                     THEA~TORNEY                 GENERAL
                                   OPI'EXAS


AT-I-OR-GENERAL                    October 10,   1957,
                                                     .._..._
                                                        -_.-,.._...

          Hon. J. M. Falkner, Commissioner
          Department of Ranking
          Austin 14, Texas
                              Opinion No. WW-274
                             Re:   Requirements as to collateral under the
                                   provisions of Section 7 of Article 1524a.
          Dear Mr. Falkner :
                    We have received your request for the opinion of this
          office involving’the application of the provisions of Article
          1524a, Vernon’s Civil Statutes to certain factual situations.
          In answering your request we w 111 discuss separately each fac-
          tual situation in the order stated in your request.
                  “1) A corporation regularly borrows large sums of
                  money from several banks, insurance companies and
                  other financial institutions, pledging its notes
                  receivable as security for such loans, The moneys
                  borrowed are used by the corporation in making
                  loans to the general public, consistent with its
                  corporate purpose, ‘,toaccumulate and lend money. ’
                  The notes taken upon these loans are in turn used
                  as security for further advances to the corpora-
                  tion from the banks, insurance companies, and other
                  financial institutions,
                       *%ection 12 of Article 1524a, V.C.So, provides
                  in part:
                       III       The words tlbonds,”%otes I1ltcertlfl-
                  cates tl’wdebenturesI1and “other obligaeions ‘Ias
                  used in this Act, s&l    not be construed to {over
                  or include notes executed by corporations to banks
                  and other financial institutions for money borrowed
                  by such corporations for use in the usual course of
                  Its business. ’
                       ‘IInthe past we have not attempted to require
                  collateralization under Section 7 of Article 1524a
Hon. J. M. Falkner, page 2   NW-2741


     of notes, bonds, debentures or other obligations
     issued by the corporation to banks, insurance
     companies or other financial institutions for
     moneys borrowed. The question has been raised,
     however, whether a& bonds, notes, debentures or
     other obligations issued by a corporation to a
     bank or other financial institution for moneys
     borrowed come within the above-quoted exemption
     set out in Section 12. Attorney General's Opin-
     ion No. o-5858, dated March 4, 1944, seemingly
     makes a distinction between moneys borrowed 'in
     the usual course of business' and moneys borrowed
      'for the purpose of accumulating a working capi-
     tal.'
          "We would appreciate your opinion as to
     whether or not all notes, bonds, debentures and
     other obligations for moneys borrowed issued to
     banks, insurance companies and other financial
     institutions are exempt, by virtue of Section 12,
     from the collateralizatlon requirements of Section
     7, Article 1524a V.C.S. If not, under what cir-
     cumstances shoul& collateralization be required?"
          In construing the provisions of Article 1524a, Ver-
non's Civil Statutes, it may be noted that the legislative
intent in its enactment was to provide a reasonable safeguard
for the public in the purchase of certain types of securities.
This intent is evidenced by the repetition of the phrase,
"offer for sale or sell in Texas its bonds, notes certifi-
cates, debentures, or other obligations11containeIiin Sections
1, 2, 4, 7, 8, 9 and 12 of the Act.
          Section 12, sunra, states that the words l*bondsw,
%otesl' "certificates" "debentures" and "other obligations"
as used'in the Act shali not be cons&ed   to cover or include
notes executed by corporations to banks or other financial in-
stitutions for money borrowed by such corporations for use in
the usual course of business, thereby making a distinction be-
tween money borrowed by a corporation evidenced by the notes
of the corporation, and money received from the g&g of direct
obligations of the corporation to the general public by means
of personal or other solicitation. Stated differently, it was
the legislative intent to require collateralizatlon under the
provisions of Section 7 of the Act of the sales made by the
corporation to the general public of the securities designated
which constitute direct obligations of the issuing corporation,
as opposed to requiring collateralization of notes evidencing
money borrowed bv the corporation from others for the purpose
Hon. J. M. Falkner, page 3   (WW-274)


of carrying on its business where, Asia part of the considera-
tion for the lending of the money, the lending institution
would generally require the borrowing corporation to furnish
collateral security therefor.
          While it is true that the money received by a cor-
poration, whether from the issuance and sale of its direct
obligations to the general public as an investment or money
borrowed from a bank or other financial institution, is used
in the.operation of the business for which the corporation is
formed, it must be borne in mind that the Legislature, by the
addition of Section 12 of the Act, intended that a definite
line of demarcation be drawn between the corporation's right
to offer for sale and sell its direct obligations to the public
and the power of the corporation, under its charter, to borrow
money in ~theusual course of business as a negotiated loan to
be used in the conduct of its business.
          !Chesituation above described is applicable to cor-
porations whose business it is to accumulate and lend money.
In order to lend money the corporation must necessarily have
a large amount of money available as working capital for the
purpose of making loans to third parties. A bank receives
deposits of A's money but uses A's money for the purpose of
making a loan to B. A's money is not the property of the bank
but is the property of A, but it is used by the bank in the or-
dinary course of business of making the loan to B. Under the
banking laws the capital of the bank is required to be invested
in certain securities which are not available for the purpose
of making loans to customers of the bank. Thus, the position
of the corporation described above is analogous to that occu-
pied by a bank, and therefore it is our opinion that notes,
bonds, debentures, or other obligations for money borrowed by
the corporation from banks or other financial institutions are
not subject to collateralization under Section 7 of the Act.
          Opinion No. O-5858 to the Honorable John Q. McAdams,
commis sioner, by Honorable Grover Sellers, Attorney General of
Texas. approved March 4, 19%   holds that obligations issued to
banks'or other financial inst1.
                              tutions for the purpose of accumu-
lating a "working capital" as opposed to increasing its "opera%
ing capltal11are subject to collateralization. With this con-
clusion we are unable to agree, since, in essence, the true test
is whether the direct obligation of the corporation is offered
for sale and sold to the general public as opposed to the issu-
ance of a direct obligation to a lending institution for the
purpose of evidencing money borrowed by the issuer tomcarry on
its business. Whether the proceeds are received for the pur-
pose of accumulating a work&g capital oreincreasing Its
Hon. J. M. Falkner, page 4   (W-274)


ouerating capital is immaterial. Opinion O-5858is overruled
insofar as it conflicts with this opinion.
     "2) A corporation has solicited money from sev-
     eral.individuals issuing its notes to certain
     of the individuals and issuing debentures and
     bonds to the other individuals. The notes, de-
     bentures and bonds issued have varying terms,
     some becoming due and payable within a year and
     others becoming due and payable in several years.
     The corporation contends that such issuance of
     its notes, debentures and bonds to individuals,
     each being a separate transaction rather than
     part of a series and each being issued in con-
     sideration for moneys borrowed from the indi-
     vidual, does not constitute a 'sale in Texas' of
     obligations which must be collateralized under
     Section 7, Article 152&a.
          "In the past this Department has required
     collateralization of obligations issued to indi-
     viduals or companies other than banks insurance
     companies or other financial institutions, irre-
     spective of whether such issuance was the result
     of a single transaction in which the corporation
     borrowed money from the individual or company or
     was one of a series of obligations issued and
     sold or negotiated to the general public."
          In the situation above described again the test to
be applied is whether the direct obligations of the corpora-
tion are offered for sale and sold to the general public as
opposed to the issuance of direct obligations to an individual
or company for the purpose of evidencing money borrowed by the
issuer to carry on its business. The mere fact that the instru-
ment evidencing the loan may be a note, bond, or debenture is
immaterial since each of these Instruments denotes a direct ob-
U.ta;;n on behalf of the issuer to pay money to the holder
       . It Is also immaterial whether the direct obligation
is represented by a single instrument or a series of instru-
ments, since it is the substance and not the form of the trans-
action which must be looked to in order to determine whether
such obligations should be collateralized by the issuer under
the provisions of Section 7.
          Although Section 12 refers specifically to "banks and
other financial institutionstlwe do not believe that the Legis-
lature intended to restrict the scope of the words "other in-
stlt.utionstt
            to corporations engaged solely in the business of
Hon. J. M. Falkner, page 5   (WW-274)


lending money to borrowers. For example, insurance companies,
mentioned in Section 13, are engaged primarily,in the business
of issuing policies of insurance to the public, abut under the
insurance laws of the various states such companies are author-
ized to invest their capital, surplus and reserve funds in va-
rious types of investments, among which are generally included
loans to individuals, associations, and corporations which are
adequately secured by collateral. In addition, there are many
educational institutions which control funds which are held in
trust for the benefit of the institution and, under the terms
of the trust instrument such funds may be invested in loans to
persons, associations, and corporations which are secured by
adequate collateral. It is our opinion that the language of
Section 12 of the Act should not be restricted so as to prevent
a corporation from securing a negotiated loan from an individ-
ual, association, or corporation whose principal business is
not that of lending money to the general public, and if the
test of whether the transaction is a negotiated loan from or a
sale of securities to the lender is applied and the individual
transaction constitutes a negotiated loan then the provisions
of Section 7, Article 152&a, are not applicable.
           You have further stated that in the situation de-
 scribed in (2) and in other situations several of the individ-
 uals involved have executed verified waivers stating that the
 individual is familiar with the requirements of Section 7, Ar-
 ticle 152&a, and that it is his expressed wish and desire that
 the corporation not be required to collateralize his note in
 accordance with Section 7, and ask whether you have the author-
 ity to accept such a waiver in a case where collateralization
,would otherwise be necessary.
          There is no provision in Article 152&a, V.C.S., which
would authorize the agency charged with its enforcement to
waive any of its provisions. It is fundamental that, unless
specifically authorized, a public official charged with the en-
forcement of any law is prohibited from waiving any of,the ob-
ligations imposed upon such public official under its provi-
sions. Therefore you do not have the authority to accept a
waiver of the requirements of Section 7, Article 1524a, in any
case where collateralizatlon of the obligation is required.
     "3) A corporation issues and sells to the general
     public its notes, secured by notes receivable held
     by the corporation. The maturity dates of the
     notes issued by the corporation vary except that
     under no circumstances will the maturity dates ex-
     ceed 180 days from date of issuance. In the event
     it is held these notes are subject to the collater-
     alization provisions of Section 7, Article 1524a,
                                                                      .
                                                           ‘      .




Hon. J. M. Falkner; page 6   (WW - 274)


     the corporation proposes the alternative plan
     of selling the notes only to banks. In either
     event the notes issued would be negotiable by
     the holder.
          "Please advise us whether or not the notes
     issued and sold to the general public and the
     notes Issued and sold to banks only are subject
     to collateralization under Section 7, Article
     1524a."
           The test stated in answer to Questions (1) and (21,
~~~i;~dis again applicable to the factual situation just de-
        . !l!hefact that the maturity dates of the notes issued
does not exceed 180 days is immaterial if such notes are sold
 to the general public. In such case the provisions of Section
 7, Article 1524a, are applicable since the transaction is a
 sale, and the fact that the notes in question are proposed to
 be sold only.to banks and may be negotiated by the holder af-
ter the sale, does not alter the legal effect of the transac-
 tion or dispense with the requirements of collateralization
 since a bank is just as much a part of the public as an indi-
vidual.
          In this connection our attention has been directed
to Opinion No. V-1489 by Honorable Price Daniel, Attorney Gen-
eral, dated August 6, 1952, which was addressed to you. You
have advised that from the factual situation stated therein
there is an implication that it is immaterial whether the'
transactions between the General Motors Acceptance Corporation
and the banks and other commercial firms acquiring the short-
term notes constitute loans to or purchases from General Motors
Acceptance Corporation. The application of the test mentioned
above as to whether the transaction constitutes a loan or a
sale must be applied to the issuance and delivery of the short-
term notes in question, and to the extent that Opinion V-1489
implies that a sale of short-term notes, whether to banks, com-
mercial firms, or automobile dealers by General Motors Accept-
ance Corporation, is exempted from the provisions of Section 7,
Article 1524a, Opinion V-1489, is overruled.
     %)   A corporation issued and sold to the general
     public a series of shares of preferred stock. The
     corporation proposes to replace the shares of pre-
     ferred stock with either debentures or bonds or
     both, of varying terms, at the option of the share-
     holders . Such debentures or bonds will be,offered
     to the present holders of the preferred stock and
     only to such holders, and the only considerat1on
.   -
        .   .




                Hon. J. M. Falkner, page 7   W-274)



                    which the corporation would accept would be its
                    own preferred stock. The bonds and debentures
                    will be negotiable (transferable on the books
                    of the company only).
                          "Please advise us whether or not in your
                     opinion the debentures or bonds issued under the
                     above-described circumstances should be collater-
                     alized.3.naccordance with the provisions of Sec-
                     tion 7, Article 1524a."
                          Under the foregoing factual situation the corporation
                proposesto exchange shares of its preferred stock for its
                bonds or debentures, or both. It may be assumed that both the
                shares of preferred stock or the bonds or debentures have a
                fixed face value. In other words the holder ~of a share of pre-
                ferred stock of the par value of 9)
                                                  100.00 would be permitted to
                exchange his share of stock for a bond or debenture having a
                face value of $100.00, and no monetary consideration would pass
                between the respective parties other than the mutual delivery
                of the stock and the debenture or bonds.
                           It is well settled that such a transaction would not
                constitute an exchange of personal property. Moreover, it is
                well settled that such a transaction constitutes a sale, al-
                though made for something else than money, where the property
                of one party is transferred for that of another at an agreed
                ,or market value, so that one thing is received in payment of
                the price of the other. In pornton V. ,Moodv 24 S.W. 331,333
                (Civ.App. 1893, error ref.), the rule was stated as follows:
                          Vhe criterion in these cases is whether
                     there is a fixed price, as a determination of the
                     value at which the things are to be exchanged. If
                     there is such a fixed price, the transact$on is a
                     sale; but, if there is not, the transaction is an
                     exchange."
                This rule of law was again stated in Sriswold v. !l'ucker,
                                                                         216
                S.W.2d 276,278 (Civ.App. 1940) and McKinnev v. Citv oftAbilene,
                25’0 S.W.2d 924,925 (Civ.App. 1452, error ref., n.r.e.1.
                          It is our opinion that, since the transaction refer-
                red to in your fourth question constitutes a sale of the de-
                benture or bond, it is subject to the provisions of Section 7,
                Article 1524a, and must be collateralized.
                                                                       -
                                                               1   .




Hon. J. M. Falkner, page 8    (WW-274)


                              SUMMARY
           Since the provisions of Article,,l52&a,Vernon's
      Civil Statutes, are applicable to corporationsoffer-
      ing for sale and selling in Texas notes, bonds, de-
      bentures and otherdirect obligations of the corpora-
      tion to the public, the applicability of these
      provisions, and particularly Section 7 of the Act,
      must be tested as to whether each Individual transac-
      tion constitutes ~a sale of securities or a negotiated
      loan. The State ~Banking Commissioner cannot permit
      a voluntarywaiver by a purchaser of direct obliga-
      tions of a corporation of the collateralization re-
      quirements of Section 7, Article 152&a.
           Where preferred stock is exchanged for deben-
      tures or bonds, both being of equal face value, such
      transaction constitutes a "sale" and not an "exchange*
      of personal,property and therefore the debenture or
      bond must be collateralized under the provisions of
      Section 7, Article 1524a, V.C.S.
                               Very truly yours,
                               WILL WILSON
                               Attorney GenEal     of Texas

                                    * 8
                                   a&         Au=XJ
                                JwC. K. Richards
CKRrwb                             Assistant
APPROVED:
OPINION COMMITTEE
Geo. P. Blackburn, Chairman
J. C. Davis, Jr.
B. H. Timmins, Jr.
John B. Webster
Wayland C. Rivers, Jr.


BY:   W. V. Geppert
