Untitled Texas Attorney General Opinion

Honorable John J. Gavin Opinion No. JM-1245
Chairman
Insurance Committee Re: Whether an individual
Texas Rouse of Representatives surety may file a letter of
P. 0. Box 2910 credit for bail bond pur-
Austin, Texas 70769-2910 poses under article 2372p-3,
V.T.C.S. (RQ-1966)
Dear Representative Gavin:
You ask whether an individual applicant for a license
to execute bail bonds may satisfy the financial security
requirements of article 2372p-3, V.T.C.S, by submitting a
letter of credit. Subsection 6(f)(l) of article 2372p-3
provides in part:
(F) Upon notice from the [county bail
bond] board that the application has been
tentatively approved, the m shall
then : (1) deposit with the county treasurer
of the county in which the license is to be
issued a cashier's check, certificate of
deposit, cash, or & a- in th.2
amount indicated by the m under sub-
division (5) of Subsection (a) of Section 6
of this Act but in no event less than $50,000
except in counties with populations of less
than 250,000 persons by the most recent
federal census, the amount for applicants in
said counties shall be $10,000 to be held in
a special fund to be called the bail security
fund. (Rmphasis added.)1
1. Section 6(a) describes the information that must be
included in the application. Section 6(a)(5) requires the
applicant to include a statement of "the amount of cash or
cash value of any certificate of deposit or cashier's checks
which the applicant intends to place on deposit . . . if the
license is granted.' Instead of complying with section
(Footnote Continued)
p. 6630
Honorable John J. Gavin - Page 2 (JM-1245)
We conclude that an individual as well as corporate appli-
cants may submit certain letters of credit as "cash eguiva-
lents." To qualify, the letters of credit must be irrevoca-
ble, must limit inquiry into the underlying transactions
between the county and the bondsman, must provide for
payment thereunder on sight or within a reasonably brief
period of time after presentation of all required documents,
and must not make such payment contingent upon the consent
of, or any other action by, the bondsman or other party.
Article 62523-3 does not define the word "applicant."
Section 6 (a) , however /' requires "any person desiring to
act as a bondsmann to file an application for a license.
"Personm is defined by section 2(l) of the act to mean an
individual or corporation. Consequently an applicant may be
either an individual or a corporation who desires to act as
a bondsman. Since the financial security requirements of
section 6(f)(l) and (2) of article 6272p-3 apply to any
applicant whose application has been tentatively approved,
they apply to both individual and corporate applicants.2
Article 6252p-3 also does not define "cash eguivalent.n
The statute as originally enacted in 1973 did not contain
that phrase. Section 6(d)(l) of the 1973 act required the
applicant upon tentative approval of his application to
deposit either "a cashier's check, certificate of deposit,
or cash in the amount of $S,OOO,w or execute in trust a deed
to nonexempt realty worth at least $10,000. Acts 1973, 63rd
(Footnote Continued)
6(f) (11, an applicant may satisfy the requirements of
section 6(f)(2) and execute in trust a deed to nonexempt
realty equal in value to the applicable minimum described in
section 6(f)(l).
2. This conclusion is consistent with the cases
applying the financial Security requirements in section 6 as
originally enacted and later amended to both individual and
corporate applicants. See. e.a,, Texas Fire & Casualtv Co,
v., 684 S.W.Zd 177 (Tax. App. -
Houston [14th Dist.] 1984, writ ref’d n.r.e.) (local rule
invalid to extent that it requires corporate surety to
deposit pursuant to section 6(f) of 1981 act more than
$5,000): Bexar Countv aail Bond Bd. Decw 604 S.W.Zd
214 (Tex. Civ. App. - San Antonio 198:, no writ; (individual
surety is not required by section 6(d) of 1973 act to
deposit more than $5,000). m Attorney General Opinion
JM-799 (1987) (section 7(a) of the act expressly makes
section 6(g) inapplicable to corporate sureties).
p. 6631
Honorable John J. Gavin - Page 3 (JM-1245)
Leg., ch. 550, 5 6, at 1523.3 The 1973 act was substan-
tially amended by the legislature in 1981. Acts 1981, 67th
Leg., ch. 312, 5 1, at 075-05. The 1981 amendments added
section 6(a)(5), renumbered section 6(d)(l) as 6(f)(l), and
amended the renumbered provision to include the phrase "cash
equivalent" and the reference to subsection 6(a) (5).
Neither the testimony at the legislative hearings nor the
bill analyses clarify this amendatory language.4
In Attorney General Opinion JM-935 (1988), we construed
the phrase "cash equivalent* to “be something commercially
as good as cash, or, as we take it, something that could
readily be converted into cash at a fixed price.' La at 2
(quoting from moau v. w, 4 S.W. 361 (Tex. 1887)).
We further described *cash eguivalentw in that opinion as an
instrument convertible into cash within a reasonable time
and with reasonable effort. &at 3. Applying those
definitions, we'noted that an assignment of a life insurance
policy without transfer of the power to surrender the policy
for its cash value would require the county to obtain the
3. In 1987 the legislature increased the minimum cash
or cash equivalent amount required by section 6(f)(l) from
$5,000 to $10,000 or $50,000 depending on the population of
the county. Acts 1987, 70th Leg., ch. 921, 5 2. at 3110.
4. The 1981 amendments also added section 6(f) (3),
which requires a corporate bondsman to furnish the county
sheriff an irrevocable letter of credit as a cash equivalent
to satisfy any final judgment of forfeiture. The legisla-
tive history is silent with regard to this addition. Article
22.14 of the Code of Criminal Procedure makes a judgment in
a bond forfeiture case final after a trial during which
insufficient cause is shown for the principal's failure to
appear. The section 6(f)(3) requirement applies after the
issuance of bonds in contrast to the financial security
requirements of section 6(f) (1) and (2). which must be
satisfied upon tentative approval of the application to
issue bonds. Thus we interpret section 6(f)(3) as an
additional financial requirement on corporate bondsmen
rather than as an indication that individual bondsmen may
not use letters of credit to satisfy section 6(f)(l).
p. 6632
Honorable John J. Gavin - Page 4 (JM-1245)
bondsman's express consent to surrender and concluded that
such a limited assignment did not constitute a "cash eguiva-
lent."5
No other opinion or judicial decision affords us
insight into the meaning of "cash equivalent." However, in
Attorney General Opinion H-430 (1974), which interpreted the
1973 version of the statute, we stated the purpose of the
financial security requirements to be the placement of
Wresources in the hands of the County with which to satisfy
a forfeiture without having to resort to court proceedings.W
& at 2 (holding that certificate of deposit, whether or
not negotiable, must be payable to the county so that it
could be reduced to cash without any action by the bail
bondsman). In Attorney General Opinion JH-935, we confirmed
this earlier interpretation of the statute's purpose by
denying a bail bondsman the right to submit as financial
security an instrument that required action on the bonds-
man's part prior to conversion of the instrument into cash.
Our holding in Attorney Opinion JM-935
(1955:.is consistent with the cardin?% of construction
that effect be given to every part of a statute. SW 67
Tex. Jur. 3d Status 5 124. We did not therein restrict
the phrase 'cash eguivalentm to the security devices listed
in section 6(a)(S) of the act: cash, cashier88 checks, and
certificates of deposit. The legislature included the
phrase "cash eguivalentn along with all three of those
devices in section 6(f)(l), and thereby indicated its intent
not to restrict the submission of security devices to those
listed in section 6(a)(5). Thus we give little weight to
the omission of the phrase "cash equivalent* in section
6(a)(S) and construe that section as requiring an applicant
to describe in his application the amount and type of
qualifying security that he will submit on tentative
approval of his application. This will achieve the purpose
of providing the financial security information that the
board needs to assess the qualifications of the applicant
without restricting the type of security in a manner that
violates the intent of section 6(f)(l).
p. 6633
Honorable John J. Gavin - Page 5 (JM-1245)
Section 5.103(a)(l) of the Texas Business and Commerce
Code defines "letter of credit " for purposes of chapter 5 of
the code6 concerning letters of credit as
an engagement by a bank or other person made
at the request of a customer and of a kind
within the scope of this chapter (Section
5.102) that the issuer will honor drafts or
other demands for payment upon compliance
with the conditions specified * the
credit. A credit may be either revo&e or
irrevocable.
Section 5.102 states that chapter 5 applies to the follow-
ing: (1) a letter of credit issued by a bank if the credit
requires a documentary draft or documentary demand7 for
payment, (2) a letter of credit issued by a person other
than a bank if the credit requires that the demand for pay-
ment be accompanied by a document of title. or (3) a letter
of credit issued by ; bank or other person if the credit
states that it is a letter of credit or is conspicuously
entitled as such.
6. your request does not refer to chapter 5 of the
Texas Business and Commerce Code. We limit our opinion,
however, to letters of credit within the scope of chapter 5,
since chapter 5 establishes the framework for development of
the law of letters of credit by codifying the fundamental
concepts underlying letters of credit. m Bus. G Corn. Code
5 5.102(c), comment 2 (Tex. UCC) (Vernon 1968); UQ p&
Commercial Coru. v. Hvn&& Inc.- 705 S.W.Zd 713, 715 (Tex.
APP. - Dallas 1986, no writ) (in&ument outside the scope
of chapter 5 cannot be a letter of credit).
7. A wdocumentary draft" or "documentary demand for
payment" refers to a draft or demand whose honor is con-
ditioned upon the presentation of any paper including a
notice of default, invoice, or document of title. Bus. G
Corn. Code f 5.103(a)(2). A draft refers to a bill of
exchange. XL 5 3.104(b) (11, Cc): ass
State 6600;.W;;18;;L 055 (Tex. App. -
&it) (bill 1s any written requirement fZ
payment of a specified sum to a third person at a stated
time or on demand); see also Black's Law Dictionary 149 (5th
ed. 1979) (bill of exchange is a third party instrument by
one party ordering payment by another party of a sum certain
to a third party).
p. 6634
Honorable John J. Gavin - Page 6 (JM-1245)
Letters of credit have traditionally been used as
security devices in international sales transactions.
Foreign sellers in those transactions ensured payment by
requiring their buyers to obtain letters of credit authoriz-
ing draws against the credits upon presentation of documents
of title such as bills of lading. &G &st Girard Sa %
593 F.2d 598 (5th CL.
1979); Annot., 35 A.L:R.3d 1404 (19;l). Traditional sales
credits are ofton referred to as sccmmercial credits."
Letters of credit in recent years have also been used to
secure the payment of various financial obligations or the
performance of real estate, construction, or other nonsales
contracts. m Annot., 44 A.L.R. 4th 172 (1986); Mueller,
Attornev. 38 Baylor L. Rev. 109 (1986) (hereinafter
Mueller); These credits are often referred.to as nstandby
credits" or "guaranty credits."
A letter of credit, whether it is a commercial or a
standby credit, concerns
three actors engaged in three related con-
tracts. The three parties . . . are: the
customer; which . . . causes it to bs issued:
the issuer [usually a financial institution],
which is the party who executes the credit;
and the beneficiary, which is the party
entitled to payment pursuant to the credit.
Typically, the first contract entered into
involves the underlying obligation between
the beneficiary and the customer. . . .
Pursuant to this underlying obligation, the
customer will next contract with the issuer
to execute the credit. In performance of
the contract with the customer, the issuer
executes the credit which embodies the
issuer's contract to pay the beneficiary when
the beneficiary satisfies the conditions for
payment expressed in the letter of credit.
(Citations omitted.)
Mueller, m, at 110-11. These contracts are independent
of one another in the case of a true letter of credit.
acts as a principal and not as the agent of the customer,
and it assumes a primary obligation to the beneficiary
independent of the performance of the contract between the
customer and the beneficiary. The issuer must therefore pay
the beneficiary if the beneficiary's demand for payment
conforms to the terms of the letter of credit "without
reference to the rights and obligations of the parties to
p. 6635
Honorable John J. Gavin - Page 7 (JM-1245)
the underlying contract." & at 114; pee am Bus. & Corn.
Code 8 5.114(a); 49 Tex. Jur. 3dvoil, at
523.8
Conforming presentation requires that the beneficiary
strictly comply with the conditions for payment described in
the credit. Westwind
m, 696 S.W.2d 378 (Tex. 1985). The cou*s, howeve:
will not construe mere promises to be conditions and wili
resolve ambiguities against the issuer. Furthermore,
absolute perfection of presentation is not a requirement.
Few Braunfels , 780 S.W.2d
Ft I 316-17 (Tex. App. - Austin 1989, writ denied); m
, 722 S.W.2d
12, 14 (Tex. App. - Dallas 1986, writ ref'd n.r.e.).
Either a commercial or a standby credit may be a
wdocumentaryn credit, a credit whose terms require that the
draft or demand for payment be accompanied by certain
documents, or a Vleana credit, a credit whose terms require
only the presentation of the draft or demand for payment.
8. Even though the issuer has a primary and not
secondary obligation to the beneficiary, the issuer may
refuse to honor a conforming draft or demand for payment
under section 5.114(b) of the Business and Commerce Code
where there is "fraud in the transaction." The customer may
also seek an injunction against payment by the issuer where
there is such fraud. Texas courts discussing this exception
to payment, have upheld injunctions only if there was fraud
so egregious that it destroyed the legitimate reason for
maintaining the independence of the credit from the underl-
ying obligation. ) ‘ W 730
S.W.2d 355, 359-64 (Tex. App. - Dallas 1967, writ dism'd)
(cattle production below the hoped for but not guaranteed
quality was unintentional and did not constitute fraud for
.114 purposes) ; -OS.. Inc. v. Oil CounQy
ts. Ltd, 709 S.W.2d 262, 264-65 (Tex. APP. -
Houston [lst Dist.] 1986, writ dism# d) (beneficiary's
intentional shipment of tot~ll~rw~Uess pipe destroyed
legitimate purposes of and justified an
injunction): see al.SG Annot., 25 A.L.R. 4th 239 (1983) 0-v
courts including Texas courts refuse to give broad construc-
tion to section 5.114). The limits of this exception to
payment may not be avoided by an issuer filing an inter-
pleader action to determine the respective rights of the
beneficiary and the issue??8 customer. Dallas Bank & TNS~
Co. v. Commonwealth Dev. CQZP, 686 S.W.2d 226 (Tex. App. -
Dallas 1984, writ ref'd n.r.e.i.
p. 6636
Honorable John J. Gavin - Page 8 (JM-1245)
Annot., 44 A.L.R. 4th 172, 176 (1986); see also Anex Oil.
Co. v. Arch-m Co,, 770 F.2d 1353, 1355 (5th Cir. 1985) (a
credit may be both "documentary" and wstandbyw); w
zJoint 748 S.W.Zd 316 (Tex.
APP. - Eastland 1988, writ denied) (standby credits are
often documentary credits since they generally require a
statement there has been a default). A commercial or
standby credit may also be a "sight" credit under which the
beneficiary may demand payment on presentation of a draft
and all other conforming documents or a wtimew credit that
is not payable until a specified time after presentation of
all required documents. Mueller, m, at 116; see a&~
722 S.W.?d at 12 (draft payable on
sight was payable on &and). Letters of credit, however,
are not negotiable instruments, although the underlying
drafts for payment may be either negotiable or non-
negotiable. Reritaae He 651 S.W.Zd
272 (Tex. App. - Dallas 1983, no writ) (sin& letters of
credit are not payable to bearer they are not negotiable):
m 660 S.W.Zd 851, 855 (Tex. App.
- Austin 1983, no writ) (u&s credit otherwise specifies,
draft may be either negotiable or nonnegotiable).
Credits may also be either revocable or irrevocable.
BUS * 61 Corn. Code f 5.103(a)(l). According to section'
5.106(b) of the Business and Commerce Code, once an irrevo-
cable credit is established with regard to the beneficiary
it can be modified or revoked only with the beneficiary's
consent. A credit is established with regard to a benefi-
ciary when he either receives the credit or an authorized
advice of its issuance. L 5 5.106(a)(2). In contrast, a
revocable credit may generally be modified or revoked by the
issuer without either notice to or consent from the customer
or the beneficiary. IQr S 5.106(c).9
Given our review of these fundamental concepts of the
law of letters of credit, we conclude #at not all letters
of credit will satisfy the requirement for "cash
9. Neither section 5.103(a) nor section 5.106 provides
which status should be presumed if the credit does not state
whether it is revocable or irrevocable. In at least one
case concerning an undesignated credit, a court has held a
standby credit irrevocable since to do otherwise would
frustrate the basic purpose of the credit -- the making
certain of the right to payment independent of disputes over
the performance of the underlying contract. Rueller, m,
at 117-18 (citing West Virmd v. Srok&
415 F. Supp. 1107 (W.D. Pa. 1975)).
p. 6637
Honorable John J. Gavin - Page 9 (JM-1245)
eguivalentsw that they be readily convertible into cash
within a reasonable time and with reasonable effort without
resort to consent by the bondsman or to other outside
action. To satisfy that requirement and thus constitute a
"cash eguivalentw for purposes of section 6(f)(l) of article
2372p-3, V.T.C.S., we hold that a standby letter of credit
used to secure the bail bond obligations of an individual or
corporate bondsman must possess the following charac-
teristics: (1) the credit must be irrevocable, (2) the
credit must be a true letter of crsdit that dces not require
examination of.the performance of the underlying transaction
absent "fraud in the transaction,w (3) the drafts or demands
for payment under the credit must be payable to the county
on sight or within a reasonably brief period of time after
presentation of all required documents, (4) the credit must
not include any condition that makes payment to the county
as beneficiary contingent upon the consent of or other
action by the bondsman or other party, and (5) the credit
must be issued by an institution or entity which
financially responsive in the amount of the credits, in tii:
opinion of the county bail bond board. However, our
conclusion does not foreclose other *cash eguivalentsw as
long as the standards of Attorney General Opinion JM-935 are
satisfied.
The credit .- .be __
must irrevocable
-. _ to that the
ensure
issuer coos not unuaterauy mociry or revoke the
credit
prior to a county88 demand for payment under the credit.
The three named security devices in section 6(f)(l) -- cash,
cashier's checks, and certificates of deposit -- are not
revocable: thus qualifying letters of credit must not be
revocable. Furthermore, to hold otherwise would not ensure
that the necessary resources would be available to satisfy
bond forfeitures.
Second, a qualifying credit must be a true letter of
credit. A true letter of credit limits the circumstances in
which the underlying transactions between the bondsman and
the county may be examined. WC Nat I1 B8& of Dal&8
578 S.W.2d at 115. If the credit requires as a conditio;
for payment that there be a factual determination of forfei-
ture or default, the county would likely have to resort to
outside action, such as a court proceeding, to establish
its rights to payment under the credit. Thus even though
the credit may require a documentlo be submitted prior to
10. As mentioned earlier, a credit may be either a
wdocumentaryw credit or a wcleanw letter of credit.
(Pootnote Continu3
p. 6638
Honorable John J. Gavin - Page 10 (JM-1245)
payment that states the bondsman has defaulted in his
underlying obligations to the county, the credit may not
require as a condition for payment proof of default or other
examination of the performance of the underlying
. -- obliga-
tions. See., iaarm-Olson-stordahl Joint Ventuzz 748
S.W.2d 316 fsummarv iudwent reversed on anneal since &edit
subject to perfon&Ge -in compliance with-underlying con-
tract and thus was not true letter of credit but guaranty
contract): w. Co. of New YQ@ v. Central Nat 1 E&j
gf Houstpn, 624 S.W.2d 222 (Tex. Civ. APP - - Housto; [lst
Dist.] 1981, writ ref*d n.r.e.) (true letter of credit may
contatn references to underlying obligations but those
references may not create conditions for honoring drafts).
Third, drafts or other demands for payment under a
qualifying letter of credit must be payable on sight or
within a reasonably brief period of time after proper
presentation of all required documents so that the credit is
readily convertible into cash. What is a reasonable time
may vary depending on individual and local circumstances,
and we are not in a position to address these varying
circumstances as a part of the opinion process. Further-
more, section 6(f)(l) sanctions the use of certificates of
deposit without prohibiting the use of time deposits. &%
Attorney General Opinion H-430 (1974) (on maturity bondsman
may withdraw certificate if substitute security is pro-
vided). We therefore conclude that county bail bond boards
may establish reasonable time periods for payment under
letters of credit submitted as "cash eguivalentsw pursuant
to section 6(f)(l) of article 23723-3.
Finally, the terms of a qualifying letter of credit
must not make payment contingent upon any action by the
bondsman or other individual or entity. To satisfy this
standard, the credit must not include any condition for
payment that the county cannot satisfy without the consent
of, or other action by, the bondsman or other party. For
(Footnote Continued)
infm, at 11. Although a wcleanw letter of credit, a credit
that requires only a draft or demand for payment, limits the
risk that it will be construed as a guaranty, standby
credits are frequently documentary credits since the terms
of the credits usually require that the draft or demand for
payment be accompanied by a statement that the customer is
in default. A cautious beneficiary can limit his risk by
avoiding any reference to guaranties and unnecessary
reference to the underlying obligations. M Mueller,
=I at 113 n.22 (various advice to cautious bene-
ficiaries).
p. 6639
Honorable John J. Gavin - Page 11 (JM-1245)
instance, the credit may not require the county as bene-
ficiary to submit a document signed by the bondsman that he
has defaulted on his underlying obligations to the county.
Neither the terms of a cashier#s check or certificate of
deposit payable to the county requires consent of or other
action by anyone else prior to conversion into cash. Thus ‘
the terms of a qualifying letter of credit must not condi-
tion payment on such consent or action.
Individual as well as corporate applicants
may submit certain letters of credit as "cash
eguivalsntsw for purposes of section 6(f) (1)
of article 2372p-3, V.T.C.S. To qualify as
"cash eguivalents,w letters of credit must be
irrevocable, must limit inquiry into the
underlying transactions between the county
and the bondsman, must provide for payment of
drafts or demands for payment thereunder on
sight or within a reasonably brief period of
time after presentation of all required
documents, and must not make payment con-
tingent upon the consent of, or other action
by, the bondsman or other party.
JIM MATTOX
Attorney General of Texas
~YNRLLHR
First Assistant Attorney General
Lou MCCREARY
Executive Assistant Attorney General
JUDGEZOLLIESTRAHIHY
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Celeste A. Baker
Assistant Attorney General
p. 6640