                       The Attorney               General of Texas
                                          November 24, 1980
MARK WHITE
Attorney General

                   Honorable Gerald Brown                   Opinion No. w-277
                   Executive Director
                   Texas Industrial Commission              Re: Use of floating interest rates
                   410 East Fifth Street                    in the issuance’ of industrial revenue
                   Capitol Station                          bonds
                   Austin, Texas 78711

                   Dear Mr. Brown:

                          You request cur opinion as to whether the board of directors of an
                   industrial revenue corporation, when Issuing revenue bonds, may set interest
                   rates for the bends which vary cr float according to certain economic
                   indicators such as a percentage of the prime rate charged by a particular
                   bank. The traditional position of the Attorney General’s Office in its bcmd
                   approval function has been that such bonds are not negotiable.

                         The Texas Supreme Court has clearly held that floating rates do
                   destroy negotiability in bonds. Brazes River Authority v. Cam, 405 S.W. 2d
                   689. 695 (Tex 1966). The ruling is DmblematiC in that the court based its
                   holding on article 3 of the U.&Z. (Commercial Paper), which, by its own
                   terms is inapplicable to investment securities.    Bus. & Comm. Code S3.103.
                   See also S8.102. However, there is authority to the effect that while article
                   8 provisions govern securities and diect         application  of article 3 to
                   investment securities is clearly precluded, recourse to article 3 for guidance
                   in points not clearly covered under article 8 is appropriate. See E. Fl Hutton
                   & Co. v. Manufacturers National Bank of Detroit, 259 F. Sqr513,        517 (E.D.


                   Problems Under the Uniform Commercial Code, Article Eight: A Premise
                   and Three Problems, 65 Mich. L. Rev. 1379, 1387 (1967). Further, the
                   common law definition of a term remains in place where the U.C.C. has not
                   specifically displaced such definition and the common law definition of
                   negotiability in Texas comports with the article 3 definition. Bus & Comm.
                   Code S1.103: See also Weisbart & Co. v. First National Bank, 568 F. 2d 391
                   i;854;ir. 1978mexs.s       Banking & his. Co. v. Tumley, 61 Tex. 365, 368


                          The court in Brazce River Authority based its holding on statutory
                   interpretation; the issue mvolved 1s not constitutional.  Instruments not
                   qualifying under the common law may, of course, be declared negotiable by




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Honorable Gerald Brown - Page Two @g-277)




legislation.   The argument has been advanced that article 8 &es in fact define
negotiability for investment securities; that if such securities meet a certain form
they are ipso jure negotiable instruments. The pertinent statutory definition includes a
requirement that the instrument be “of a type commonly dealt in upon securities
exchanges or markets or commonly recognized in any area which it is Issued or dealt in
as a medium for investment.” Bus. & Comm. Code 58.102(a)(l)(B). Due to the Brazes
River Authority case there is no basis for arguing that a bond or note with a fi-
interest rate can fit this part of the definition, thereby qualifying as a negotiable
instrument under article 8. See Folk, s.           See also Bsnkhaus Hermsnn, slgra;
Zamore v. Whitten, 395 A. 2d 435 (Me. 1978); Guttmsn, Article 8 - Investment
Securities, 17 Rutgers L. Rev. 136, 138 (1962).

      Industrial development    corporations are not limited by statute to issuing
negotiable paper. There is no difficulty in such a corporation issuing non-negotiable
paper with.a floating interest rate. However, absent a clear legislative determination
that industrial development corporations may issue negotiable paper tied to floating
rates, we feel that Brazes River Authority controls in its holding that securities with
float@ rates are non-negotiable.

                                    SUMMARY

               Under present Texas law an investment security tied to a
           flcating interest rate is not a negotiable instrument.  Thus an
           industrial development corporation may issue its non-negotiable
           paper tied to a floating rate, but it must Issue its negotiable
           paper with a fixed rate of interest.




                                             MARK      WHITE
                                             Attorney General of Texas

JOHN W. FAINTER, JR.
First Assistant Attorney General

RICHARD E. GRAY III
Executive Assistant Attorney General

Prepared by Susan L. Voss
Assistant Attorney General




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Honorable Gerald Brown - Page Three   (W-277)




APPROVED:
OPINION COMMlTTEE

&an L. Garrison, Acting Chairman
Jon Bible
Rick Gilpin
Thomas M. Pollan
Susan L. Vass




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