                              @ffice of the EIttornep @enerat
                                            &ate      of tEexa8
DAN MORALES
 ATTORNEY
       GENERAL                                 March 10, 1995

      Honorable Kenny Marchant                            Opinion No. DM-332
      Chair
      Committee on Investments and Banking                Re: Whether certain subordiited      debt
      Texas House of Representatives                      of a pawnshop must be included in the
      P.O. Box 2910                                       calculation of net assets for purposes of
      Austin, Texas 78768-2910                            determining eligibility for a pawnshop
                                                          license under the Texas Pawnshop Act,
                                                          V.T.C.S. tit. 79, ch. 51 (RQ-724)



              You have asked whether certain subordinated debts constitute applicable liabiities
      that must be included in the calculation of net assets for purposes of the Texas Pawnshop
      Act (the “act”), V.T.C.S. tit. 79, ch. 51. Under the act, no person may engage in business
      as a pawnbroker unless the person has received a license from the Consumer Credit
      Commission.r V.T.C.S. art. 5069-51.03(a). To be eligible for a pawnshop license, an
      applicant must, among other things, “have net assets of at least $150,000 readily available
      for use in conducting the business of each licensed pawnshop.‘?                    Id. art.
      5069-51.03A(a)(2). Pursuant to article 5069-51.02(g),

                       “[n]et assets”-means the book value of the current assets of a
                   person or pawnbroker less its applicable liabilities as stated in this

              ‘Tbepmposeoftheactisto

                        (1) exercise the state’spolice powr to ensure a sound system of making
                   pawn loam and acquiring aad disposing of taagible perbanalproperlyby and
                   tbmogb pawnshopsand to preventudawiul pmpeztytrawacdons, parlicularlyin
                   sloien property,through liccasing and legdating pawnbrokersand certain
                   personsunplsvea by or ia pawnshops;
                        (2) provide for licensing fees, investigationfees, and minimum capital
                   rcpuinmnts of licensees;
                        (3) enme fioaocial reapmaiiilityto the stateand tbe public;
                        (4) ensure umlpliaoce with federal, state, and led            laws, roles,
                   regulations,and ordinances;and
                        (5) assisIloeal govmmcntaiotbe-ofIheirpoliapown.
      V.T.C.S. art. 5069-51.0111
              2A paw&&u        most receivea separetelieenae for each place of business. See V.T.C.S. art.
      5069-51.06(a).
Honorable Kenny h4archant - Page 2        W-332)




          subsection. Current assets include the investment made in cash, bank
          deposits, merchandise inventory, and loans due from customers
          excluding the pawn service charge. Current assets do not include the
          investments made in fixed assets of real estate, furniture, fixtures, or
          equipment; investments made in stocks, bonds, or other securities; or
          investments made in prepaid expenses or other general intangibles.
          Applicable liabilities include trade or other accounts payable; accrued
          sales, income, or other taxes; accrued expenses; and notes or other
          payables that are. Unsecured or secured in whole or part by current
          assets. Applicable liiies         do not include liabilities secured by
          assets other than current assets. Net assets must be represented by a
          capital investment unencumbered by any liens or other encumbrances
          to be subject to the claims of general creditors. . . .

        The Of& of the Consumer Credit Commissioner has promulgated a rub9
explaining the method by which it calculates an applicant’s or a licensee’s net assets:

          An applicant or licensee’s net assets is the sum of cash on hand, bank
          deposits, the value of merchandise inventory held for sale in the
          pawnshop or to be held for sale in the pawnshop, and the amount of
          money loaned on open pawn loans receivable less any and alI un-
          secured debts, and debts secured in whole or part by the previously
          listed assets. Assets must be available for use in the pawnshop
          business to be acceptable.

7 T.A.C. § 85.2(a)(2)(A).

          You have described a hypothetical situation similar to a situation you understand
to occur with increasing frequency. You establish that a pawnshop has current assets of
$160,000, and with the exception of its subordinated debt, the pawnshop has no applicable
liabilities. You continue by adviSmg that the pawnshop has borrowed from and owes
money to a bank in the amount of SlOO,OOO. The pawnshop has executed a security
agreement and financing statement to the bank, covering all of the business’s assets.
Simultaneously with the execution of the security agreement and financing statement, the
pawnshop and the bank executed a subordiition agreement.

        Under the subordination agreement, you state that the bank agrees to subordinate
any lien or claim it might have to permit the pawnshop to meet the act’s net asset require-
ment. The subordination agreement provides that any lien or claim of the bank to the
assets of the pawnshop always will be subordinate to the S150,oOn net asset requirement
and subordinate to the right of general creditors to have 6rst claim : the first $150,000 of
net assets of the pawnshop. You indicate that subordination agreements come in various


        3Article 5069-51.09(b), V.T.C.S., authorizes the ~3mwner Credit &mmissioner to adopt
regulations-        for the enforcelnent oftbe set and consistentwith the act’sprovisioas.



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Honorable Kenny Marchant - Page 3          (DM-332)




forms with various requirements, but all of the subordination agreements of which you are
aware do not vary in their basic thrust: a lender who would otherwise be secured (by
current assets) or a general creditor has agreed to subordinate its debt and any claim it
might have against the current assets of the pawnshop to permit the pawnshop to meet the
act’s net asset requirement.

         If the debt that is the subject of the subordination agreement is not an applicable
liabiity for purposes of determining the pawnshop’s net assets under V.T.C.S. article
5069-5 1.02(g), then the pawnshop has sufficient net assets to be eligible Rx a pawnshop
license. See V.T.C.S. art. 5069-51.03A(a)(2). If, on the other hand, the debt is an
applicable liability, then the net assets of the pawnshop in the hypothetical you have
described are insu&ent to qualify for licensure under the act. See id. You ask us to
construe the defmition of “net assets” provided in section 51.02(g) to determine whether a
subordinated debt such as you describe is an applicable liability.

         The legislature amended the act in 1981. adding the statement of purpose and the
detinition of net assets, among other things. See Act of April 27, 1981,67th Leg., ch. 99,
§ 2,198l Tex. Gen. Laws 221,221-22. The legislature had enacted a substantially simihu
detInition of net assets in 1979, see S.B. 166, 66th Leg., R.S. (1979). but the governor
vetoed the bii. In 1979 Rep resent&e Laney, house sponsor of Senate Bill 166,
explained to the House Committee on Piicial      Institutions that the bii “tightened up” the
act. Hearings on S.B. 166 Before the House Comm. on Financial Institutions, 66th Leg.
(Peb. 27, 1979) (tape available from House Video/Audio Services) (statement of
Representative L-army). According to a witness who spoke at the hearing, at that time the
act required pawnbrokers and applicants to have net assets in the amount of $25,000, but
the act did not define “net assets.” Id. (statement of WtiamR. Pakis, representmg the
Texas Pawn Brokers Association). An unidentitied representative stated that the bill
defined the term “net assets” in terms of assets that a pawnbroker might liquidate quickly
to give to a consumer. Id.; see &o id. (statement of unidentbied representative
explaining that S.B. 166 is consumer oriented).

        In interpreting a statute, a court diligently must attempt to asmtain legislative
intent. Gov’t Code $312.005; see 67 TEX JUR 3D Srufutes 8 91, at 651-52 (1989) (and
sources cited therein). Upon examming the legislative history, we see that the legislature
meant by the term “net assets” to describe assets of a pawnshop business that a
pawnbroker might liquidate quickly to make available to a consumer.

         In this regard, we note that article 5069-51.03A(a), which provides requisites for
eligibiity for a pawnshop license, includes a mandate that an applicant for a license have
net assets of at least SlSO,OOO“readily available for use in conducting the business of each
licensed pawnshop.” We further note that, for purposes of calculating an applicant’s or
licensee’s net assets, the act lists as current assets items easily liquidated. See V.T.C.S.
art. 5069-51.02(g). The act explicitly excludes items that may be di&ult to liquidate:
“investments made in fixed assets of real estate, linniture, fixtures, or equipment;
investments made in stocks, bonds, or other securities; or investments made in prepaid


                                          p. 1757
HonorableKenny Marchant - Page 4           (nM-337-I




expenses or other general intangibles.*’ Id. Likewise, applicable liabilities include
liabiities secured by current assets, which would hinder the quick liquidation of the assets.
See id.

        Ordinarily, different hens on the same property have priority in the time of their
creation. 50 TEX. JUR. 3D Liens 5 12, at 299 (1986) (and authorities cited therein).
Parties may vary the common practice by contract, however. See id. at 299-300. A
subordination agreement is a contractual modification of hen priorities. ITT Diversified
Credit Corp. v. First Ci@ Capikzl COT., 737 S.W.Zd 803,804 (Tex. 1987); Western Auto
Sup&~ Co. v. Brawport Bank, 840 S.W.2d 157, 159 (Tex. App.-Houston [lst Dist.]
1992, no writ) (citing Zi’T Diversijkd Creub Corp.). Accordingly, such an agreement
must be construed consistent with the parties’ expressed intention as well as the terms of
the agreement itself ZZT Diversified Credit Corp., 737 S.W.2d at 804; Western Auto
Supply Corp., 840 S.W.2d at 159 (citing ITTDiversified CreaYtCorp.).

         From your description of the subordination agreement and f?om the information
we have found, it appears that a bank forfeits its security priority to current assets of the
pawnshop in the amount of $150,000. It also would .appear that the bank forfeits any
rights it may have as an unsecured creditor to current assets in the amount of S150,OOO. Jf
these assumptions are true, a subordination agreement would not render a pawnshop’s
current assets unavailable for use in the pawnshop business, see V.T.C.S. art.
5069-51.03A(a)(2); 7 T.A.C. 5 85.2(a)(2)(A), nor would it hinder a pawnshop’s ability
quickly to liquidate its assets. Thus, debt that is subject to a subordination agreement such
as you describe would not be an applicable liability for purposes of calculating a
pawnshop’s net assets under article 5069-51.02(g), V.T.C.S.

        We do not construe contracts in the opinion process, however. Attorney General
Opinions DM- 192 (1992) at 10; JM-697 (1987) at 6. Additionally, we cannot resolve fact
questions in the opinion process. See, e.g., Attorney GeneraJ Opinions DM-98 (1992) at
3; H-56 (1973) at 3; M-187 (1968) at 3; O-2911 (1940) at 2. Thus, we are unable to
determine whether, in a particular case, a debt subject to a particular subordination
agreement actually is an unsecured debt or a debt secured in whole or part by a
pawnshop’s current assets.




                                          p. 1758
Honorable Kenny Marchant - Page 5        (~~-332)




                                   UMMARY
                                   s
                Assuming that under a subordination agreement, a bank forfeits
          its security priority as well as any rights it may have as an unsecured
          creditor to current assets of a pawnshop-borrower in the amount of
          S150,000, a subordination agreement would not render the pawn-
          shop’s current assets unavailable for use in the pawnshop business.
          Accordingly, debt that is subject to a lender’s subordination
          agreement generally is not an applicable liabiity for the purpose of
          calculating the pawnshop’s net assets under V.T.C.S. article
          5069-50.02(g).




                                                       DAN MORALES
                                                       Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opiion Committee

Prepared by Kymberly K. Oltrogge
Assistant Attorney Geneml




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