 i   OFFICE OF THE ATTORNEY GENERAL . STATE OF TEXAS

     JOHN   CORNYN




                                            March 12,2002



Mr. Randall S. James                                   Opinion No. JC-0477
Banking Cornmissioner
Texas Department of Banking                            Re: Applicability of section 154.155(d) of the
2601 North Lamar Boulevard                             Finance Code to insurance-funded,       prepaid
Austin, Texas 787054294                                funeral benefits contracts (RQ-0434-JC)


Dear Mr. James:

         During the Seventy-seventh      Legislative Session, the Texas Legislature amended section
 154.155 of the Finance Code, which governs refunds available to consumers who cancel prepaid
funeral benefits contracts. Prior to its amendment, section 154.155 provided that, except as provided
therein, purchasers of prepaid funeral benefits contracts were entitled to receive only the actual
amount paid by the purchaser. The amendment to section 154.155 increased the amount of such a
refund to include “half of all earnings attributable to that money.” See TEX. FIN. CODE ANN.
4 154.155(d)(V emon Supp. 2002). You ask whether the amendatory language applies to insurance-
funded prepaid funeral benefits contracts as well as to trust-funded prepaid funeral benefits contracts,
or only to trust-funded prepaid funeral benefits contracts. We conclude that the amendment applies
only to trust-funded prepaid funeral benefits contracts.

         Prepaid funeral benefits contracts in Texas are governed by chapter 154 of the Finance Code.
Any person seeking to sell or accept money for prepaid funeral benefits or solicit an individual’s
designation ofprepaid funeral benefits to be provided out of a fund, investment, security, or contract,
including a contract or policy of insurance authorized and sold under a license issued by the Texas
Department of Insurance, must hold a permit to do so issued by the Texas Department of Banking.
See id. 8 154.101 (Vernon 1998). Prepaid funeral benefits contracts are paid for through the
purchase or creation of a “fund, investment, security, or contract, including an insurance policy,”
with the fund created by an insurance policy approved by the Texas Department of Insurance
regulated under subchapter E of chapter 154, a trust created under and regulated by subchapter F of
chapter 154, or a “fund, investment, security, or contract” approved by the Texas Department of
Banking. Id. $ 154.201.

         Contracts paid for by the creation of a trust involve a purchaser entering into a contract with
a seller of funeral services or merchandise, with the payments to the seller deposited into a trust
created for that purpose. See generally id. $5 154.25 l-.264 (Vernon 1998 & Supp. 2002) (chapter
154, subchapter F). Money deposited into such trusts may be invested only as provided by
sections 154.258 and 154.259, of subchapter F of the Finance Code, in accordance with an approved
Mr. Randall S. James - Page 2                         (JC-0477)




investment plan. See id. 8 154.257 (Vernon Supp. 2002). Contracts paid for by the purchase of an
insurance policy, on the other hand, involve two contracts-the    first between the purchaser and the
seller of funeral services and merchandise that must be executed in conjunction with the application
for the issuance of the second, an insurance policy typically between the same purchaser and an
insurance company, with the seller of the funeral services and merchandise named as the beneficiary
of the insurance contract. See id. 5 154.202 (Vernon 1998). Money received for prepaid funeral
benefits must be administered as prescribed by section 154.155 of the Finance Code and subchapters
E and F of the Finance Code, as applicable. See id. 9 154.159.

        Section 154.155 of the Finance Code, which governs cancellation of contracts for prepaid
funeral benefits and the section about which you inquire, provided the following prior to its
amendment by the Seventy-seventh Legislature:

                       (a) A purchaser of a prepaid funeral benefits contract may cancel
                  the contract before maturity by giving written notice of cancellation
                  to the seller on forms prescribed by the department. The seller shall
                  maintain copies of the cancellation forms for examination by the
                  department.

                       (b) Not later than the 30th day after the date of the cancellation
                  notice, the seller shall withdraw and pay to the purchaser money in
                  the depository being held for the purchaser’s use and benefit.

                     (c) The purchaser or seller may not make a partial cancellation or
                 withdrawal.

                     (d) The purchaser is entitled to receive only the actual amount
                 paid by the purchaser less the amount permitted to be retained as
                 provided by Section 154.252, except as provided by Subsection (e)
                 and by Sections 154.205 and 154.254.’


          ‘Section 154.205 of the Finance Code governs cancellation      of insurance-funded   prepaid   funeral benefits
contracts during the first year of the contract and provides:

                      A purchaser of an insurance-funded       prepaid funeral benefits contract who
                 cancels the contract during the fust year of the contract when payments required
                 under the contract are current is entitled to receive the cash surrender value of the
                 policy.

TEX. FIN. CODEANN. $ 154.205 (Vernon      1998). Section 154.254 of the Finance Code governs cancellation        of trust-
funded prepaid funeral benefits contracts during the fust year of the contract and provides:

                      A purchaser of a trust-funded prepaid funeral benetits contract who cancels the
                 contract during the fast year of the contract when payments required under the
                                                                                                           (continued...)
Mr. Randall S. James - Page 3                               (JC-0477)




                         (e) A purchaser who cancels a contract on the solicitation of the
                    seller is entitled to withdraw all money paid to the seller and all
                    earnings attributable to that money. If the money is used to purchase
                    a new prepaid funeral benefits contract under a solicitation by the
                    seller, the new contract must protect the purchaser to an extent equal
                    to or greater than that provided by the original contract, as determined
                    by the department. Under the new contract, the cost to the purchaser
                    of the same or substantially the same services or merchandise may
                    not be greater than that provided by the canceled contract.

Act ofMay24,1997,75thLeg.,R.S.,ch.     1008,§ 1, sec. 154.155,1997Tex. Gen. Laws 3091,3392
(footnote added). Section 154.155 was amended by the Seventy-seventh Legislature by amending
subsection (d), which now provides:

                          (d) The purchaser is entitled to receive the actual amount paid by
                     the purchaser and half of all earnings attributable to that money, less
                     the amount permitted to be retained as provided by Section 154.252,
                     except as provided by Subsection (e) and by Sections 154.205 and
                      154.254.

TEX.FNCODEANN.§~~~.~~~(~)(V          emon Supp. 2002) (as amended by Senate Bill 3 14, Act of May
24,2001, 77th Leg., R.S., ch. 699, 9 7,200l Tex. Sess. Law Serv. 1254, 1256 (emphasis added).
In your letter requesting an opinion from this office you state:

                    The amendment plainly applies to a trust-funded prepaid funeral
                    benefits contract.  I request your opinion regarding whether the
                    enhanced refund provision also applies to an insurance-funded
                    prepaid funeral benefits contract.2

        For two reasons we conclude that the amendatory language of subsection (d) properly should
be construed to apply only to trust-funded contracts. First, the term “earnings” is defined at section



           *(. . .continued)
                        contract are current is entitled to receive, regardless of the amount held in trust, the
                        greater of:

                               (1)   90 percent of the actual amount paid by the purchaser;       or

                               (2)   the amount deposited in trust with respect to the purchaser’s     contract.

Id. 0 154.254.

           *Letter from Randall S. James, Banking Commissioner of Texas, to Honorable John Comyn, Texas Attorney
General,   at 1 (Sept. 13,200l) (on file with Opinion Committee) [hereinafter Request Letter].
Mr. Randall S. James - Page 4                 (JC-0477)




154.002 of the Finance Code clearly to apply only to earnings of a trust-funded      contract.   Section
154.002(4) provides:

                     “Earnings” means the amount in an account in excess of the
                amount paid by the purchaser of a prepaid funeral benefits contract
                that is deposited in the account as provided by Section 154.253,
                including accrued interest, accrued income, and enhanced or
                increased value.

TEX.   FIN. CODE ANN. 8 154.002(4) (V emon Supp. 2002). Section 154.253, which is set forth in
subchapter F governing trust-funded prepaid funeral benefits, requires money paid pursuant to a
trust-funded contract to be deposited in a financial institution in an interest-bearing account or in
trust with a financial institution to be invested by the financial institution as trustee. See id.
 154.253(a). Thus, half of the “earnings” to which persons are entitled are earnings of trust-funded
contracts.

         Second, a construction limiting the amendatory language to trust-funded prepaid funeral
benefits contracts is consistent with the regulatory scheme adopted by the legislature because the
legislature has provided for a form of refund for cancelled life insurance policies or annuities
elsewhere. As we noted earlier, insurance-funded prepaid funeral benefits contracts actually involve
two contracts-a    contract for funeral services and merchandise between a purchase and a seller and
an insurance contract between a purchaser and an insurance company with the seller named as a
beneficiary. While certain aspects of the contractual relationships are governed by subchapter E of
chapter 154 (and section 154.155), the insurance contract itself must be “approved by the Texas
Department of Insurance and issued by an insurance company licensed by the Texas Department of
Insurance.” Id. 5 154.201(l) (Vernon 1998). Articles 3.44a and 3.44b of the Insurance Code, which
govern life insurance contracts and annuities, respectively, require that all such contracts for
insurance contain, inter alia, provisions requiring the company to grant certain benefits, including
under certain circumstances,      the cash surrender value of the policy in event of default (or,
presumably, cancellation). See TEX. INS. CODEANN. arts. 3.44a, 3.44b (Vernon 198 1 & Supp. 2002).

          Taken together then, a purchaser who cancels a trust-funded prepaid funeral benefits contract
during the contract’s first year is entitled to a refund in an amount based upon the amount paid by
the purchaser into the trust. See TEX. FIN. CODE ANN. 8 154.254 (Vernon 1998). If a purchaser
cancels a trust-funded prepaid funeral benefits contract after the contract’s first year, the purchaser
is entitled to a refund in an amount equal to his payments and half of the earnings generated by those
payments. See id. 8 154.155(d) (Vernon Supp. 2002). A purchaser who cancels an insurance-funded
prepaid funeral benefits contract during the contract’s first year is entitled to a refund in an amount
based upon the cash surrender value of that insurance contract. See id. 5 154.205 (Vernon 1998).
If a purchaser cancels an insurance-funded       prepaid funeral benefits contract after the insurance
policy’s or annuity’s first year, the purchaser is entitled to a refund based on a “nonforfeiture
benefit” or the cash surrender value of the contract as provided by articles 3.44a and 3.44b of the
Insurance Code. Therefore, we conclude that the amendatory language to subsection (d) of section
Mr. Randall S. James - Page 5                 (JC-0477)




154.155 of the Finance Code applies only to trust-funded prepaid funeral benefits contracts; it does
not apply to insurance-funded prepaid funeral benefits contracts.

         Our conclusion comports with the Sunset Advisory Commission report prepared in
anticipation of the Seventy-seventh Legislature. A careful reading of the staff report prepared by
the Sunset Advisory Commission regarding the Texas Funeral Commission, several of whose
recommendations     were included in the “sunset bill” for the Texas Department of Banking, Senate
Bill 3 14, supports limiting the application of the amendatory language of subsection (d) to trust-
funded contracts. Both the Texas Department of Banking and the Texas Funeral Commission were
subject to the “sunset review” process prior to the 2001 legislative session. The Sunset Advisory
Commission for the Texas Funeral Commission addressed problems it identified with the statutes
governing, inter alia, prepaid funeral benefits contracts. The staff report recognized the distinction
between trust-funded and insurance-funded        contracts. The staff did not expressly distinguish
between the two in its text recommending       statutory amendments regarding refunds of earnings,
which was included in Senate Bill 3 14 as amendatory language to subsection (d). However, a close
reading of the text clearly indicates that the staff was referring in its recommendations     to trust-
funded contracts only:

                Problem: Consumers who cancel their prepaid funeral contracts
                do not receive reasonable refunds.

                l   Texas statute authorizes contract sellers to take 10 percent of the
                    consumer’s principal to cover selling expenses, service costs, and
                    general overhead. Consumers who cancel their prepaid funeral
                    contract receive 90 percent of their original payment. In addition,
                    consumers who cancel their contracts are not entitled by law to
                    receive the interest that their funds have earned. That money
                    remains with the contract seller.

SUNSETADVISORY COMM’N, STAFFREPORT: TEX. FUNERALSERVICESCOMM’N,                    at 65 (2000). The
statutory provisions referred to apply only to trust-funded contracts; they do not apply to insurance-
funded contracts. See TEX. FIN. CODE ANN. $5 154.205, -254 (Vernon 1998). The staff report
describes the income tax consequences of Texas law in this area:

                The IRS requires trust-funded contract holders to declare their interest
                income on their Income Tax Return. Consequently, funeral contract
                purchasers are held liable for all interest and capital gains accrued by
                trust-funded investments.    Recently the IRS has begun to allow
                funeral homes to declare trust fund interest on their tax returns. The
                IRS provision does not require this, however.

SUNSETADVISORY COMM’N, STAFFREPORT: TEX. FUNERALSERVICESCOMM’N, at 66 (2000). See also
SUNSETADVISORY COMM’N DECISIONS: TEX. FUNERALSERVICESCOMM’N, at 21-23 (2001).
Mr. Randall S. James - Page 6                  (JC-0477)




        You offer, though do not necessarily endorse, two arguments in support of a construction that
the amendatory language of subsection (d) reaches insurance-funded funeral benefits contracts, in
addition to trust-funded contracts. We will address each argument in turn.

         First, it is suggested that, by inclusion of section 154.155 in the subchapter titled “General
Provisions for Sales Contracts,” the legislature intended that section to apply to both trust-funded
and insurance-funded       contracts. See Request Letter, supra note 2, at 2. We find this suggestion
unpersuasive.      Section 3 11.024 of the Government Code (the “Code Construction Act”) provides
that “[tlhe heading of a title, subtitle, chapter, subchapter, or section does not limit or expand the
meaning of a statute.” TEX. GOV’T CODE ANN. 5 3 11.024 (Vernon 1998). Thus, for example,

                while the headings and divisions of the Insurance Code might prove
                useful to the researcher seeking a particular statute, any inferences
                about the substantive limitations of the statute must be founded upon
                more than the mere placement or labeling of the provision within the
                Code.

In re Hosek, 136 B.R. 672,673 (Bar&r. W.D. Tex., 1991). Similarly, we believe that the mere fact
that the legislature placed the text of section 154.155 of the Finance Code in the subchapter
containing general provisions for sales contracts does not, by itself, necessarily make every clause
of every section of that subchapter equally applicable to both trust-funded and insurance-funded
contracts, at least if the clear meaning of the language at issue, as it is here, can apply only to one
sort of contract.

         Second, it is suggested that the legislative history of section 154.155 prior to the 2001
statutory amendment supports a construction applying the 2001 amendatory language to insurance-
funded contracts. Specifically, it is argued that, because the predecessor statute of chapter 154,
article 548b of the Revised Civil Statutes, provided in section lA(e) that refunds due a purchaser
upon cancellation of an insurance-funded contract “shall be handled as provided by Section 5(b) of
this Act,” and because section 5(b) of article 548b provided, inter alia, that a purchaser who
cancelled a trust-funded contract after the first year was entitled to receive as a refund only the actual
amounts paid in by the purchaser less an amount permitted to be retained by the seller, a purchaser
of an insurance-funded     contract who cancelled the contract after the first year also was entitled to
a refund of the actual amounts paid. See Act of May 26, 1993, 73d Leg., R.S., ch. 808, 9 1, 1993
Tex. Gen. Laws 32 11, 3214, 3221 (predecessor to chapter 154). Again, we find this suggested
argument unpersuasive. The argument presupposes that the refund language of subsection (d), prior
to the 200 1 amendment, applied to both trust-funded and insurance-funded contracts; it assumes that
the inclusion of the language “except as provided by . . . Sections 154.205 [which applies to
insurance-funded     contracts] and 154.254 [which applies to trust-funded contracts]” in section
 154.155(d) necessarily requires such a construction. See TEX. FIN. CODEANN. 8 154.155 (d) (Vernon
Supp. 2002). A brief discussion of relevant legislative history of the predecessor statute to section
 154.155 of the Finance Code supports the proposition that the refund language of subsection (d),
Mr. Randall S. James - Page 7                 (JC-0477)




prior to the 2001 amendment, never applied to insurance-funded    contracts; therefore, the amendatory
language at issue could not either.

        The language providing that “[tlhe cancellation of an insurance-funded         prepaid funeral
benefits contract shall be handled as provided by Section 5(b) of this Act” was added to then article
548b in 1993. See Act of May 26,1993,73d Leg., R.S., ch. 808,§ 1,1993 Tex. Gen. Laws 3211,
32 14. The same bill, in addition to adding a section title and renumbering the provisions to indicate
that Section 5 of then article 548b of the Revised Civil Statutes applied to trust-funded contracts,
added the following relevant language to subsection (b):

                    (b)( 1) [@j] In the event a purchaser under a trust-funded contract
               should desire to cancel the contract prior to maturity, such
               cancellation may be accomplished by thepurchaser [seller] giving to
               the seller written [GR~~T&TJ+s] no t’       ice of cancellation on forms
                                                                                   .
               prescribed by the Department [[
               -1,                  and thereafter, the [q
               m]                 9        seller within 30 days after the date of the
               cancellation notice shall [may] withdraw and pay to the purchaser
               the funds in such depository being held for the purchaser’s use and
               benefit; provided however, such purchaser shall be entitled to receive
               only the actual amounts paid in by him less the amounts permitted to
               be retained as provided in Subsection (a)( 1) hereof. The seller shall
               maintain copies of the cancellation forms for examination by the
               Department. Purchaser or seller may make no partial cancellations
               for withdrawals.

                   (2) A purchaser of a trust-funded contract who elects to cancel
               the contract during the first year of the contract when payments
               required under the contract are current is entitled to receive 90
               percent of the actual amounts paid in by the purchaser or the
               amounts deposited in trust with respect to the purchaser’s contract,
               whichever is greater, regardless of the amount held in trust. A
               purchaser of an insurance-funded contract who elects to cancel the
               contract during thefirstyear of the contract when payments required
               under the contract are current is entitled to receive the cash
               surrender value of the policy.

Id. 1993 Tex. Gen. Laws at 3221 (added language is italicized). Thus the only language in section
5 of then article 548b governing cancellation of insurance-funded         contracts was set forth in
subdivision (2) and applied to cancellation of contracts during the first year. The two sentences of
subdivision (2) were codified as Sections 154.205 and 154.254, respectively, in the nonsubstantive
codification of the Finance Code in 1997. See Act of May 24,1997,75th Leg., R.S., ch. 1008,@ 1,
7, 1997 Tex. Gen. Laws 3091, 3394,3395, 3603. The language in subdivision (1) of section 5 of
Mr. Randall S. James - Page 8                 (JC-0477)




then article 548b that permitted a refund of amounts paid when a contract was cancelled after the
first year and applied only, by its express terms, to trust-funded contracts was codified at what is now
section 154.155 of the Finance Code. See id. 1997 Tex. Gen. Laws at 3392; TEX. FIN. CODE ANN.
8 154.155 (Vernon Supp. 2002). Therefore, prior to its nonsubstantive codification, the refund
language of section 5 that was codified as part of the new Finance Code at section 154.155 clearly
applied only to trust-funded contracts. The inclusion of the “except for” language in subsection (d)
that includes a reference to section 154.205 does not have the effect of making the language of the
principal clause of the subsection applicable to insurance-funded contracts.

         Therefore, we conclude that the amendatory language to section 154.155(d), Finance Code,
enacted by the Seventy-seventh Legislature applies only to trust-funded prepaid funeral benefits
contracts; it does not apply to insurance-funded prepaid funeral benefits contracts.
Mr. Randall S. James - Page 9                 (JC-0477)




                                        SUMMARY

                        The amendatory language of section 154.155(d) of the
               Finance Code, which entitles a purchaser who cancels a prepaid
               funeral benefits contract to a refund that includes half of the earnings
               attributable to the payments made by the purchaser, applies only to
               trust-funded prepaid funeral benefits contracts; it does not apply to
               cancellations of insurance-funded prepaid funeral benefits contracts.




                                               JOHN     CORNYN
                                               Attorney General of Texas



HOWARD G. BALDWIN, JR.
First Assistant Attorney General

NANCY FULLER
Deputy Attorney General - General Counsel

SUSAN DENMON GUSKY
Chair, Opinion Committee

Jim Moellinger
Assistant Attorney General
