Untitled Texas Attorney General Opinion ( 1958 )

.
December 1 , 1958
Honorable Zollie Steakley Opinion No. WW-527
secretary of state
Capitol Station Re: Is the proposed purpose “to
Austin, Texas operate under the Small Business
Investment Act of 1958 a fully stated
purpose under Article 2.OlA of the
Business Corporation Act?” May
the Secretary of State accept and
file articles of incorporation reclt-
lng that the corporation is to have
all the powers specified in the Small
Business Investment Act, including
the power “to act as depositary or
fiscal agent of the United States when
so designated by the Secretary of the
Dear Sir: Treasury” and related questions?
You have requested our opinion concerning your authority to
accept and file articles of incorporation of proposed corporations being
formed for the primary purpose of operating under the Small Business
Investment Act of 1958 (Public Law 85-699, 85th Congress, S. 3651, August
21, 1958). Your first question is whether or not @the proposed purpose to
operate under the Small Business Investment Act of 1958 is a fully stated
purpose under the requirements of Article 2.Ol.A of the Business Corpora-
tion Act.’ Your second question relates to your authority to file a charter
which recites, that ‘?he corporation shall have and exer,cise all the powers
specified in the ‘Small Business Investment Act of 1958 . . .Clause (i).
To act as depositary or fiscal agent of the United States when so designated
by the Secretary of the Treasury.” Your third question, to be answered
only if we conclude that the power to act as such a depositary or fiscal
agent is a banking or trust company power, concerns your authority to act
in situations where such language is qualified by the words “without bank-
fug and discounting privileges.”
Article 2.OlA of the Business Corporation Act provides that
corporations for profit may be organized for any lawful purpose or purposes,
“which purposes shall be fully stated in the articles of incorporation.” It
will be noted that this language is somewhat more restrictive than that
contained in the old corporation law (Article 1304 V.C.S.) which merely
provided that ‘A charter must be prepared setting forth . . . the purposes
for which it 1s formed.” Yet even under the prior enactment it had been
Hon. Zollie Steakley, page 2 (WW-527)
well settled that the charter must state the proposed purpose with partlcular-
ity. Many have been struck down for vagueness by previous attorney general
opinions. See, for example, o-5960, 0-435~5, V.yl@‘?8-&d .WWXMU.“~~The disciple
underlying this requirement is given in 1OB Tex. Jur. 87, Corporations,
41:
“The requirement that the purpose of the corporation be
stated in its articles is for the orotectlon of the incoroorators
and stockholders, and the publli, in order that they may be
advised as to the character of the corporate activities, and to
enable the state, through its proper officers, to collect filing
fees and franchise taxes, and to-supervise and control the use
and to punish the non-use of the corporate franchlse.“(Emphasls
supplied.) See also Johnston v. Townsend (Sup. Ct. 1910) 103 Tex.
122, 1245 S.W. 417.
As stated in the speech of the Honorable Wright Patman in the
Unfted States House of Representatives, August 21, 1958, which incorporates
a report by the Small Business Committee explaining the provisions of the
bill; the purpose of a Small Business Investment Company is ‘to help SIMII
business concerns raise capital. . .by making loans directly, or by purchas-
ing the debentures of the small business concern.” Yet this ultimate pur-
pose cannot be gleaned from the charter provision in your first question
without reference to the act itself. We have concluded therefore, that the
proposed purpose contained in your first question violates the provisions
of Article 2.OlA.
Your second question presents a much more difficult problem.
Since the passage of the Texas Business Corporation Act, corporations
for profit may be formed for any lawful purpose or purposes. (Art. 2.OlA)
At this point ‘we must refer to our opinion WW-440 addressed to you on
May 30, 1958. As was pointed out therein many of the lawful purposes for
.which corporations could be formed prior to the Business Corporation Act
contained restrictive provisions or words of limitation. These were pro-
vided in order .to “limit the purposes for which a corporation might legal~ly
do business -within this state so that it could not transact business which
was properly being transacted by other corporations which were under
strict regulatory and supervisory limitations imposed by law, and which
were administered by state officers or agencies.*
It was one of the conclusSons of that opinion that ‘in enacting the
Business Corporation Act the Legislature manifestly did not intend to
remove the restrictive provisions or words of limitation which qualified
the l,awfu,l purposes granted by it. (Art, 9.15B)* Another conclusion of
this opinion, as well as of Opinion WW-77 and WW-503, is that corporations
organized under the Business Corporation Act may perform some of the
functions normally carried on by banking Institutions as long as they are
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Hon. Zollie Steakley, page 3 (WW-527)
performed without the exercise of banking or discounting privileges. For
convenience, throughout the remainder of the opinion these prohibited
privileges ~111 be denominated *banking functions , or ‘prohibited banking
functions.’
Therefore, the answer to your second question depends upon
whether or not, once a Small Btrsiness Corporation has been organized
and destgnated a depositary or fiscal agent of the United States by the
Secretary of the Treasury, it will be performing a prohibited banking
function. This in turn involves both a discussion of prohibited banking
fnnctions as we11 as a discussion of the duties of a United States depositary
or fiscal agent.
BANXING FUNCTIONS
According to Volume 1 of Michie, on Banks and Banking, Section
2, page 6, *the chief function of a ‘bank’ involves the receipt of deposits
from the general public, repayable to the depositors on demand or at a
fixed time, and the use of deposit funds for secured loans, and the relation-
ship of debtor and creditor, between the bank and depositor.‘(Emphasis
hupplied).
The opinion written by Chief Justice Cureton, while Assistant
Attorney General, in the Report and Opinions of Attorneys General of
Texas, (1912-1914), page 342, is an exhaustive study of prohibited banking
functions in connection with corporations seeking to organize under what
was then Subdivision 29 of Article 1121, which authorized the formation of
corporations for Ythe accumulation and loan of money; but these subdivisions
shall not permit corporations with banking or discounting privileges.- He
states that ‘the ordinary and usnal powers exercised by banks. . . are to
discount notes and receive deposits.* With regard to the meaning of ‘dis-
count” the opinion concludes, that in order for a transactton to become a
discounting transaction within the technical and banking meaning of the
word ‘dis cormto’, two facts mnst exist.
(I). &Less than the face value of the note must be paid for it.*
(2). “The party offering the note to the bank must be liable
upon the note either as a maker, endorser, or guarantor.
In the absence of either of these two requisits the trans-
action is not a discounting one such as is inhibited by
the statnte under examination.Y
Cureton then proceeds to discuss the question of the receipts of deposits as
a banking function. .
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eon. zouie steakley, page 4 (WW-52-I’)
“Having shown that the receiving of deposits is the exerc,ise
of a banking privilege, and therefore inhlbited to corporations
chartered under the statute we are dfscussing, it next devolves
upon us to determine the nature of the relation created between
a depositor and the bank. It is elementary that a general deposit
of money in a bank creates a debt from the bank to the depositor. 0s
“We take it as well settled then that generally when we refer
to the receipt of deposits by a bank we refer to the creation of the
relation of debtor and creditor as between the bank and fts depostt-
ors, and not to the creation of the relation of bailee, although in a
case of special deposits the relation of batlee may sometimes be
created. However, in the general and ordinary sense of the terms
as used in the business of banking ‘we would say that the receiving
of deposits as a banking privilege is the receiving of general de-
posits or special deposits which create the relation of debtor and
creditor and not the relation of trustee and cestui qui trust or of
bail,ee and bailor or of principal and agent.*
“From thls opinion (Merch.antlle National Bank of New York
v, Mayor, etc of New York, 1.21 LJ. S. 138) it is clear that the re-
ceipt of money by a corporation as bailee or as agent for the
purpose of in;es&nent and not as a deposit in which the relation
of debtor and creditor is created, would not be the exercise of a
banking privilege i for it 1s seen from the deflnitlon of the busi-
ness of banking as given by the Supreme Court of the United
States in th,is case, that the receipt of deposits as a banking
[~:wivil~ege generally is the ‘receiving of deposits payable on
ii< irLand.”
DEPOSITARY AND FISCAL AGENTS
Authorities are few which are definitive as to just’what a United
States depositar-: or fiscal agent is or does. In Thomas Branch, et al v.
Th- United States, 12 Ct. Cls. 281, affirmed 100 U.S. 673, 25 L-Ed. (59,
??., court. in %u,ssing the status of a national bank as a deposttary, had
the following to say:
‘Designating a national bank as a depositary of public
money under this provision does not change the character
of its organization, or convert its managers into public
officers, or give to the Government any addltlonal control
over the institution, or render the United States Liable for
any of the acts, contracts, or obligations of the bank. Nor
does It constitute the bank a general. financial agent of the
Government, but when after such designation it is required
by law or by direction of the Secretary of the Treasury to
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Hon. Zollie Steakley, page 5 (W.W-527)
perform any financial duties for the United States, it then becomes
a special agent for the particular purpose required, with no power
to bind the Government beyond the special authority conferred upon
it. . .*
*But when public money is deposited with a destgnated-deposlt-
ary nat~ional bank, it is not there retained in kind as the special
property of the United States, of which the bank is made the custo-
dian, bat it becomes at once the property of the bank, is mingled
with its other funds, is loaned or otherwise employed in the ordinary
business of the corporation, and the bank, instead of being the c~us-
todian of public money, becomes a debtor to the United States pre-
cisely as it does to other depositors on receipt of individual deposits
. . . The Government has the same rights and remedies against the
bank as other creditors have. If the bank fails, the United States
resort to the collateral security, if any, given to secure the de-
posits of public money to the extent of the proceeds thereof. . .”
(Emphasis supplied).
The General Counsel of the United States Treasury, in an opinion
dated May 9, 1941, had the following to say concerning the duties devolving
upon a particular bank subsequent to its designation as ‘financial agent of
the Government”:
-As you are aware, the Federal Reserve Bank of New York
has been called upon, pursuant to this provision, to perform a
wide variety of functions for the Government, Lncluding the as-
sisting in carrying out the Foreign Funds program (in this it
shared its duties with other Federal reserve banks), the purchase
and sale of gold for the United States, the purchase and sale of
currencies under stabilization agreements, the purchase of for-
eign silver under the Silver Purchase Act of 1934, the carrying
of accounts for the UNNRA, and the carrying of an account for
Saudi Arabia.’
Certain sections of the Code of Federal Regulations are pertinent
to an inquiry as to the duties of a depositary or fiscal agent, particularly
the following from Title 31, Money and Finances’ Treasury.
General Provisions and Definitions:
:&ion 202.1
(e) General depositarfesj definition of. The term ‘general deposit-
aries. as used in this part means depositaries and financial agents
of the Government that have been authorized to maintain on their
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Hon. collie Steakley, page 6 (WW-527)
books an~account In the name of the Treasurer of the United States.
General depositaries are designated and maintained only at points
where depositary is needed to receive deposits from depositors
of public monies for credit to the account of the Treasurer of the
United States or to render other essential Banking services auth-
orized by the Secretary of the Treasury. The balances maintained
wfth general depositaries to the credit-of the Treasurer of the
United States are fixed in proportion to the volume and character
of the Government business transacted by such depositaries and
are adjusted periodically upon that basis; General depositaries,
when so authorized by the Secretary of the Treasury, may also
accept deposits for credit in the official checking accounts of
other Government officers with such depositaries.”
(f). LLmited depositaries; definition of. *The term ‘limited de-
positaries’ means depositaries and financial agents of the govern-
ment that have been designated by the Secretary of the Treasury
for the sole purpose of recetving, up to specified maximum amour&
deposits made by capitalized government officers for credit in
their official checking accounts wlth such depositaries. Limited
depositaries are not authorized to accept deposits for credit to the
account of the Treasurer of the United States.”
Section 202.4 Deposits by Government officers with general and limited
depositaries for credtt m their official checking accounts
with such deposItaries.
*It is the responsibility of government officers to maintain the
balances (including the outstanding drafts) in their official check-
ing accounts with general and limited depositaries within the
authorized limits, flxed by the Secretary of the Treasury. If a
government officer determines that the balance in his official
checking account will exceed the authorized limit of the deposit-
ary in which the account:is.m&intained, he shall immediately
advise the Secretary of the Treasury throughhis~administrative
office and the TreasKry ~111 take action to obtain additional col-
lateral from the depositary and will increase its authority ac-
cordingly. . .*
FOR SPECIAL ATTENTION OF GENERAL DEPOSITARIES
Section 202.15 Glasses of General depositaries.
“There are two classes of general depositaries, namely, ‘active
general depositaries’ and ‘inactive general depositartes’. An
‘active general depositary* is a depositary which Is authorized
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Hon. Zoiiie Steakley, page 7 (WW-527)
to maintain on its books an account in the name of the Treasury of
the United States and is authorized to accept deposits from gwern-
ment officers for credit in that account. An ‘inactive general deposit-
ary’ is a depositary that is authorized to maintain on its books an ac-
count in the name of the Treasury of the United States, but does not
have authority to accept deposits from government officers for credit
in that account.”
Perhaps the case most directly ln point on this question in Texas is
Brenham Production Credit Association v. Zeiss, 264 S.W.2d 95 (Sup. Ct. 1953)
153 Tex. 152 wherein the Gitv of Brenham was seeking to tax the Brenham
Production Credit Association on the theory that it was a banking corporation
as contemplated by Article 7166 V4.C.S. The Court concluded that it was not
such~ a banking corporation. The opinion will be quoted at some length below
inasmuch as it has a bearing not only on the answer to your second question,
but on the third as well.
‘A production credit association is to be distinguished from a
joint stock land bank in a number of respects. The latter is specl-
fically designated as a bank. It has authority to Issue bonds based
upon the mortgages taken by it, and is designated as a depository
of public money. Its borrowers are not required to become stock-
holders. Its offerings of capital stock are open to the public.’
(Emphasis supplied.)
‘Its loans are restricted to farmers for general agricultural
purposes and borrowers are requlred to purchase stock in the
association up to five per cent of the desired Loan. The association
is empowered to issue no bonds. It serves as a depositary for no
funds, either public or private, and rather carries its own funds in
three separate banks, the greater part of same being on deposit ln
two banks outside the City of Brenham.*
The Court quotes the following from Warren v. Shook, 91 U.S. 704,
23 L. Ed. 421.
cs
having
. . . a place of business where deposits are received
and paid out on checks, and where money is loaned upon security
is the substance of the business of a banker:”
“While, of course, the lending of money is one of the principal
functions of a bank, nevertheless there are many agencies authorized
by both State and Federal governments to lend money, which are not
banks nor considered as such. Artlcies 1302a and 1303b expressly
authorize the chartering of corporations to lend and borrow money,
but without ‘banking privileges’. . .*
“The activities of this association are limited by law to making
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Hon. Zollie Steakley, page 8 (WW-527)
short-term loans to farmers for agricultural purposes and only
to those who purchase stock in the association. To carry out
such functionit was authorized to borrow from, and rediscount
paper with, Federal Intermediate Credit Banks and could deal
in that respect with no other bank or agency except with the ap-
proval of the Governor of the Farm Credit Administration. . .
It cannot deal in exchange or purchase notes and is not under
the supervision of the national or state banking authorities.’
It will be noted that one of the elements looked ID by the Court in c
distinguishing the Association, which was not a bank, from a joint stock
land bank, which is, is the fact that the latter is designated as a depositary.
A close study of the Federal Regulations set out above and their interpreta-
tion by the General Counsel of the Treasury shows, without question, that
some of the duties which might be imposed upon depositaries and fiscal
agents by the Treasurer, subsequent to their designation as such, involve
the performance of banking functions. In the light of the foregoing, we,
therefore, conclude that you would be without authority to accept and file
articles of incorporation which, without limitation, purport to authorize
the corporation to’act as a depositary or fiscal agent for the United States.
In answering your third question we must again refer to our Opinion
ww-77:
“A corporation may be formed under the Texas Business Corpr-
ration Act with a purpose clause authorizing the corporation to en-
gage in the business of accumulating and loaning money; selling and
dealing in notes, bonds and securities~ to subscribe for, purchase,
invest in, hold, own, assign, pledge, and otherwise deal in and dis-
pose of shares of capital stock, bonds, mortgages, debentures,
notes, and other securities or obligations , contracts and evidences
of indebtedness of foreign and domestic corporations not competing
with each other in the same line of business; to borrow money or
issue debentures for carrying out any or all of the purposes above
enumerated; but without banking or insurance prLvileges.” Opinion
ww-77.
As pointed out above, the primary purpose of a Small Business
Investment Complny is to help small business concerns raise capital by
making loans directly, or by purchasing the debentures of the small business
concern.
After studying the Small Business Investment Act LtseIf, the explan-
atory speech of Representative Patmaa, together with the proposed imple-
menting regulations promulgated by the Small Business Administrator, we
are of the opinion and so hold that a Small Business Investment Company can
be chartered and operate in Texas under articles of incorporation the pur-
pose clause of which contains the restrictive phrase”without banking or
discounting privileges.’ This conclusion is reenforced by comparLng the
opinion in the Zeiss case, supra, with the way in which the Small Business
Investment Company will operate under the Act in question. Among other
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.
, .~..)~,
Hon. Zollie Steakbay, page 9 (WW-527), ‘:
things, a Small Business Investment Company’s loans will be restricted to
“incorporated and unincorporated small business concerns.* (In the Zeiss
case the Association’s loans were only to farmers for agricultural purposes);
borrowers are required to purchase stock in an amount between two’ per
cent and five per cent of the capital provided, as in the case of borrowers
from the Brenham Production Credit Association.
By limiting the purpose *to act as depositary or fiscal agent of
the Unlted States when so designated by the Secretary of the Treasury” with
the phrase =but without banking and discounting privileges“ the company
would be authorized to perform those functions lawfully required by the
Secretary of the Treasury which do not infringe on banking functions. At
the same time, it would be effectively prohibited from performing those
duties of depositaries or fiscal agents which are considered prohibited
banking functions,
SUMMARY
The proposed purpose “to operate under the Small
Business Investment Act of 1958* is not a fully stated
purpose under Article 2.01 of the Texas Business Cor-
poration Act. The Secretary of State is not authorized
to accept and file articles of incorporation reciting
that the corporation is to have all the powers specified
in the Small Business Investment Act of 1958 including
the power ‘to act as such a depositary or fiscal agent
of the United States whenever designated by the Secretary
of the Treasury.’ The foregoing phrase, when limited
by the words “- . .but without banking or discounting
privileges” is acceptable.
Very truly yours,
WILL WILSON
Attornev General of Texas .
RVL:jg
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I.. :~I ,^j 7
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Hon. Zollie Steakley, page 10 (WW-527)
APPROVED:
OPINION COMMITTEE:
Geo. P. Blackburn, Chairman
Houghton Brownlee, Jr.
Elmer McVey
Jay Howell
REVIEWED FOR THE ATTORNEY GENERAL
BY:
W. V. Ceppert