.          .,.




                                             The Attorney          General of Texas
                                                            December 21, 1982
    MARK WHITE
    Attorney General


                                            Honorable Oscar H. Mauzy                Opinion No. MI.&524
    Supreme      Court Building
                                            Chairman
    P. 0. BOX 12546
    Austin,    TX. 76711. 2548
                                            Senate Committee on Jurisprudence       Ret    Regulation by   credit
    512,475.2501                            Texas State Senate                      union connnissioner of credit
    Telex    9101874-1367                   State Capitol                           union loans
    Telecopier     51214750266              Austin, Texas   78711

    1607 Main St., Suite 1400
                                            Dear Senator Mauzy:
    Dallas, TX. 75201.4709
    2141742-6944                                 You have inquired about article 2461-7.02, V.T.C.S., of the Texas
                                            Credit Union Act, which limits the lending powers of credit unions as
                                            follows:
    4624 Alberta       Ave., Suite    160
    El Paso. TX.       79905.2793
    9151533.3464                                        No credit union may make a loan or aggregate of
                                                     loans to any one member in an amount greater than
                                                     10 percent of the unimpaired capital and surplus
    1220 Dallas Ave., Suite          202
    Houston,   TX. 77002.6966
                                                     of the credit union.
    7131650-0666
                                                 You pose the following questions regarding the application of
                                            this article:
    606 Broadway.        Suite 312
    Lubbock.     TX.    79401-3479
    8061747-5238
                                                        1. Is the credit union    commissioner allowed to
                                                     pierce the corporate veil    in determining whether
                                                     the ten percent limitation   on loans to an official
    4309 N. Tenth. Suite B                           of a credit union has been   reached; and
    McAllen,     TX. 76501-1685
    5121662-4547
                                                        2. Must the commission consider each loan to a
                                                     corporation, whether controlled by an officer of
    200 Main Plaza, Suite 400                        the credit union or not, as a separate and
    San Anfonio.  TX. 76205-2797                     distinct transaction subject to the ten percent
    5121225-4191                                     limitation?

    An Equal       Opportunity/                  YOW   questions concerning article 2461-7.02 arise in
    Affirmative      Action     Employer    circumstance where a credit union officer and a corporation controlled
                                            by that officer receive credit union loans, the total amount of which
                                            exceeds ten percent of the unimpaired capital and surplus of the
                                            credit union. You ask generally whether the credit union commissioner
                                            has the power to disregard the controlled corporate entities and
                                            aggregate the loans in enforcing the ten percent limit of article
                                            2461-7.02.




                                                                    p. 1898
Honorable Oscar H. Mausy - Page 2   (MW-524)




     Initially, we note that the article 2461-7.02 limitation applies
to loans made to "members" of a credit union. Indeed, a credit union
is authorized to make loans only to its members. V.T.C.S. art.
2461-7.01. Consequently, we answer your inquiries more generally as
that article applies to loans to any credit union member, not just
members who are officers. It should be noted, however, that loans to
officers are subjected to special scrutiny under the act.         See
V.T.C.S. art. 2461-7.05.

     The credit union commissioner has specific statutory authority to
determine whether a particular practice by a credit union violates the
Credit Union Act. V.T.C.S. art. 2461-5.09(a)(l), (2). This power to
find violations necessarily implies the power to decide whether a
particular practice is, in fact, violating the act, and consequently
involves interpretation of the act itself. As with all administrative
adjudications, the commissioner's decision as to whether article
2461-7.02 is violated involves interpretation of the scope of that
article. Therefore, it falls under the primary jurisdiction of the
commissioner to determine whether, under applicable standards of law,
an aggregation of loans to a member and a corporation controlled by
that member violates article 2461-7.02.

     Disregarding the corporate entity is an equitable doctrine
invoked to protect matters of public policy.         Pacific American
Gasoline Company v. Miller,   76  S.W.2d 833,  851  (Tex. Civ. App. -
Amarillo 1934, writ ref'd); Roylex, Inc. v. Langson Brothers
Construction Company, 585 S.W.2d 768, 771 (Tex. Civ. App. - Houston
[lst Dist.] 1979, writ ref'd n.r.e.). Among the reasons justifying
the application of this doctrine is frustration of a statute's
purpose. Particularly with regulatory statutes, whenever the use of a
corporation circumvents the statutory purposes, it is proper to
disregard the corporate entity in enforcing the statute. Delaney v.
Fidelity Lease Ltd., 526 S.W.2d 543, 546 (Tex. 1975); Sapphire Homes.
Inc. V. Gilbert, 426 S.W.2d 278, 283 (Tex. Civ. App. - Dallas 1968,
writ ref'd n.r.e.); Beneficial Finance Company v. Miskell, 424 S.W.2d
482, 484 (Tex. Civ. App. - Austin 1968, writ ref'd n.r.e.).

     Turning to the present inquiry, it would be proper to disregard a
corporation's existence if it was determined that use of the corporate
entity resulted in circumvention of the purposes of the ten percent
loan limit of article 2461-7.02. One of the primary purposes of that
article is to insure credit union solvency and viability by
prohibiting a concentration of loans in a single entity. Due to the
inherent limitations on capital infusion available to credit unions,
it is important to minimize lending risks by diversifying loans among
borrowers. A high level of concentration of loans in a single
responsible entity could have severe financial consequences to a
credit union should that entity go into default.




                               p. 1899
.   -


        Honorable Oscar H. Mausy - Page 3   (NW-524)




             In the case of loans to a controlled corporation, it may be
        determined that actual or ultimate responsibility for those loans lies
        with the controlling member. In light of the risk prevention purpose
        of article 2461-7.02, the corporate entity could be ignored and the
        loans could be treated as loans of the member in calculating whether
        the ten percent loan limit has been exceeded.

             Many factors are relevant to a decision to aggregate such
        corporate loans under article 2461-7.02, including the degree of
        control by the member, the capitalization and current financial
        position of the corporation, the use of the loan money, the collateral
        for the loan, and guarantors or co-signers of the loan. In light of
        these and other relevant factors, if the commissioner determines that
        the use of the corporate entity would frustrate the statutory purpose
        he would have authority to aggregate the corporate loans with those
        of the controlling member in enforcing the ten percent loan limit.
        See generally Hamilton, The Corporate Entity, 49 Tex. L.Rev. 979,
        997-998 (1971).

             Therefore, we conclude that when the commissioner determines that
        the purpose or effect of loans to a member and a corporation
        controlled by that member violate the policies of the ten percent loan
        limit of article 2461-7.02, he has authority to disregard the
        corporate entities and aggregate the loans for purposes of enforcing
        that article.

                                    SUMMARY

                    The credit union commissioner has the authority
                 to disregard a corporate entity and aggregate
                 credit union loans to a corporation with loans to
                 the member controlling the corporation, for
                 purposes of determining whether the ten percent
                 loan limit of article 2461-7.02, V.T.C.S., has
                 been violated.




                                                 MARK      WHITE
                                                 Attorney General of Texas

        JOHN W. FAINTER, JR.
        First Assistant Attorney General

        RICHARD E. GRAY III
        Executive Assistant Attorney General




                                       p. 1900
                                                ..   .


Honorable Oscar H. Mauzy - Page 4    (MW-524)




Prepared by Thomas M. Pollan
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Susan L. Garrison, Chairman
Rick Gilpin
Patricia Hinojosa
Jim Moellinger
Thomas M. Pollan




                                    p. 1901
