .

             Many factors are relevant to a decision to
          aggregate such corporate loans under article
          2461-7.02, including the degree of control by the
          member, the capitaliaation and current financial
          position of the corporation, the use of the loan
          money, the collateral for the loan, and guarantors
          or co-signers of the loan. In light of these and
          other relevant factors, if the coaaaissioner
          determines that the use of the corporate entity
          would frustrate the statutory purpose he would
          have authority to aggregate the corporate loans
          with those of the controlling member in enforcing
          the ten percent loan limit.         See generally
          Hamilton, [supral.

Id. We are unaware of cases where the corporate entity has been
disregarded merely because of the debts owed by the holder of a




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Honorable John R. Hale - Page 8      (JM-802)




of each case, based on the policy of the statute, before deciding to
aggregate legally disparate entities and we cannot foreclose decisions
you may reach as a part of your statutory duty.

Question Eight: May a credit union loan six percent of its assets to
a member and six percent to a business in which the member has a
majority interest?

Discussion: Refer to our discussion of the question above.

Question Nine: May a credit union loan six percent of its assets to a
member and six percent to a business in which the member's spouse has
a majority controlling interest (assume no ownership by the first
member)?

Discussion: Refer to our discussion of questions one and seven,
above. The precise resolution of this question depends on several
variables, not the least of which are the marital property laws. See,
s,    Family Code 65.61, (set out in the discussion of question one
above); see also &      95.62. Because there are so many factual
variables which control the outcome to this question, it is impossible
to discuss all possible outcomes in the abstract.

                              SUMMARY             .                      I
             The credit union commissioner has the authority
          to determine whether the ten percent loan limit of
          article 2461-7.02, V.T.C.S., has been violated.




                                         JIM     MATTOX
                                         Attorney General of Texas

MARY KFLLER
Executive Assistant Attorney General

JUDGE ZOLLIE STRAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Don Bustion
Assistant Attorney General




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