Untitled Texas Attorney General Opinion ( 2007 )

GREG A B B O T T
August 14,2007
Mr. James A. Cox, Jr., Chair Opinion No. GA-0563
Texas Lottery Commission
Post Office Box 16630 Re: Eligibility for a manufacturer's or distributor's
Austin, Texas 78761-6630 license under the Bingo Enabling Act, chapter
2001 of the Occupations Code (RQ-0573-GA)
Dear Mr. Cox:
Under the Bingo Enabling Act, chapter 2001 of the Occupations Code (the "Act"), the Texas
Lottery Commission (the "Commission") licenses manufacturers and distributors of bingo equipment
and supplies. See TEX. OCC. CODEANN. tjtj 2001.201, .206 (Vernon 2004). Under sections
2001.202 and 2001.207 of the Act, a person holding an "equitable or credit interest" in another
distributor or manufacturer or an applicant required to name such persons in its application is
generally ineligible for a manufacturer's or distributor's license. See id. $5 2001.202(8)-(9),
.207(8)-(9). On behalf of the Commission, you ask whether "a person is ineligible for a bingo
manufacturer's or distributor's license . . . if an individual required to be named in the license
application holds a ten percent or more proprietary, equitable, or credit interest in a holding company
that has a proprietary, equitable, or credit interest in [another] manufacturer or distributor."' We first
consider the relevant provisions of the Act.
I. Statutory Background
The Act generally requires persons involved in the bingo industry, including bingo
distributors and manufacturer^,^ to be licensed by the Commission. See, e.g.,id.$5 200 1.101, .15 1,
.201, .206, .251; see also Tex. Att'y Gen. Op. No. GA-0186 (2004) at 1 (stating that the Act
generally requires licensing of "all persons . . . involved in any aspect of the bingo industry"). An
unlicensed manufacturer "may not sell or supply to a person in this state or for use in this state bingo
'See Letter £tom James A. Cox, Jr., Chair, Texas Lottery Commission, to Honorable Greg Abbott, Attorney
General of Texas, at 1 (Feb. 23,2007) (on file with the Opinion Committee, also available at http://www.oag.state.tx.us)
(footnote omitted) [hereinafter Request Letter].
'A "distributor" is "a person who obtains . . . bingo equipment or supplies for use in bingo in this state and sells
or fhmishes the items to another person for use, resale, display, or operation." TEX.OCC.CODEANN. 4 2001.002(9)
(Vernon 2004). And a "manufacturer" is, in general, a person who assembles bingo equipment or supplies or who
converts bingo equipment or items to further promote the sale or use of the same in the state. See id. 3 2001.002(16).
Mr. James A. Cox, Jr. - Page 2 (GA-0563)
cards, boards, sheets, pads, or other supplies, or equipment designed to be used in playing bingo, or
engage in any intrastate activity involving those items." TEX.OCC.CODEANN.5 2001.201 (Vernon
2004). Similarly, an unlicensed distributor "may not sell, distribute, or supply bingo equipment or
supplies for use in bingo in this state." Id. 5 2001.206. Moreover, a manufacturer is ineligible
for a distributor's license and a distributor is ineligible for a manufacturer's license. See id.
$5 2001.202(6), .207(6).
Sections 200 1.202(relating to manufacturers) and 200 1.207(relatingto distributors)provide,
in essentially identical language, that the following persons, among others, are ineligible for
manufacturers' and distributors' licenses, respectively:
(8) an owner, officer, director, or shareholder of, or aperson
holding an equitable or credit interest in, another manufacturer or
distributor licensed or required to be licensed under this chapter; or
(9) a person:
(A) in which aperson described by Subdivision (I), (2),
(3), (4), (9,(6), (7), or (8) or in which a person married or related in
the first degree by consanguinity or affinity to one of those persons
has greater than a 10 percent proprietary, equitable, or credit interest
or in which one of those persons is active or employed; or
(B) in whose application for a [manufacturer's or
distributor's] license a person described by Subdivision (I), (2), (3),
(4), (9,(6), (7), or (8) is required to be named.
Id. 5 2001.202(8)-(9) (emphasis added); see id. 5 2001.207(8)-(9) (using essentially the same
language). Under the Act, a "person" is defined to "mean[] an individual, partnership, corporation,
or other group." Id. 5 2001.002(20).
You ask about an applicant required to list in its application an individual who holds ten
percent or more of an equitable or credit interest in a holding company that in turn has an equitable
or credit interest in another licensed manufacturer or distributor, but you do not indicate whether the
applicant is corporate or noncorporate. See Request Letter, supra note 1, at 1.3 A noncorporate
applicant must list in its application to the Commission the "name and home address of each owner."
TEX.OCC.CODEANN.$5 2001.203(b)(3)(A), .208(3) (Vernon 2004). And a corporate applicant for
a license must list the name of each person that owns ten percent or more of stock in the applicant
as well as the name of each officer and director. Id. $5 2001.203(b)(3)(B), .208(4). Because both
corporate and noncorporate applicants must list individuals with the described relationship to the
~ about "a proprietary, equitable, or credit" interest. See Request Letter, supra note 1, at 1. We note,
3 Y o ask
however, that sections 2001.202(8) and 2001.207(8), which are the relevant provisions here, do not reference
"proprietary" interest. See TEX.OCC.CODEANN.§ § 2001.202(8), .207(8) (Vernon 2004).
Mr. James A. Cox, Jr. - Page 3 (GA-0563)
applicant, your question is not limited to any particular type of applicant and, on its face, implicates
sections 2001.202(9)(B) and 2001.207(9)(B), which incorporate sections 2001.202(8) and
2001.207(8). See id. $5 2001.202(9)(B), .207(9)(B).
Under sections 200 1.202(9)(B) and 200 1.207(9)(B), an applicant required in its application
to name a person described by any of the subdivisions (1) through (8) of sections 2001.202 and
2001.207, respectively, is ineligible for a license. See id. $5 2001.202(9)(B), . 2 0 7 ( 9 ) ( ~ ) ."[A]
~
person [holding or having] an equitable or credit interest in, another manufacturer or distributor" is
a person described by subdivision (8) of each of these statute^.^ Id. $5 2001.202(8), .207(8).
11. Analysis
Thus, your question requires us to construe sections 2001.202(8) and 2001.207(8) and
determine whether an individual, solely by virtue of his or her ownership of an equitable or credit
interest in a holding company, holds an equitable or credit interest in a subsidiary bingo
manufacturer or distributor company.
If the statutory language is unambiguous, courts will "generally interpret the statute according
to its plain meaning." City of Sun Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003); see
also TEX.GOV'TCODEANN.$ 3 11.011(a) (Vernon 2005) ("Words and phrases shall be read in
context and construed according to the rules of grammar and common usage."). Accordingly, we
begin with the plain language of sections 2001.202(8) and 2001.207(8). Subdivision (8) of each
statute renders ineligible for a manufacturer's or distributor's license "an owner, officer, director,
or shareholder of, or a person [holding or having] an equitable or credit interest in, another
manufacturer or distributor." TEX. OCC.CODEANN. $8 2001.202(8), .207(8) (Vernon 2004)
(emphasis added); see also id. $5 2001.202(9)(B), .207(9)(B) (providing that persons required to
name persons described by subdivision (8) are ineligible for a license). By their plain language, the
statutes require the person in question to hold or possess the equitable or credit interest in the other
manufacturer or distributor. See id. $5 2001.202(8), .207(8).
But the person in question here-the individual required to be named by the applicant for a
license--does not hold the equitable or credit interest in the other manufacturer or distributor. See
4Suchan applicant may also be ineligible for a license under sections 200 1.202(9)(A) and 200 1.207(9)(A). See
TEX.OCC.CODEANN. $5 200 1.202(9)(A), .207(9)(A) (Vernon 2004). We do not consider these provisions because you
do not describe the individual's relationship to the applicant. Moreover, your concern here is with the meaning of
sections 2001.202(8) and 2001.207(8). See Request Letter, supra note 1, at 1-2.
'You ask about an individual holding ten percent or more of an equitable or credit interest in a holding company
that holds an equitable or credit interest in a manufacturer or distributor. See id. We note, however, that neither section
200 1.202(8) nor section 200 1.207(8) of the Act limits its application to a person holding a certain percentage of equitable
or credit interest in another manufacturer or distributor; it applies to a person holding any percentage of such interest.
See TEX.OCC.CODEANN.$ 5 200 1.202(8)(B), .207(8)(B) (Vernon 2004); cJ: Tex. Att'y Gen. Op. No. GA-0186 (2004)
at 4 (stating that neither section 2001.202(8) nor section 2001.207(8) requires any particular percentage of ownership
of shares).
Mr. James A. Cox, Jr. - Page 4 (GA-0563)
Request Letter, supra note 1, at 1-2. Instead, you tell us that the holding company holds such
equitable or credit interest. See id. The Act does not reference or define a "holding company," but
we understand you to refer to a company that owns "securities by which it is possible to control or
substantially to influence the policies and management of one or more operating companies in a
particular field of enterpri~e."~ N. Am. Co. v. S.E. C., 327 U.S. 686, 701 (1946).
While a holding company may control the subsidiary company, the holding company and the
subsidiary are distinct and separate legal entities. See CNOOC Se. Asia Ltd. v. Paladin Res.
(SUNDA) Ltd., 222 S.W.3d 889,898 (Tex. App.-Dallas 2007, no pet. h.); Docudata Records Mgmt.
Servs., Inc. v. Wieser, 966 S.W.2d 192,197 (Tex. App.-Houston [1st Dist.] 1998, pet. denied); see
also I & J C Corp. v. Helen of Troy L.P., 164 S.W.3d 877, 889-90 (Tex. App.-El Paso 2005, pet.
denied) (discussing general distinction between a parent company and its subsidiary and when they
may be "fused" for the purposes of a legal proceeding). The distinction between a holding company
and its subsidiary will not generally be disregarded because "disregard of the 'legal fiction of
corporate entity' is 'an exception to the general rule which forbids disregarding corporate
existence."' Lucas v. Tex. Indus., Inc., 696 S.W.2d 372,374 (Tex. 1984) (quoting First Nut 'I Bank
in Canyon v. Gamble, 132 S.W.2d 100,103 (Tex. 1939)). Texas courts will not "because of stock
ownership or interlocking directorship disregard the separate legal identities of corporations, unless
such relationship is used to defeat public convenience, justify wrongs, such as violation of the anti-
trust laws, protect fraud, or defend crime." I & J C Corp., 164 S.W.3d at 889 (quoting Bell Oil &
Gas Co. v. Allied Chem. Corp., 43 1 S.W.2d 336, 339 (Tex. 1968)); see also Town Hall Estates-
Whitney, Inc. v. Winters, 220 S.W.3d 76, 86 (Tex. App.-Waco 2007, no pet.) ("There must be
something more than mere unity of financial interest, ownership and control for a court to treat the
subsidiary as the alter ego of the parent and make the parent liable for the subsidiary's tort.").
Because the holding company is a separate legal entity from its subsidiary manufacturer or
distributor, the individual in question does not hold, as a matter of law, an equitable or credit interest
in the subsidiary manufacturer or distributor by virtue of his or her equitable or credit interest in the
holding company. It is possible, however, that a holding company and its subsidiary might, in
particular circumstances, be treated as a single entity and an equitable or credit interest in a holding
company determined to be an equitable or credit interest in the subsidiary company. CJ: I & J C
Corp., 164 S.W.3d at 889 (stating general rule that separate corporate identities will not be
disregarded by Texas courts unless the relationship is used to defeat public convenience, justify
wrongs, protect fraud, or defend crime). However, that determination would be a fact-sensitive
inquiry made by a court with the appropriate jurisdiction over the particular legal proceedings. See
id.
6See, e.g., TEX.BUS.ORGS.CODEANN.Ij 10.005(a)(2) (Vernon 2006) ("'Holding company' means a domestic
entity that, fkom its organization until a merger takes effect, was at all times a direct or indirect wholly owned subsidiary
ofthe merging domestic entity and the ownership or membership interests of which are issued to the members or owners
of the merging domestic entity in the merger."); TEX.FIN.CODEANN. § 91.002(16) (Vernon Supp. 2006) ("'Holding
company' means a company that directly or indirectly controls a savings bank or controls another company that directly
or indirectly controls a savings bank."); TEX.INS.CODEANN.5 823.002(5) (Vernon 2006) ("'Holding company' means
a person who directly or indirectly controls an insurer.").
Mr. James A. Cox, Jr. - Page 5 (GA-0563)
Your letter suggests that the terms "equitable or credit interest" in sections 2001.202(8) and
2001.207(8) may reach the "interest" that the individual in question has or may have-through the
holding company-in the separate subsidiary manufacturer or distributor. See Request Letter, supra
note 1, at 2 ("Does this sort of relationship [among the applicant, the individual, the holding
company, and the subsidiary manufacturer or distributor] create an "equitable, proprietary or credit
interest?"). The Act does not define "equitable interest" or "credit interest." And we have found no
other statutory or judicial decisions defining such terms in this or a similar context. But read in the
context of sections 200 1.202(8) and 200 1.207(8), "equitable interest" appears to contemplate some
type of beneficial interest in another bingo manufacturer or distributor. See TEX.OCC.CODEANN.
2001.202(8), .207(8) (Vernon 2004); see also TEX.GOV'TCODEANN.5 31 1.011(a) (Vernon
2005) ("Words and phrases shall be read in context and construed according to the rules of grammar
and common usage."); Monsanto Co. v. Cornerstones Mun. Util. Dist., 865 S.W.2d 937,939 (Tex.
1993) ("When the legislature has failed to define a word or term, courts will apply its ordinary
meaning.").7 And "credit interest," read in the statutory and commercial context here, appears to
refer broadly to any right or claim to repayment for money loaned or advanced to another
manufacturer or distributor regardless of the profitability of that entity or ~ e n t u r e Read
. ~ in context,
the term "equitable or credit interest" does not encompass, as a matter of law, the individual's
"interest," if any, in the subsidiary manufacturer or distributor.
The individual here holds some type of beneficial interest in or has a right or claim to be
repaid moneys from the holding company rather than from the subsidiary manufacturer or distributor
company. Again, because the holding company is a separate legal entity from its subsidiary bingo
manufacturer or distributor, the individual does not possess, as a matter of law, a beneficial interest
in the subsidiary or a monetary claim against the subsidiary solely by virtue of his or her interest in
the holding company. It is entirely possible that in particular circumstances, such an individual may
possess or be deemed to possess a beneficial interestgin the subsidiary manufacturer or distributor
notwithstanding its legal separation from the holding company. But, that determination must be
made by the Commission or a court based on the particular factual circumstances.
We recognize that a holding company might be used as a device to circumvent the Act's
ownership and interest restrictions in its licensing requirements. But, like a court, this office cannot
disregard the plain language of the statute or insert words into the statute to foreclose that possibility.
'See MERRIAM-WEBSTER'S COLLEGIATEDICTIONARY 423 (1 1th ed. 2005) (defining "equitable" in the sense of
"existing or valid in equity as distinguished from law"); BLACK'SLAWDICTIONARY 816 (7th ed. 1999) (defining
"equitable interest" as "[aln interest held by virtue of an equitable title or claimed on equitable grounds, such as the
interest held by a trust beneficiary").
'See MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY 294 (1 lth ed. 2005) (defming "creditor" as "one to whom
a debt is owed"); WEBSTER'S NEWWORLDFINANCE AND INVESTMENT DICTIONARY 83,85 (2003) (defining "credit" as
"[alny money lent through bonds or loans" that "must be paid back or the borrower risks defaulting," and a "creditor"
as "[aln entity that has a monetary claim against a debtor"); see also Bauer v. Comm 'r of Internal Revenue, 748 F.2d
1365, 1367 (distinguishing between shareholder and creditor).
'See supra note 8.
Mr. James A. Cox, Jr. - Page 6 (GA-0563)
See R.R. Comm 'n of Tex. v. Miller, 434 S.W.2d 670,672 (Tex. 1968) (stating that because courts
are not the law-making body, they are not responsible for omissions in legislation but only for
interpreting the statute as written, quoting Simmons v. Amim, 22 S.W. 66,70 (Tex. 1920)); see also
McIntyre v. Ramirez, 109 S.W.3d 741,748 (Tex. 2003) (stating that a court's role is not to second-
guess the Legislature's policy choices informing a statute or to weigh the effectiveness of their
results). It is the Legislature's responsibility to impose restrictions, if any, in the statutory language
that it deems necessary or desirable. See Holmes v. Morales, 924 S.W.2d 920,925 (Tex. 1996); see
also Seay v. Hall, 677 S.W.2d 19,25 (Tex. 1984) ("[Ilt would be an usurpation of our powers to add
language to a law where the legislature has refrained.").
Nor can this office disregard the separate legal identities of a holding company and its
subsidiary manufacturer or distributor to avert that possibility. First, this office cannot ignore or
overrule judicial decisions generally recognizing the distinction between a holding company and its
subsidiary. See supra pp. 3-4; see also Tex. Att'y Gen. Op. No. JC-0507 (2002) at 8 ("[Tlhe Office
of the Attorney General cannot overrule a judicial decision."). Second, while courts have the
authority to disregard separate corporate identities in particular instances when necessary for the
public convenience or to prevent violations of the law, they do so sparingly and after a fact-intensive
analysis. Cf I & J C Corp., 164 S.W.3d at 889.
111. Conclusion
In response to your question, we conclude that an applicant that must list in its application
an individual who holds ten percent or more of an equitable or credit interest in a holding company
that, in turn, holds an equitable or credit interest in another subsidiary bingo manufacturer or
distributor company, is not ineligible as a matter of law for a distributor's or manufacturer's license
under the Act.
Mr. James A. Cox, Jr. - Page 7
S U M M A R Y
Under the Bingo Enabling Act, chapter 2001 of the
Occupations Code, an applicant required to list in its application an
individual who holds ten percent or more of an equitable or credit
interest in a holding company that, in turn, holds an equitable or
credit interest in another subsidiary manufacturer or distributor
company, is not ineligible as a matter of law for a distributor's or
manufacturer's license. Because the holding company and its
subsidiary are treated as separate and distinct legal entities under
Texas law, the individual does not hold, as a matter of law, an
equitable or credit interest in the subsidiary bingo manufacturer or
distributor by virtue of his or her equitable or credit interest in the
holding company.
KENT C. SULLIVAN
First Assistant Attorney General
NANCY S. FULLER
Chair, Opinion Committee
Sheela Rai
Assistant Attorney General, Opinion Committee