Untitled Texas Attorney General Opinion

Mr. Kenneth B. Ashworth opinion No. ``-583
Commissioner
Coordinating Board Re: Whether a member of the board
Texas College and University of trustees of a community college
System district must abstain from voting
P. 0. Box 12788 on particular matters under article
Austin, Texas 78711 988b, V.T.C.S., where he is an
officer in a bank affected by
the vote and holds a substantial
interest therein
Dear Mr. Ashworth:
On behalf of a commun:Ltycollege, you request ati opinion on the
following question:
Must a member tmf the board of trustees of a
commniity college district abstain from voting on
financial matten affecting fund balances in the
district depository bank if the member is an
officer in the bank, and holds a substantial
interest in the bank as defined by article 988b?
A brief submitted on behalf of the trustee in question states
that he is a trust officer of the bank which serves as the depository
bank for the community college. A letter from the community college
states that the bank was chosen as its depository before the trustee
in question was elected to the board.
Article 98813, V.T.C.S., applies to conflicts of interest
involving local public officials. It applies to a member of the
governing body of "any district (including a school district) . . .
who exercises responsibilLties beyond those that are advisory in
nature" and who has a substantial interest in a business entity that
would be affected by an action of the governing body. V.T.C.S. art.
988b, §l(l). The trustees of a community college exercise responsi-
bilities that are not mere:Ly advisory in nature. See, e.g., Educ.
Code 5130.084; Letter Advisory No. 149 (1977) (trustees of community
college district are officers).
The trustee's salary from the bank exceeds ten percent of his
gross income. Therefore, he has a substantial interest in the bank
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Mr. Kenneth 8. Ashworth - Page 2 (JM-583)
for purposes of article 98Eb. V.T.C.S. art. 988b, 62(a)(2). Article
988b. V.T.C.S., provides in part:
Sec. 3. (a) Ewept as provided by section 5 of
this Act, a local public official commits an
offense if he knaa:Lngly:.
(1) patticipat~a in a vote or decision on a
matter involving a business entity in which the
local public off:%ial has a substantial interest
if it is reasonably foreseeable that an action on
the matter would &nfer an economic benefit to the
business entity IGvolved;
. . . .
(b) An offense under this section is a Class A
misdemeanor.
Sec. 4. If a local public official or a person
related to that official in the first or second
degree by either affinity or consanguinity has a
substantial 1nte:rest in a business entity that
would be peculiarly affected by any official ?
action taken by the governing body, the local
public official, before a vote or decision on the
matter, shall file an affidavit stating the nature
and extent of thr,interest ahd shall abstain from
further participi~t:ionin the matter. The affi-
davit must be filed with the official recordkeeper
of the governmental entity.
Sec. 5. [Exwption for business that is only
business within the jurisdiction which supplies
the product or s?:tviceand that is sole bidder.]
(Emphasis added).
V.T.C.S. art. 988b.
The community college district board of trustees is concerned
that the trustee in que~,tion may be required by article 988b,
V.T.C.S., to abstain from participation in any vote which would result
in an expenditure and thereby decrease the funds on deposit in the
depository bank. The bank would be affected by such action, since a
reduction of the amount on deposit could decrease the interest income
earned by the bank on the deposit. See Attorney General Opinion
JM-178 (1984). However, t:x letter frmThe community college board
of trustees points out that section 23.75 of the Education Code, and
not article 988b. V.T.C.S., may control the trustee's powers and ?
duties toward the depository bank.
p. 2607
Mr. Kenneth H. Ashworth - Pn8e 3 (JM-583)
Section 23.75 of the Education Code is a provision of the School
Depository Act. Educ. Code 1823.71-23.80. This office has determined
that the School Depository Act applies to community colleges as well
as to independent school districts. Attorney General Opinions JM-13
(1983); MU-272 (1980). Section 23.75 of the Education Code states as
follows:
In the event L.member of the board of trustees
of a school district ~1s a stockholder, officer,
director, or employee of a bank, said bank shall
not be disqualified from bidding and becoming the
school depository Iofsaid school district provided
said bank is selected by a majority vote of the
board of trustees of said school district or a
majority vote of a quotum when only a quorum
eligible to vote is present. Common law rules in
conflict with the terms and provisions of this Act
are hereby modii?.ed as herein provided. If a
member of the boaG:d of trustees of a school dis-
trict is a stocz;holder, officer, director, or
employee of a b&k that has bid to become a
depository for s;zd school district, said member
of said.board of-trustees shall not vote on the
awarding of a.dep&itory contract to said bank and
said school depolz.torycontract shall be awarded
by a majority vote of said trustees as above
provided .who are not either a stockholder,
officer, director, or employee of a bank receiving
a school district:depository contract. (Emphasis
added).
Educ. Code 523.75. This p:rt~visionwas enacted as part of the School
Depository Act of 1967. Acts 1967, 60th Leg., ch. 456, $4, at 1040.
Prior to 1967 this cffice on several occasions construed the
predecessor to the School Jepository Act. Acts 1905, 29th Leg., ch.
124, 5165, at 263; repealedib Acts 1979, 66th Leg., ch. 829, at 2167.
The opinions of this office determined that a stockholder, officer,
director, or managing emplo:yeeof a corporation serving as a school
district depository could not serve as trustee of that school
district. See, e.g., Attor,r.eyGeneral Opinions WW-161 (1957); O-7514
(1946); O-5158 (1943); O-Xi56 (1940); Attorney General Opinion (To
Hon. S.M.N. Marrs, September 16, 1929), 1928-30 Texas Attorney General
Biennial Report 126. Most #of these opinions quoted the reasoning of
an opinion of September 16, 1929 which concluded that a stockholder or
director of the depository corporation would not be eligible to serve
as trustee of the school district contracting with the depository.
The opinion stated as follaws:
[T]he two positi,ons present such a conflict of
interests as to prevent the holding of the two
p. 2608
Mr. Kenneth Il.Ashworth - Pa:ge4 (JM-583)
relationshins at one and the same time. The
trustees of an ind,ependentschool district have=
part of their dr'iy the task of seeing that the
treasurer or depczitory properly manages the fund
and moneys of tlz: school district. It is also
incumbent upon the trustees to see that the school
funds are properly protected by bonds and that the
solvency of the bonds and also the solvency of the
institution shou:?l be watched after to the end
that the moneys nz~y always be properly protected.
Innumerable instazces could be recounted where the
pecuniary intereses of a stockholder in a corpora-
tion would sway the trustee to an act of favorit-
ism, at least th;; an unbiased and non-interested
trustee would resolve against such depository or
treasurer; without attempting to enumerate these
various objections we conclude that upon the
grounds of public policy the two positions are
incompatible. . . . (Emphasis added).
Attorney General Opinion ('CoHon. S.M.N. Marrs, September 16, 1929),,
1928-30 Texas Attorney General Biennial Report 126.
.The enactment of section 23.75 of the Education Code modified the
common law rule expressed in the September 16, 1929 opinion. The
common law prohibition against such a contract applied not only to
contract formation but to actions taken by the trustees that had a
bearing on the contract. ---
See Attorney General Opinions O-7514 (1946);
O-2656 (1940); Attorney General Opinion (To Hon. S.M.N. Marrs,
September 16, 1929), -,. In our opinion, section 23.75 must be
read to permit actions whLch the trustees must necessarily perform
under an existing depository contract. Otherwise, the common law
rule would prohibit the entire board from acting in any matter
involving the depository contract if one board member were pecuniarily
interested in it. ---
See Delt:aElectric Construction Co. v. City of San
Antonio, 437 S.W.2d 602 (Tex. Civ. App. - San Antonio 1969, writ ref'd
n.r.e.); Attorney General Opinion JM-424 (1986).
The detailed provisions of the School Depository Act limit,
moreover, the board's discretion, thereby providing some protection
from the favoritism against which the common law rule was directed.
Section 23.77 of the EducatLon Code sets out the depository's duties
in detail and expressly reserves the district's right to invest funds
as permitted by sections :20.42 and 23.80 of the Education Code.
Section 23.79 of the Education Code provides that
[tlhe bank or bauks selected as school depository
or depositories ,Ln accordance with the terms and
provisions of this Act, and the school district
shall make and enter into a depository contract or
contracts, bond or bonds, or such other necessary
p. 2609
Mr. Kenneth H. Ashworth - Page 5 (JM-583)
instruments settinizforth the duties. resuonsibil-
ities, and agree&&s pertaining to-said-deposit-
ory, in a form ard with the content prescribed by
the State Board of Education, attaching to the
contract and int``rporating in the contract by
reference the bid of -the depository. . . .
(Emphasis added).
Educ. Code 523.79(a).
Section 23.75 of the Education Code in effect allows an
individual to be a school 'trusteedespite his role as stockholder,
officer, director, or employee of the school's depository bank. We do
not believe the legislaturl!intended to restrict.that board member's
participation in the business of the board to the extent that he would
virtually be a non-voting trustee. In our opinion, since section
23.75 requires the trustee to recuse himself only from the decision to
enter into the contract, t: impliedly authorizes a board member with
an interest in the d'eposj,toryto vote on expenditures that would
decrease the amount of funds on deposit.
The depository bank js required by law to pay the checks and
drafts written by the schocl board on its funds. Educ. Code 5923.77,
23.79. Such a provision is (centralto the depository contract, and is
set out in some detail in the contract and statute. A prospective
bidder should be fully aware of the school board's right to withdraw
funds. We.believe that thr,interested trustee may participate in the
routine exercise of the board's right to withdraw funds as established
by the contract and the statute.
The School Depository Act is a special statute which governs a
particular kind of contract entered into by independent school
districts and community college districts. Section 23.75 modifies the
common law rule applicable to a specific conflict of interest that
might arise in the context of school depository contracts. As a
specific statute, it was ne>t repealed by. article 988b. V.T.C.S. The
latter statute is a general provision, which applies to conflict of
interest situations involving local officers as a class. The specific
statute more clearly evi,dences the legislative intent, and is
considered to be an exception to the more recently enacted general
statute. Townsend v. Terra:Ll, 16 S.W.2d 1063 (Tex. 1929); American
Canal Co. v. Dow Chemically, 380 S.W.2d 662 (Tex. Civ. App. -
Houston 1964, writ dism'd); Hallum v. Texas Liquor Co:trol Board, 166
S.W.2d 175 (Tex. Civ. App. - Dallas 1942, writ ref d). Therefore,
article 988b, V.T.C.S., doltsnot govern the trustee's conduct in the
present case.
Briefs submitted in ,connection with your request refer to
Attorney General Opinion N-331 (1969). This opinion construed the
predecessor statute to sect,ion23.75 of the Education Code, which was
essentially the same as the present provision. -See Acts 1967, 60th
p. 2610
Mr. Kenneth H. Ashworth - P;lge6 (JM-583)
Leg., ch. 456, 94, at 1040, 1041 (formerly codified as V.T.C.S. art.
2832~. §4(b)(1925)) (recodiE:ied1969). Attorney General Opinion M-331
concluded that the predecessor to section 23.75 of the Education Code
allowed a school district to borrow money from the depository bank
even though a school board member was also an officer or stockholder
in that bank. Relying on znalogies between a contract of deposit and
a contract of loan expressed in an attorney general opinion and
judicial authorities, Attorloy General Opinion M-331 concluded that
the legislature intended to remove the common law
prohibitions which, in the past, had prevented a
school board from borrowing from and/or choosing
as a depository, a bank in which one of its
members also serves as a director or stockholder
provided that the school district had adopted
article 2832~ ar,d had complied with section 4
thereof.
Attorney General Opinion M-331 (1969) at 4.
The reasoning and conclusion of Attorney General Opinion M-331
was criticized in Attorney General Opinion H-649 (1975). which
determined that a city was prohibited from borrowing money from a bank
of which the mayor was director. Article 2529c. V.T.C.S., allowed
state agencies and politicz.1subdivisions to choose a depository even
though a member of its goyreming body was an officer, director, or
stockholder of the deposi:ory corporation. Despite the similarity
between article 2529c. V.T.C.S., and section 23.75 of the Education
Code, Attorney General Opinion H-649 declined to follow Attorney
General Opinion M-331, stating as follows:
Although Attor,ney General Opinion M-331 found
little difference between depositing public funds
in a depository bsnk and borrowing funds from that
depository, there are numerous statutory require-
ments regarding the qualifications and selection
of a depository and the security which must be
provided to pr,,tect the governmental body's
deposits. See Kducation Code, 523.71 et seq.
These restr1ctior.sand requirements do not apply
to other transactions such as the tw YOU
describe. Compare,Attorney General Opinion V-640
(1948).
[W]e do not believe the Legislature intended that
article 2529c should have a wider application than
its language plainly indicates. We think a narrow
exception to the clldand well established common-
law rule against self-dealing was intended and
that intent is reflected in the language of the
statute where it provides that 'common-law rules
p. 2611
Mr. Kenneth H. Ashworth - P,Ige7 (JM-583)
in conflict ar,z hereby modified as herein
provided.'
Attorney General Opinion H-549 (1975) at 3-4.
We agree with the criticisms of Attorney General Opinion M-331
which are expressed in Attorney General Opinion H-649. We do not
believe section 23.75 of the Education Code removes common law
prohibitions against loan transactions between the school district and
its depository where the s,me individual is a trustee of the school
district that borrows the money and a stockholder, officer, director,
or employee of the depository bank which lends the money. Attorney
General Opinion M-331 incorrectly construes section 23.75 of the
Education Code and we hereby overrule it.
In view of our answer to.your first question; we need not answer
your second question.
SUMMARY
Section 23.75 of the Education Code. consti-
tutes an implied exception to the provisions of
article 988b, V.T.C.S. Under section 23.75 of the
Education Code, II trustee of a community college
district who is also a stockholder, officer,
director, or employee of the district's depository
bank may vote on matters which would result in an
expenditure and thereby decrease the funds on
deposit in the depository bank. Attorney General
Opinion M-331 (196'9)is overruled.
JIM MATTOX
Attorney General of Texas
JACK HIGHTOWER
First Assistant Attorney General
MARY KELLER
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Susan L. Garrison
Assistant Attorney General
p. 2612