Untitled Texas Attorney General Opinion ( 1939 )

NO. 3097
Article 4727, Revised Civil Statutes ‘of
Texas, 1925, and Article 577$ Penal Code of
Texas, 1925, do not prohibit a life insurance
company from making a,loan to another corpora-
tion if a director or officer of the insurance
company is also a director or officer of the
borrowing corporation,where the officer or.di-
rector of the insurance company has no personal
interest in the loan and receives no money or
valuable thing for negotiating, procuring, re-
commending, or adding in.the furtherance of the
lOan3 either as principal, co-rincipal,agent
.orbeneficiary in such loan,
OFFICE OF TRE ATTORREY GENERLL
January 6, 1940
Iion:Walter C. Wood;ilard,
Chairman ;fnion NO. O-1586
Board of Insurance Commissioners : Constructionof Arti-
Austin, Texas cle 4727, Revised Civil
Statutes of Texas, and Ar-
tic&e 577, Penal Code of
Dear Sir: Texas.
We are in receipt of your letter in which you quott
Article 4727 Revised Civil Statutes of Texas end Article 577,
Penal Code oh Texas, and request an opinion 0; the following
questibn:
8, whether in your opinion Article 4727,
supra,*pGoi&bitsa life insurance c6mpany from
making a loan to another cprporation if a diroc,-
tor or officer of the life insurance conpany is
also a director or an officer of the borrozting
corporation, the officer or director having no
personal interest in the loan and receiving no
looney or valuable thing for negotiating, procur-
ing\ r,ecomnending, or aiding in the furtherance
of the loan, either as princl.pal,co-princLpa.l;l,
agent or beneficiary in such loanli."
Arrticlc4727, supra; rezds as follzsz
"No dlroctor or officer of any l.nsuranceCOW
pany transacting buslncss in or organized under the
Hon. kklter C. Moodward, January 6, 1940, page 2
laws of this State, shell
._ receive
s- any money or
valuable thing for negotlatlng, procurlng, recom-
mendIng or aiding in any purchase or sale by such
company of any property, or any loan from such
company; nor be pecuniarily, interested, either
as principal, co-principal,agent or beneficiary
in any such purchase, sale or loan. Nothing in
this article shall prevent a life insurance cor-
poration from making a loan upon a policy held
therein, by the borrower, not in excess of the re-
serve value thereof."
Article 577 of the Penal Code provides:
%o director or officer of any insurance com-
pany transacting biness in this State
ized under the laws of this State, shali ````$0"
any money or valuable thing for negotiating, pro-
curing, recommending or aiding in any purchase or
sale by such company of any property~or loan from
such company, nor be pecuniarily interested either
as principal, co-principal,agent or beneficiary,
in any such purchase, sale or loan. Nothing con-
: tained in this article shall prevent a life insur-
ance corporationfrom making a loan upon a policy
held therein, by the,borrower not in excess of,.the
reserve value thereof.. hny person violating any
provision of this article shall.begfined not les8
than three hundred nor more than ohe thousand dol-
lars."
Both articles stem from Senate Bill 291, Chapter 108,
?I& Legislature,.approvedKarch 22, 1909, which reads as fol-
:
Wo director or officer of any insurance com-
pany transactingbusiness in this State, or organ-
.ised under the laws of this State, shall receive
any money or valuable thfng for negotiating, procur-
ing, recommending or aiding in any purchase or sale
by such company of any property or any loan from such
cornpan:?,
nor be pecuniarfly interested tither as prin-
cipal, co-princ3.pa1,agent or beneficiary, in any
such purchase, sale or loan; provided, that nothing
contained in this Section shall prevent a life icsur-
am0 corporationilromuiak3.s~ a loar,GpoIla policy
held therein, by the boxover not in excess of the
reserva valua t!121’eof..-Al’/
per ‘:i.Q:;.j,+i,nS
S’-‘3 a:,yp;:a..
risior-;cf t::ijSei:tionsha11 be guilty of a misde-
meazort and upon convIction thereof, shall be punished
Hon. ualter C. Moodward, January 6; 1940, page 3
by a fine of not less than $330.00 nor more than
$19000000~)'
At the outset we call your attention to the fact
that Article ~4727and Article 577 do not prohibita life
insurance company from doing anything.
The two statutes, civil and criminal, do contain an
express prohibition, but it is directed at the directors and
officers of insurance com&anies, and in no manner can it be
construed as a restraint upon the power and authority of in-
surance companies to make valid loans.
-At the expense of repetition we again call attention
to the explicit and unambiguous language of the articles above
quoted:
JINodirector or officer of any insurance com-
pany... shall receive any money or valuable
t$..iIf;; negotiating, procuring, recommending or
. 'any loan from such company nor be
pecuniaril; interested, either as principd, co-
g;ictpal, agent or beneficiary in any such . . .
a
The directors and officers of insurance companies
are inhibited from receiving any money or valuable thing for
their part in negotiating the loan, and also from'being pecun-
iarily interested, either as principal, co-principal,agent
or beneficiary in such loan. Any director or officer who vio-
lates the law in this respect is subj,ectunder the criminal
statute to a fine of not less than three hundred nor more than
one,thousand dollars. But neither the inhibition nor the pen-
alty can be stretched to prevent an insurance company from
makIng a loan to a corporationwhere a director or ~officerof
the lending insurance company is also a director or an officer
of the borrowing corporation. Whatever the guilt of the di-
rector or officer-in-common the insurance company, i.e., the
corporate entity, has commleted no offense under Articles 4727
and 577$ and cannot be punished by fine.
The prohibition, by the clear language of the stat-
utes, being operative against individual officers and direc-
tors and not the company itself, a life insurance company may
make loans in accordance with the provisions of Section 2 of
lirticle472s9 vernon9.snnnotated Civil Statutes, and subject
to the regulatory poi!crsof the Board of Insurance CoiMXCSSiOn-
ers as set out'in Chagtsr I, Title 78, Insurance, A rticles
b679-4698, Vernon's i¬ated Civil Satute~.
Hon. Walter C. Woodward, January 6, 1940, page 4
In this opinion we are not concerneriwith the rela-
tionship of the diraotor or officer to the loan or the degree
.of interest,’direct or indirect, vhich the director may or
may not have in the loan, The question, however, is whether
or not the life insurance company may make a loan to aqother
corporationtrhereItadirector or officer of the life insurance
company is also a dire&or :or an officer of the borrowing co:-
poration, the officer or director having no.personal interest
in the loan and receiving no money or valuable thing for nego-
tiating, procuring, reoommending or aiding in the furtherance
of the loan, either as principal, co-principal,agent or bene-
ficiary in such loan.”
The question is not whether a director of an insur-
ance company which makes a loan to a corporation of which he
is also a director falls within the prohibition of the civil
and criminal statutes.
It is to.be noted that in the question propounded.to
;~us:; director or officer-in-commonis given a clean bill of
. The Board of Insurance Commissioners,using the lan-
guage of the statute, states that none of the prohibitionsof
the statute are v:oLated. The statutory phrase "nor be decun-
iarily interested" is not incorparatedspocificzLl.y in the
uestion, but the director or officer-in-commonis said to have
sno per.sonalinterest in the loan and reoeiring no money or
valuablesthing. . 2'
‘where,under the language of the articles, there is
a serious question that a director of. a life insurance company
is 8~pecuniarilyinterested . 0 . as o 0 o beneficiary” in a loan
made to a corporation of which he is also a director, it would
indeed be doing violence to the language of the statutes under
considerationto hold that the prohibition therein operated as
a bar against the insurance cornpanG,as well as against the di-
rectors.and officers.
,The question propoaded presents the weakast situation
imaginable for extending the statutory prohibition to a loan by
a life insurance company to a corporationwith which it has a
director in common.
f to Irrafficbetween two cor-
The common law in respec,
porations ui%h one or more identical d2roct6rs or officers sup-
ports our constructionof Artif;les6727 ,z?d577. The foUowdrig
statement i.n2 Thompson.on Corporations, page 842, is persuasive
and illuminating:
Hon. Walter C. Woodward, January 6, 1940, page 5
corporations,from the mer'efact that a portion,
less than a quorum, of the board of directors in
the one 6onstituteda part of that in the other
at the same time, and participated in the dealings
between the two; .birt
it is only when their deal-
ings are shown to be prejudicial to one of the cor-
porations represented by them that they will be
set aside by the courts."
The rule acted on in Texas, in respect to benefit to
directors as individuals, as stated in 10 Texas Juri,s.,p. 958,
IS:
'(. . i assuming that the transactionbe au-
thorized by competent, disinterested directors,
and that it passes the test of fairness to the
corporation,the interested director may not be
deprived of the profits of the transaction.11
and
VhiJ.e the transaction, if otherwise unassail-
table,is not void because interested directors con-.
stituting a minority use their.positionfor the
purpose of advancing their own interests, any want
of good faith, reflected in the unfairness of the
transaction to the corporation,will render it void-
able even though sanctionedby "fqualified majority
of the directors."
The same reasoning is applicable to officers as well
as directors.
The contemplatedLoan would be valid at common law;
it is not prevented by the statutory law of this State. We feel
that your question is answerable in the negative.
It is our opinion, and you are so advised that Artiale
4727 Revised Civil Statutes of Texas' 1925 and Ar?Scle 577t Pe-
nal &ode of Texas, 1925, do not prohi6i.ta iife insurance company
from makin& a loan to another corporation if a director or offi-
cer of the insurance company is also a director or officer of the
borrowing corporation,where the officer or director of the in-
surance company has no personal interest in the loan and receives
no money or valuable thing for negotiating, procuring, recommend-
ing? or aiding in the furtherance of the loan: either as princi-
co-principal,agent or beneficiary in such 105:~.
pal!.,
Reference was made in your letter of re+cst'to eil~Piir.
i.cn of this department by the \Jriter under date of September 17,
aon. tjalterC. Woodward, January 6,,1940, page 6
1937, to Honorable R. L. Wiiiel, Chairman of the Board of In-
surance Commissioners, gusting Texas. In that opinion the
main question urder considerationwas whether the provisions
of Articles 4727 and 577, supra, extended to fire and cas-
ualty insurance com?annies: and it was held that they did. In-
sofar as said opinion in answer to rel&ted questions held
that Articles 4727 and-577 prevents an Insurance company from
maldng a loan to a corporationwith which it has a director in
common,-it is overruled.
Wewish to emphasize the fact that this opinion is
U$ed strictly to the circumstancesdescribed in your re-
There Is no attempt on.our part to lay down a universal
rule &pllcable to every situation in which a director or offi-
cer of the lending insuranca company is also a director or of-
ficer.of the borrowing corporation.-
~Trustingthat we have answered your inquiry satisfac-
torily, we are
Yours very truly
ATTORXEY GENERbI,GF TEIUS
By /s/ Dick Stout
Dick Stout, Assistant
DSaLWtwb
This opinion has been considqed in conference, ap-
proved, and ordered recorded.