Untitled Texas Attorney General Opinion

TEE ATTORNEY GENERAL
OF TEXAS
April 6, 1988
Mr. Kenneth W. Littlefield Opinion No. JM-886
Commissioner
Texas Department of Banking Re: Constitutionality of
2601 N. Lamar Blvd. article 342-803a, V.T.C.S.,
Austin, Texas 78705 which permits the sale of
the assets of a bank with-
out shareholder approval in
certain circumstances
(RQ-1252)
Dear Mr. Littlefield:
You ask our opinion about the constitutionality of
article 342-803a, V.T.C.S., a recent addition to the Texas
Banking Code. You note that the provision is designed to
facilitate so-called "open bank assistance" schemes under-
taken by the Federal Deposit Insurance Corporation (FDIC)
to prevent the closure and liquidation of failing banks in
Texas. An "open bank assistance" transaction permits the
FDIC to undertake a variety of measures to prevent the
outright closure of a bank insured by it, including making
contributions to a prospective purchaser who may buy the
assets of a failing bank. See aenerally 12 U.S.C.
51823(c).
Article 342-803a provides:
Sec. 1. The board of directors of a
state bank, with the approval of the
Commissioner, may cause the bank to sell all
or a substantial portion of the bank's
assets without shareholder approval if:
(1) the Commissioner, through examina-
tion, finds that the interests of depositors
and creditors of the bank are seriously
jeopardized because of the bank's insolvency
or imminent insolvency and that it is in
the best interests of the depositors and
creditors that certain assets of the bank be
sold: and
p. 4331
Mr. Kenneth W. Littlefield - Page 2 (JM-886)
(2) the Federal Deposit Insurance Cor-
poration or its successor has expressly
consented to and approved the transaction
and has agreed to provide assistance to the
prospective buyer under 12 U.S.C. Section
1823(c) or a comparable provision of law.
Sec. 2. A sale under this article must
include an assumption and promise by the
buyer to pay or otherwise discharge:
(1) all of the bank's liabilities to
depositors;
(2) all of the bank's liabilities for
salaries of the bank's employees incurred
before the date of the sale; and
(3) the obligations incurred by the Com-
missioner and fees and assessments due to
the Department arising out of the supervi-
sion of the bank or the sale.
7.
Sec. 3. This article does not affect the
right of the Commissioner to take any other
appropriate action permitted by [articles
342-801a or 342-8031 or any other provision
of this code.
V.T.C.S. art. 342-803a.
You relate that the FDIC is reluctant to participate
in assistance schemes undertaken pursuant to this pro-
vision because of unspecified concerns about the constitu-
tionality of article 342-803a. Accordingly, you seek our
advice on the following questions:
(1) Does article 342-803a violate any of
the applicable substantive or procedural
requirements of the due process clauses of
the United States Constitution or any
similar provisions of the Texas Constitu-
tion?
(2) Does article 342-803a violate the
impairment of contracts clause of Article
One of the United States Constitution or any
similar provision of the Texas Constitution?
p. 4332
Mr. Kenneth W. Littlefield - Page 3 (JM-886)
(3) What are the nature and extent of
P the banking commissioner's powers to
regulate state banks, particularly those
banks that are insolvent or imminently
insolvent? Can the banking commissioner use
his regulatory powers to effectuate the sale
of a bank's assets without judicial or
shareholder approval if he finds that the
interests of depositors or creditors are
seriously jeopardized because of the bank's
insolvency or imminent insolvency, and that
it is in the best interest of depositors and
creditors that certain assets be sold?
We assume that your last question is limited to the
scope of the commissioner's power over "failing" banks in
the limited circumstances specified by the legislature in
article 342-803a. Article 342-803a furnishes a concise,
complete description of the banking commissioner's powers
to effectuate transactions designed to prevent "failing"
banks from becoming "failed" ones. We note that in
addition to article 342-803a, the Bankings Code provides a
"complete system of laws governing . . . banks" and vests
the banking commissioner with the authority to insure a
strong banking system for Texas by expeditiously winding
up the affairs of a failed bank. V.T.C.S. art. 342-101.
See also Skillern, Closina and Licuidation of Banks in
Texas, 26 SW. L.J. 830 (1972).
The powers of the banking commissioner have been set
out by the legislature in the Banking Code of 1943, Title
16, V.T.C.S. Among the more important of these powers
is the power to close insolvent banks. Article 342-803
provides that whenever the commissioner,
through examination, finds that the interests
of depositors and creditors of a state bank
are seriously jeopardized through its insolv;
ency or imminent insolvency and that it is to
the best interest of such depositors and
creditors that the bank be closed and its
assets liquidated, he may close and liquidate
the bank, unless its board of directors close
the bank and place it in his hands for ligui-
dation. . . .
V.T.C.S. art. 342-803. A bank is insolvent when it is
unable to pay its obligations, including the demands of
depositors, as they come due. &8 V.T.C.S. art. 342-803
p. 4333
Mr. Kenneth W. Littlefield - Page 4 (JM-886)
?
and cases decided thereunder. The Banking Code sets forth
in detail the duties which the commissioner of banking
must discharge with regard to banks closed for liguida-
tion. V.T.C.S. arts. 342-803 to 342-808.
You note that article 342-803a provides an important
mechanism to facilitate the state's efforts to prevent a
``failing`` institution from becoming a "failed" one. YOU
define a "failing" institution as one which is l*imminently
insolvent and whose failure is highly probable." YOU
relate that the
financial condition of these institutions
weakens gradually until an insolvency is
produced and the institution is closed. The
transition from a failing institution to a
failed one takes from six to twelve months
and the institution's value steadily
deteriorates as it gets closer to failure.
You state that the new powers granted to the banking
commissioner by article 342-803a permit the commissioner
to prevent the outright closure of banks by facilitating
arrangements which include the sale of a failing
bank's "healthy" assets to a new entity which also
agrees to assume some of the selling bank's liabilities,
as specified in the statute.1 The statute does not,
however, permit the Banking Commission to act unilater-
ally; a sale of assets under article 342-803a can take
place a if the Federal Deposit Insurance Corporation
has expressly consented to and approved the
transaction [for the sale of assets] and has
agreed to provide assistance to the prospec-
tive buyer under 12 U.S.C. Section 1823(c)
or a comparable provision of law.
1. Article 342-803a does not require the purchasing
entity to assume claims of subordinated creditors or
claims of stockholders. See V.T.C.S. art. 342-804a.
Because the article requires only a partial assumption of
liabilities, the consummation of a sale of assets
transaction under article 342-803a may in practice be
insufficient to save a failing bank from insolvency.
p. 4334
Mr. Kenneth W. Littlefield - Page 5 (JM-886)
V.T.C.S. art. 342-803a, 51(2). It is in this c,ontext that
you ask us to address the FDIC's concerns about the
constitutionality of the sale of assets procedure set
forth in article 342-803a.
I.
A.
Article XVI, section 16, of the Texas Constitution
provides, in pertinent part:
Sec. 16. (a) The Legislature shall by
general laws, authorize the incorporation of
state banks and savings and loan associa-
tions and shall provide for a system of
State supervision, regulation and control of
such bodies which will adequately protect
and secure the depo~sitors and creditors
thereof.
This provision permits the legislature, by general law, to
authorize the creation of corporations with banking and
discounting privileges and to provide for the control and
supervision of such corporations by the state. Pursuant
to this constitutional grant of legislative authority, the
Texas Banking Code of 1943
provides a complete system of laws governing
the organization, operation, supervision and
liquidation of state banks, and to the
extent indicated by the context, governing
private banks and national banks domiciled
in this State. . . .
V.T.C.S. art. 342-101.
The Banking Code specifically commits the management
of all of the affairs of a banking corporation to the
directors of the banking corporation elected by the share-
holders, unless the shareholders have adopted by-laws
providing otherwise. V.T.C.S. art. 342-409. Unlike the
Texas Business Corporations Act, nothing in the Banking
Code requires that shareholders approve the sale of all,
or substantially all, of the banking corporation's assets.
Comnare Bus. Corp. Act art. 5.10 (A)(3) (two-thirds vote
of shareholders required for sale of all, or substantially
all, of the assets of a non-banking corporation outside of
the regular course of business). The provisions in
article 342-803a of the Banking Code for a sale of assets
p. 4335
Mr. Kenneth W. Littlefield - Page 6 (JM-886)
based solely on the approval of the directors are consis-
tent with the Banking Code's overall commitment of author-
ity to directors elected by the shareholders rather than
to the shareholders themselves.
In the context of the question under discussion, it
is important to note that the provisions of the Business
Corporations Act do not apply to banking corporations
unless the Banking Code is silent with regard to some
matter of corporate governance provided for in the
Business Corporations Act. Bus. Corp. Act art. 9.14,
5 (A) - Where the Banking Code is silent, the provisions of
the Business Corporations Act will apply, to the extent
that they are not inconsistent with the provisions of the
Banking Code. u.
The provision in the Business Corporations Act
requiring shareholder approval for the sale of all of the
assets of a corporation outside of the regular course of
business is in conflict with the provisions of the Banking
Code, which leave such decisions generally in the hands
of the directors. Article 342-409 of the Banking Code
requires that the directors, and not the stockholders,
make decisions about the management of the bank, unless a
banking corporation#s by-laws provide otherwise. Article
342-803a is consistent with the Banking Code generally in
committing a decision about whether to sell all of the
assets of the bank corporation to the directors. Since
the Banking Code commits authority over bank affairs to
directors rather than shareholders, the provision in the
Business Corporations Act. requiring shareholder approval
for the sale of all of the assets of a corporation outside
of the regular course of business does not apply to sales
of bank assets such as those contemplated in article
342-803a of the Banking Code. See aenerallv Robertson v.
State ex rel. William H. Clement, 406 S.W.Zd 90 (Tex. Civ.
APP. -- Fort Worth 1966, writ ref'd n.r.e.) (Banking Code
of 1943 provides a complete system of laws governing the
organization of banking corporations: when the Banking
Code is specific about some aspect of the management of a
banking corporation, it operates to the exclusion of
provisions in the Business Corporations Act).
Consequently, in the ordinary situation, article
342-803a cannot possibly impair any of the "rightsl' of
shareholders guaranteed under either federal or state law,
because shareholders in banking corporations have no
**right** to approve the sale of the assets of the corpor-
ation in the situation specified in article 342-803a,
p. 4336
Mr. Kenneth W. Littlefield - Page 7 (JM-886)
unless they have reserved that right in a corporate
by-law. Only when the shareholders have reserved through
a by-law the right ~to approve the sale of the assets
of the bank do questions about the constitutionality of
article 342-803a arise.
B.
The by-laws of a corporation are a contract between
the corporation and its shareholders. Ainsworth v.
Southwestern Drug Corooration, 95 F.2d 172 (5th Cir. 1938)
(citing Texas law). Both the federal and state constitu-
tions prohibit the impairment of contracts by the state.
U.S. Const., art. I, section 10, clause 1. U.S. Const.
amend. 14; Tex. Const. art. I, 516. In this case, it is
important to determine whether the legislature's
determination in article 342-803a that the directors of a
banking corporation may sell all of the assets of the
corporation without shareholder approval impermissibly
impairs the contract rights of shareholders who, by means
of a corporate by-law, have reserved the right to approve
such transactions.
Ordinarily, rights are governed by the law that
existed at the the time the rights vested. Lanuever
Miller, 76 S.W.2d 1025 (Tex. 1934). Subsequent legisl::
tion that impairs vested contract rights is unconstitu-
tional. Id.: Travellers' Insurance Comnanv v. Marshall, 76
S.W.2d 1007 (Tex. 1934). S , a., Trustees of Dartmouth
Colleae v. Woodward, 17 eX' (4 Wheat.) 518 (1819)
(charters granted to corporations by state are
constitutionally protected contracts).
In the case of banking corporations created under the
general authority granted by the constitution to the
legislature, a somewhat different analysis of the issue of
an unconstitutional. impairment of a contract must be
pursued. Every charter granted to a banking corporation
by the state is subject to the following reservation:
The rights, privileges, and powers conferred
by this [Banking] Code are held subject to
the right of the legislature to amend, alter
or reform the same.
V.T.C.S. art. 342-302. See also Bus. Corp. Act. art. 9.12.
Without this specific reservation, we believe that
article 342-803a would be considered, under Texas law, to
work an unconstitutional impairment of a contract between
p. 4337
,
Mr. Kenneth W. Littlefield - Page 8 (JM-886)
the shareholders and the corporation, where the share-
holders have reserved the right, by means of a by-law, to
vote to approve the sale of all, or substantially all, of
the assets of the banking corporation. Tex . Const . art.
I, 516; Travellers' Insurance Co., m.2
Both the charter of a corporation and the legislative
act creating it become part of the contract between share-
holders, Shanken v. Lee Wolfman. Inc., 370 S.W.2d 197
(Tex. Civ. App. - Houston 1963, writ ref'd n.r.e.), and
all relevant constitutional and statutory laws are incor-
porated as a part of the corporate charter (which controls
the by-laws bf the corporation). Baw ‘V. Lone Star
Buildina 8 Loan Association 71 S.W.2d 863, 867, (Tex.
1934) see also wner v. Sohthwestern Sav. and Loan Ass'n
'of Houston, 320 S.W.Zd 164 (Tex. Civ. App. - Austin 1958),
aff'd in Dart, rev'd in Dart, 331 S.W.Zd 917 ( Tex.1960).
The legislature's reservation of authority, in
article 342-302, to alter the Banking Code, is sufficient
to permit the state to alter the relationship between the
state and the banking corporation, and the relationship
between the banking corporation and its shareholders,
without violating any constitutional prohibitions against
the impairment of contracts. Trustees of Dartmouth
co11 eae, sunra, s concurring opinion of Justice Story.
See also The Sinkins Fund Cases, 99 U.S. 700 (1878);
Brundaue V. he New Jersev Zinc. Co, 226 A.2d 585 (1967)
See a enerally 18 Am. Jur. 2d 5083-901 Official Comments to
section 1.02 of the Model Business Corporations Act
(1987); 7A Fletcher Cyclopedia Corporations, 553668-3690;
Gibson, How Fixed are Class Shareholder Riahts?, 23 Law &
2. The Texas Constitution has been interpreted to
impose a far stricter limit on legislation under the
police power which impedes the exercise of a pre-existing
contract right that which is imposed by the federal
constitution. Comoare the decision of the Texas Supreme
Court in Travellers' Insurance co., suora (holding a
mortgage moratorium unconstitutional under article I,
section 16, of the Texas Constitution even under the
circumstances of a general economic collapse) with the
decision of the United States Supreme Court in Home
Buildins & Loan Association v. Blaisdell, 290 U.S. 398
(1934) (sustaining a similar moratorium against a
challenge under the contracts clause).
p. 4338
Mr. Kenneth W. Littlefield - Page 9 (JW-886)
Contemp. Probs., 283 (1958); Note, "Corporations -- Stock
P
Alienation Restrictions -- Powers of Directors to Restrict
Issued Stock,*' 14 SW. L. J. 106 (1960); Note,
Vorporations: Alteration of Shareholder's Rights: Scope
of the Reserved Power," 3 Okla. L. Rev. 222 (1950).
Contracts, however express, may not fetter the
constitutional authority of the legislature. "Parties may
not remove their transactions from the reach of the
dominant constitutional power by making contracts about
them." Norman v. Baltimore & Ohio R. Co., 294 U.S. 240,
307-08 (1935). Any other conclusion would alter the
long-standing policy, embodied in both the state con-
stitution and the banking code, of placing strict controls
upon, the operations of banking corporations to protect
the public interest.
II.
You also inquire whether article 342-803a deprives
shareholders in banking corporations of their property in
violation of either the United States or Texas Constitu-
tions. See U.S. Const., amends. 5 and 14; Tex. Const.
,- art. I, §17. We conclude that the statute works no such
deprivation.
Article I, section 17, of the Texas Constitution
provide, in part:
No person's property shall be taken, damaged
or destroyed or applied to a public use
without adequate compensation being made,
unless by the consent of such person. . . .
We are unable to determine how article 342-803a could
be applied to violate either article I, section 17, of the
Texas Constitution, or the United States Constitution's
Fifth and Fourteenth Amendment prohibitions against
deprivation of property without "just compensation" or
"due process of law. Article 342-803a of the Banking Code
does not permit the banking commissioner to order the
directors of banking corporation to sell the assets of the
corporation in lieu of closing it: it merely permits the
commissioner to approve, and in some ways to facilitate,
-
such a sale after the directors have approved it in accord
with their powers under the Banking Code. Nor do we
understand that the banking commissioner is granted the
power by article 342-803a to 1'coercee8 recalcitrant
directors to vote to sell the banking corporation's
assets. While the directors of a failing bank may not be
p. 4339
,
Mr. Kenneth W. Littlefield - Page 10 (374-886)
given to acts of heroism in resisting the unpleasant
suggestions of bank regulators, article 342-803a gives the
commissioner no power to force bank directors to do
anything. So long as a bank is not in a condition which
would permit the banking commissioner to intervene in its
management, or to close it, see V.T.C.S. arts. 342-801 and
803, then the directors remain in control of the
institution's fate.
The foregoing analysis leads us to conclude that
article 342-803a cannot be considered to be a species of
"eminent domain," "forced sale," or lltaking'* statute,
since it '*takes10 nothing, and since it can in no way be
said to render valueless by state action something
previously valuable. See, e.a Attorney General Opinion
JW-827 (1987). If anything, aiticle 342-803a extends a
modicum of hope to the shareholders of a failing,
imminently insolvent bank that they may be able to
preserve something of their equity property interests
through a government-assisted sale of assets sufficient to
raise the cash necessary to pay all claims against the
bank in accordance with the table of priorities specified
in article 342-804a, V.T.C.S. The statute thus preserves
rather than defeats the "distinct investment-backed
expectationst' of stockholders, a key factor mitigating
against a "taking" label for the provision. Penn Central
Transnortation Co. v. New York Citv, 438 U.S. 104 (1978).
Although the banking commissioner has wide powers to
act to protect the public welfare by preserving a sound
banking system, those powers are circumscribed by consti-
tutional safeguards. The prohibitions in article I,
section 17, of the Texas Constitution and the constitution
forbid the state to appropriate the assets of a banking
corporation owned by the stockholders, either directly, as
a prize for the state treasury, or indirectly, by forcing
the transfer of those assets to some private party of the
state's choosing, all without payment.
Even if article 342-803a raises threshold questions
which trigger the application of constitutional safe-
guards, analysis cannot end with a simple conclusion that
any exercise of power by the state to the detriment of the
owners of a failing bank is impermissible. Under certain
circumstances, property may in fact be constitutionally
expropriated, without anv compensation as an exercise of
the kind of police power -- power to protect the public
welfare against the depredations of banking
corporations -- which the Texas Constitution expressly
p. 4340
Mr. Kenneth W. Littlefield - Page 11 (JM-886)
reserves to the state in Article XVI, section 16. Attorney
General Opinion JM-600 (1986) (and the cases cited there-
in). Of course, we acknowledge that the Texas Supreme
Court holds that in certain circumstances property may not
be taken without compensation, even in the exercise of the
police power. Citv of C lleae Station v. Turtle Rock
Corooration, 680 S.W.2d 8:2 804 (Tex. 1984); Citv of
Austin v. Teaoue, 570 S.W.2d 389, 391 (Tex. 1978);
Attorney General Opinion JM-294 (1984). See also
Stoebuck, Police Power. Takinas and Due Process, 37 Wash.
8 Lee L. Rev. 1057 (1980). Whether a particular applica-
tion of the police power is unconstitutional is always
a matter of fact, and the issue must be decided on a
case-by-case basis. Citv of Austin v. Teaaue, a;
Attorney Genera; CFinAo; y-827 (1987). See also Connollv
v. Pension &an fi u r ntv Corooration, 475 U.S. 211
(1986). We are confident that article 342-803a is far
removed from being the species of statute that engenders
such constitutional concerns. The provision, enacted to
deal with general distress in the banking industry, merely
implements '*a public program that adjusts the benefits and
burdens of economic life and . . . does not constitute a
taking" requiring compensation. Connollv Pension
Benefit Guarantv Coroora``o`` suora. See oenerzily Annot.
"Supreme Court's views what constitutes "takina."
within meaning of Fifth Amendment's command that private
property not be taken for public use without just com-
pensation," 57 L. Ed. 2d 1254.
III.
You relate that the Federal Deposit Insurance Cor-
poration (FDIC), whose promise of assistance to the
purchasers of a failing bank's assets (who must also
assume certain of its liabilities) legally is required
before article 342-803a may be applied by the banking
commissioner, has expressed certain unspecified concerns
about the constitutionality of the statute. Because those
concerns remain unidentified, we cannot address them
directly, other than to assume that they may encompass
some of the points discussed in parts one and two of this
opinion.
National bank regulators may rely on a federal
statute which works in a much more severe fashion to
accomplish certain bank "rescue" operations through the
sale of assets in a way similar to article 342-803a. The
provision, 12 U.S.C. section 181, provides in relevant
P part:
p. 4341
Mr. Kenneth W.,Littlefield - Page 12 (JW-886)
Any [national banking] association may go
into liquidation and be closed by the vote
of its shareholders owning two-thirds of its
stock. If the liouidation is to be effected
in whole or in Dart throuah the sale of its
assets to and the assumDtion of its deDosits
and liabilities bv another bank. the Dur-
chase and sale aoreement must also be
DDrOVed bv its shareholders owninq
gwo-thirds of its stock unless an emeraencv
exists. .and the corDtroller of the Currencv
sDecificallv waives such reouirement for
shareholder aDDrova1. (Emphasis added.)
12 U.S.C. 5181 (Supp. 1988). The power of the comptroller
of the currency to suspend the right of shareholders to
approve the sale of a bank's assets has been sustained.
See. e.q, Minichello v. Saxon, 266 F. Supp. 279 (D.C. M.D.
Pa. 1967), aff'd sub nom. Minichello v. CamD 394 F.2d 715
(3rd Cir. 1968), cert. den. 393 U.S. 849, rehearino den.,
393 U.S. 992 (1968). We find no reported cases upholding
a constitutional challenge to this statute. Certainly, the
"emergency" required by the federal statute must be
analogous to the situation in which article 342-803a would
be applied, namely a situation in which a financial
institution finds itself in a *'failingl' but not yet
**failed" condition. Minichello v. Saxon, supra.
Additionally, unlike banking corporations subject to the
federal statute, shareholders in banks operating under the
Texas Banking Code have no general statutory right to
approve the sale of all of the assets of the corporation.
SUMMARY
Article 342-803a of the Texas Banking
Code of 1943, which permits the banking
commissioner to approve the sale of the
assets of a banking corporation by its
directors in certain situations specified in
the statute, is a constitutional exercise
the legislature's power to provide for a
safe banking system. Shareholders '
banking corporations organized under tk:
Banking Code have no right to approve the
sale of all, or substantially all, of the
assets of the banking corporation, unless
they have reserved such a right by means of
a corporate by-law. The legislature has, by
means of its reserved power to amend the
p. 4342
Mr. Kenneth W. Littlefield - Page 13 (JM-886)
Banking Code, overridden such by-laws in the
case of banking corporations operating
within the circumstances specified in
article 342-803a, V.T.C.S.
JIM MATTOX
Attorney General of Texas
MARY KELLER
First Assistant Attorney General
LOU MCCREARY
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Don Bustion
Assistant Attorney General
p. 4343