            H~~:~~TIYORNEY           GENERAL
                              EXAS




Hon. Lee Brady               Opinion No. O-2714
Banking Commissioner         Re: Security deposited under trust
Austin, Texas                indenture~is  for benefit for Texas
                             certificate  holders.
Dear Sir:
           For a full understanding of the problems involved in
your inquiry of January 10, 1941, we deem it essential   to here
set out your request in full:
            Investors Syndicate is a Minnesota corporation   au-
     thorized to do business in Texas under Section 48 of
     Article 1302, and is subject to the provisions     of Sen-
     ate Bill 165, Acts of the 45th Legislature,    commonly
     known as the Loan and Brokerage law.
           “On January 19, 1932, the Investors Syndicate,     on
     one part, and Guardian Trust Company as Trustee, on the
     other part, executed a trust indenture,      a copy of which
     is hereto attached.   This indenture was approved by the
     Banking Commissioner on June 20, 1932.       Pursuant to this
     indenture the Investors Syndicate sold bonds of the char-
     acter attached to the original     trust indenture, both in
     Texas and ia most of the other states in the Union.
     Seemingly, the Investors Syndicate construed this trust
     indenture to secure the payment only of the bonds sold
     in Texas, despite the fact that bonds identical      in every
     respect were sold elsewhere.      Following that construc-
     tion the Investors Syndicate deposited with the Trustee,
     under this indenture,  collateral     equal only to the with-
     drawal value of bonds sold in Texas.
           “011 August 28, 1934, Investors Syndicate prepared,
     and caused to be approved, by the Banking Commissioner,
     its ‘10 year coupon and annuity certificate’      aa its’10
     year -single payment certificate’,    copies of -which are
     hereto at?ached and marked ‘Exhibits      A & B’.  Bonds iden-
     tical   to these exhibits  were sold both in, Texas and in
     other states,   but the Syndicate construing the indenture
     to secure only those bonds of this type sold in Texas,
     maintained with the trustee collateral      equal only to
     the withdrawal value of the bonds sold in Texas.       At an
     undetermined date the Investors     Syndicate prepared, and
     had approved by the Banking Commissioner, its ‘10 year
                                                                  .   .




Hon. Lee Brady,   page 2   (O-2714)


     coupon certificate’,      ‘10 year coupon and annuity
     certificate’,     and !15-year installment    investment
     certificate   I, copies of which are hereto attached
     and marked respectively       ‘Exhibit C, D & El.    These
     certificates    were likewise    sold both-in Texas, and
     in other states and the Syndicate has maintained
     collateral    with the Trustee only to the extent of
     the withdrawal value of the bonds of this character
     sold in Texas.
            “On July 6, 1936, Investors Syndicate prepared
     and caused to be approved, its ‘10 year single pay-
     ment certificate   I, ‘10 year coupon and annuity cer-
     tificate’  , and its !investment contract’,   copies of
     which are hereto attached and marked respectively
     ‘Exhibits   F, G, & H’.   These last three bonds are
     generally referred to as ‘Series M bonds’.      You will
     note the printed sticker which is attached to each
     of these bonds.     These bonds were likewise  sold in
     Texas and in other states.     However, the bonds sold
     outside of Texas did not carry the printed sticker
     above referred to.     The Investors Syndicate likewise
     construed the trust indenture to secure only those
     bonds equal to the withdrawal value of Texas bonds.
           “It is my understanding that during this entire
     period the Investors Syndicate maintained a general
     trust indenture by which it intended to secure bonds
     sold in those states which did not require a local
     trust indenture,   or which required no trust indenture
     at all.   In other states,   as in Texas, where the law
     or state authority required a local trust indenture,
     the Syndicate executed trust indentures in favor of
     local trustees and presumptively    intended that the
     bonds sold in each of these states would be respect-
     ively secured by the trust indenture required by such
     states.   No trust indenture other than the indenture
     executed by the Syndicate in favor of Guardian Trust
     Company was ever presented to the Banking Commissioner
     of Texas, or ever approved by hiti.     We have no knowl-
     edge or information   as to the character of collateral
     held by the several trustees,    nor the amount of col-
     lateral.   We are advised by the Investors Syndicate
     that these trust indentures do exist and that the sum
     total of all collateral    held by all the trustees  is
     at least equal to the sum total of withdrawal value
     on all bonds sold throughout the United States.
          “Your attention   is directed to the fact that un-
     der the provisions   of Senate Bill 165, the Banking
.   -




        Hon. Lee Brady,    page 3    (O-2714)


               Commissioner is required to approve both the trustee
               named, the trust indenture, (which, under the law
               must describe the character of collateral) and the
               bond to be sold.
                    “In the light of the above,     we respectfully    sub-
               mit the following  questions:
                     “1.   Are bonds of the kind and character origi-
               nally ‘attached to the .trust indenture and sold out-
               side of the State of Texas secured by the trust in-
               denture?
                     “2 : Are bonds of the character shown in Exhibits
               i, B.,C. D, and E, which were sold by the Investors
               Syndicate.outside  of the State of Texas, secured by
               the Trust indenture?

                    #3.  Are bonds of the character shown, as Exhibits
              F, G. & H, not bearing the printed sticker and sol,d
              outside of the State of Texas secured by this trust
              indenture?
                     "4. If, in answer to any of the above questions,
              you have held that any of these bonds sold outside of
              the State of Texas, are secured by this trust indenture,
              then is the Investors Syndicate complying with the re-
              quirement of Texas law by maintaining with the trustee
              collateral   of a value equal to the withdrawal value of
              the bonds secured by the trust indenture?
                      “5.    If you have held that the Investors Syndicate
              is not complying with provisions        of Texas law, in thcit
              it  is not maintaining adequ.ate collateral       under the
              trust indenture,      may the Investors   Syndicate legal,ly
              collect     future installments  on bonds heretofore    sold fn
              Texas and not outstanding in the hands of Texas inves-
              tors?
                    '"6.  If you have held that the Investors      Syndicate
               cannot legally   collect future installments    on its bonds,
               as contemplated in Question 5 above, is it the duty of
               the Banking Commissioner to prohibit     the collection    of
               such future installments    until such time as the Inves-
               tors Syndicate has deposited collateral     with the trustee
               equal to the withdrawal value of bonds outstanding and
               secured by trust indenture?”
                                             .
                     Senate Bill 165, acts of the 42nd Legislature,       thereaf-
        ter   amended, and now known as Article 1524a of the Revised Civil
Hon. Lee Brady,    page 4    (O-2714)


Statutes is a comprehensive act for the supervision    and regula-
tion of corporations,  both domestic and foreign,   dealing in
the business of loaning money and dealing in bonds and securi-
ties, without banking and discounting   privileges.   Section 7
thereof,  with which we are here concerned, reads in part:
             “All bonds, notes, certificates,          debentures,     or
     other obligations        sold in Texas by any corporation
      affected    by a provision     of this Act shall be Secured
     bv securities       of the reasonabluarket          value. eaual-
                 ea t at all times the fa e value of such
     !?%i$! ioke”s. ce rtificates.         debeitures    o    th     obli.-
                   If such corporation       sells in Tzxzs E&ds
     few       certificates,      debentures or other obligatio&
     upon :hich it receives         installment    payments such
     bonds, notes, certificates,           debentures and &her ob-
     ligations     sh a11 be set ure d at all times by securities
     havinp the reason&le          market value eaual to the with-
     &-wla a o r cancellation       valu    of u h obliaations         ut-
     standigg.       Said securities     zhallsbt    placed in the’
     hands of a corporation         having trust powers approved
     by the Banking Commissioner of Texas as Trustee under
      a trust agreement, the terms of which shall be approved
      in writing by the Banking Commissioner of Texas, or at
     the option of any such corporation            which sells in
      Texas bonds, notes, certificates,           debentures or other
     obligations      upon which it receives       installment      pay-
     ments , such corporation        may upon application        to, and
      approval by, the Banking Commissioner of Texas deposit
      securities    having a reasonable market value equal to
     the withdrawal or cancellation           value of such obliga-
     tions outstanding with the State Treasurer of Texas
      in lieu of such deposits with a Trustee as set forth
     hereinabove,       . . .‘I (Underscoring ours>
            We are not called upon and consequently   do not pass
upon the question of whether or not the statute within itself
is sufficient   to create a lien upon the funds required to be de-
posited thereunder in favor of Texas purchasers of bonds or cer-
tificates.    This necessity  is eliminated by the fact that the
determination   of such question rests upon construction   of a con-
tract and not upon statute.
            After the passage of such act Investors      Syndicate made
and entered into a trust agreement pursuant to the authority con-
tained in the above quoted section.        The agreement, dated Janu-
ary 19, .1932, between Investors Syndicate as the party of the
first   part and Guardian Trust Company as trustee is a third party
beneficiary   contract,  the beneficiaries    being the purchasers of
bonds secured under the terms of such contract.        We must look
therefore   to the contract for the creation and existence       of the
Hon. Lee Brady,     page 5   (O-2714)


lien granted in favor of creditors    by virtue of their acqui si-
tion of, bonds ore dertificates  and for the determination of what
creditors, are secured, thereby.
            The trust agreement consists      of 18 pages and because
of the d,isposition    to ,be~made of the questions before us we do
not deem .it nec:essary to here set out ‘the terms of such indenture e
We are not requested to, and do snot pass upon the question of
whether or not such indenture adequately describes         the character
of collateral    deposited,with   the trustee as required under the
terms of Senate Bill 165.       Suffice  it to say that the indenture
is vague; indefinite     and uncertain   in many respects.    We believe,
however, that the certified      copy of the resolution    of the Board
of Direct;ors of Investor~s Syndicate attached to and made a part
of,the trust agreement negatives the possibility        that the funds
deposited thereunder can stand as security for any other than
Texas purchasers.
             The second paragraph of the trust      agreement reads   in
part:
               ‘WHEREAS,the Company has determined for its cor-
        porate purposes to execute,     issue and sell, its Bonds,
        as provided for hereunder, and to secure the same as
        herein provided,  and has full corporate power and au-
        thority so to execute,    issue, sell and secure the same,
        and the execution of this instrument has been fully
        authorized by the Board of Directors     of the Company, a
        certified  copy of the resolution    or order, authorizing
        its ezecution 1,s h eret o attached and made a Dart hereof,
        . . .
          The resolution      referred   to in the paragraph next herein-
above reads:
              ~QISSOLVED,  that the Board of Directors      hereby au-
        thorizes   the execution of a collateral      trust agreement
        dated January 19, 1932, between Investors         Syndicate and
        the Guardian Trust Company of Houston, Texas, covering
        m    deoosit of securities      for the benefit   of nurchaserg
        gfeInvestors    Syndicate Certificates     in Texas subsequent ,j
        to May 22, 1931, and B. E. Grabb, Vice President and
        E. M. Richardson,     Secretary,   are hereby authorized to
        execute said trust agreement on behalf of Investors          Syn-
        dicate.”     (Unde:~~scoring ours)
           The words “deposit   of securities   for the benefit of pur-
chasers of . . . Certificates    in Texas” are a definite    and ex-
press limitation   of the deposit as security for those bonds sold
in Texas.   No citation  of authorities    is required to support the
principle  of law that an exhibit attached to an agreement and
Hon. Lee Brady, page 6    (o-2714)




expressly made a part thereof by appropriate   language consti-
tutes a part of such agreement just as effectively    as if set
out in full in the body of the agreement.
           It ne.cessarily follows therefore    that all your ques-
tions are disposed of by our conclusion     that the trust agree-
ment presented secures Texas purchasers only.
                                     Yours very truly
                                     BTTORNEY
                                            GENERAL
                                                  OF TEXAS
                                     tiy /s/ Lloyd &strong
                                     Lloyd Armstrong) hSiStant
APPROVED FEB 24, 1941
/s/ Gerald C. Mann
ATTORNEY  GENERALOF TEXAS
APPROVED:OPINION COMMITTEE
BY:     RWF, CHAIRMAN
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