Untitled Texas Attorney General Opinion

Honorable Robert E. Stewart Opinion No. M-273 Deputy Commissioner Department of Banking John H. Reagan State Office Building Austin, Texas 78711 Re: Branch Banking; Machines for the purpose of accept- ing and receipting off-premises bank Dear Mr. Stewart: deQO8it8. In connection with your request for an opinion on whether Texas banks may use off-premise machine8 for the purpose of accepting and receipting off-premise bank de- posits, you etate that machine8 for accepting and receipt- ing off-premises bank deposits are currently In use In Arizona and possibly elsewhere. Under one plan of service about which you inquire, a national bank In Arizona contracts with owner8 of such machines to place them in selected location8 in the bank- ing area, The bank retains the owner to lease, service, and supply the maChlne8, and to pick up and deliver de- posits from the machines to the bank. In this regard, the owner purports to act as an outside independent contractor and to "absolve the bank" from any direct connection with the operation, maintenance and collection from the machines. The deposits are accepted in the machine by it8 owner who purport8 to act as agent for the depositor. The machine owner carries knSuranCe covering the equipment and deposit8 until their delivery to the bank. A special bank deposit receipt Is used which specifies that the deposit ha8 been received by the machine owner for deposit in the,bank. &posit8 are collected daily by an armored oar aer- vice retained by the machine owner for delivery to the bank, and the deposits are not designated as being offlcirlly "In the bank" until 80 delivered to the bank. In maklng the delivery, the machlne owner purports to act as agent ror the depositor and not for the bank. Time of colleotion Is posted at the machine. The physical locations for the - 1319 - Hondrable Robert E. Stewart, page 2 M-273 machines In shopping center8 and elsewhere are negotiated not by the machine owner or operator but by the participating bank, Your Inquiry relates to whether the above described plan Is Qermi8Slble to state and national banks in Texae. A national bank has offered additional or alternatlvd proposal8 to see If the Department of Eanklng would challenge either or both. Under alternate plan (l), the bank would own (or lease from the distributor, In the bank's name), these deposit boxes. The bank's name would be prominently displayed on the boxes where ever they are placed, but there would be a form of notification at some place on the box that the bank Is not actually accepting any depoalt until the deposited Items are presented at the bank. Siml-. lar language and notice would be printed on the deposit ticket or receipt received by the depositor from the machine. The bank would employ personnel to service the boxes and to pick up and transfer to the bank any ltema therein. Also, the bank’s fldellty and theft insurance coverage would ex- tend to Items placed in the box and would pay any loss SUB- talned by a deposit customer through employee defalcatlon or through robbery. Alternate plan (2) provides that 'the,,boxe&,wouIdbe,.' ...".' '~.' owned or leaeed from the distributor by a third party (In this specific case, the bank's stockholder company.) The bank would contract with thls thlrd party for the Qlace- ment of the machines In varloua locationa. The owner would be reSQOn8lble for servicing the boxes and for QlCk-Up and delivery of Items deposited therein to the bank. Lan- guage concerning the bank's acceptance of the deposit only upon receiptat It8 banking house would be located on the boxes and on the deposit tloket issued to the depositor, and It would be stated that the box owner would be acting In the capeclty of agent for the depositor. The Insurance against loss would be provided by the bank, however, aa in the other alternate plan. Your lnqulr relates also to whether such alternate plans (1) and (2T are Qermleslble to state and national banks in Texas. A state bank ha8 asked your office whether such machine8 would be legal for use if the boxes are owned or leased - 1320 - Honorable Robert E. Stewart, page 3 M-273 from the distributor by a third party (probably the bank's stockholder company), serviced by that third Qarty, and insured agalnet loss by the third party. The bank would contract with the owner for placement of the machines, and the bank's name would be prominently displayed on the face' of the machine. There would be notification to depositors, however, on the face of the machine and on the degoslt re- ceipt Issued to the depositor that the owner la acting as agent for the depositor and that the bank will not give credit for deposits made In the machines until the Items are received at the banking house. The machine owner would accept full responsibility for items depoelted therein and would provide fidelity and robbery Insurance from the time Items are placed in the mechlne until delivery Is made to the banking house. You have Inquired also a8 to whether the Immediately preceding proposal by the state bank la Qermlsslble to state and national banks In Textis. Your preclae questions have been stated aa follows: "(1) Can the bank own or lease In Its own name these machines, and provide fidelity ln- aurance protection? "(2) Can the bank contract with a thlrd- party owner, but provide insurance protection? “(3) Can the bank contract with a thlrd- party owner as above, if the third party Qro- vldes the Insurance protection? "(4) Can bank personnel be Used In the servicing, or pick-up and delivery of Items depoalted? “(5) Can bank personnel be employed at the site of the machines to aeelst depositors In their u8e of the mBChlneB?" Pursuant to the dlSCuS8lon set out below, your questions 1 through 5 are an8Wered In the negative, and you are ad- vised that not any of the various proposals summarized above are compatible with state law. -1321- Honorable Robert E. Stewart, page 4 M-273 The extent, If any, to which branch banking will be pcrmltted within the varloua state8 Is a matter which IS prlnclpelly within the control of the Individual states. Each state 18, of course, permitted to decide for itself whether banks operating under state Charter8 will be per- mitted to branch; and with regard to nationally cha~rtered banks, the Federal Congress has provided that such re- strictions a8 pertain to branching by banks chartered by the states aleo apply to nations1 bank8 operating within such states. Section 36(c) of the National Bank Act (12 U.S.C. 8 s(c)) provides, In part: "A national banking aseoclatlon may, with the approval of the Comptroller of the Currency, establish and operate new branches: (1) Within the limits of the city, town or village in which said aseoclatlon 18 situated, if such establleh- ment and operation are at the time expreealy authorized to State bank8 by the law of the State In question; and (2) at any point within the State In which said association Is situated, If such eatabllshment and operation are at the time authorized to State banks by the statute law of the State In queatlon by language spe- cifically granting such authority affirmatively and not merely by lmQllcatlon or recognition, and subject to the restr,lctlonsas to loCatiOn Imposed by the law of the State on State banka.” The Texas Constitution, Article XVI, Section 16, provides for the supervision, regulation and control of corporate bodlee with banking and discounting privileges. It has bten ex- pressly stated therein that such corporate bodies . . . shall not b$ authorized to engage In business In more than one place . . . Article 3, Chapter IX of the Texas Banking Code (Article 342-903, Vernon’s Civil Statutes), which was enacted pur- suant to the quoted constitutional prohibition, provides: “No state, national or private bank shall engage In buaineas In more than one place, maintain any branch office, or cash check8 or receive deposit8 except in it8 own banking house. For purpose of this Article ‘banking house’ means tliebuilding - 1322- Honorable Robert E. Stewart, page 5 M-273 In whose office8 the bU8ineSS of the bank 18 conducted and which Is functionally one place of business, including office facllltle8 whose nearest wall Is located within five hundred (500) feet of the nearest wall of the central building and 18 physically connected to the central building by tunnel, paeaage- way or hallway providing direct aCCe8S be- tween the central building and the connected office facility or by pneumatic tube or other almllar carrier. The entire banking house shall for all purposes under the law be con- sidered one Integral banking house." From the above quoted prohibitions, It 1s clear that Texas law doe8 not favor the U8e of multiple banking facilities by a single banking lnetltutlon. Accordingly, It Is the opinion of this office that Texas law would not permit the Implementation of any of the various proposals hereinabove set forth, You have requested that we i,elateour discUS8lon to the following ruling Issued In 1965 by the Comptroller of the Currency, to-wit: "7491. Deposit Machines "A national bank may utilize at any location a machine which receives checka, currency, or coin for deposit. The machine shall provide documentary evidence of the transaction which state8 that the transaction will become a de- posit upon verification and crediting at the main office or a branch office of the bank. Utilization of 8UCh machine8 at locationa other than the main office or a branch office of the bank does not constitute branch banking. A bank may provide Insurance protection under Its bonding program for transactions Involving euch machines." The above quoted ruling ha8 not yet been passed upon by the courts, and the Comptroller of the Currency has cited no legal authority In support thereof, The Administrator's recent rulings with regard to branch banking facilities have been said to be largely without supporting statutory authority - 1323- . Honorable Robert E. Stewart, page 6 M-273 and open to serious question. See 32 University of Chicago Law Review 148; 31 Law and Contemporary Problems 749, 765, and cases cited. In our opinion, no substantial difference exists be- tween that plan approved by the above quoted ruling and any other plan which may be designed for the acceptance of bank deposits In branch locations. The use of a mechanical con- trivance to perform these operations will not render them non-banking operations which are outside the general and usual rules governing and restricting branch banking. “Branch- ing” Is defined by both state and federal law In terms of end results and not In terms of any Instrumentality or agency by which such results are accomplished. Section 36(f) of the National Bank Act (12 U.S.C. 8 36(f)) provides, In part: "The term branch as used In this section shall be held to Include any branch bank, branch office, branch agency, additional office, or any branch place of business located In any state . . , at which deposits are received, or checks paid, or money lent." In a recent federal declslon, It was observed In con- nection with the above quoted federal definition of "branch- ing": 9, . .'/A 7n additional office' or 'branch "' place if bueTnrsss will be considered a 'branch' for the purposes of B 36 If any one of the three specified condltlons 18 met, I.e., If deposits are received or checks are peld or money Is lent." Jackson v. FIi%t National Bank orValdosta, 246 F s 134 138 (M .D . Qa. . (Original em- pia8Fj ' ThO8e plans which have been proposed which would deslg- nate third parties to be the operator(s) of the machines are likewise subject to attack on several fronts. Initially, we observe with respect to these so-called "Independent contractor arrangements' that from the manner In which these plans have been formulated and proposed, It Is clear that the’end result ssllghtIs a branch banking operation over which the parent bank will retain the maxl- mum possible actual control which can be exercised and re- - 1324- Honorable Robert E. Stewart, page 7 M-273 talned consistent with the theory or pretense that legal control Is elsewhere. Legal control Is sought to be vested In a separate corporation solely for the purpose of circumventing the restrictions on branch banking operations as they may apply to restrict the parent bank. Such an arrangement may be held to be, In and of Itself, a Suffi- cient basis for attacking the agreement between the bank and “the third party Independent contractor .‘I See 1 Fletcher, Corporations (1963 revised ed.) 240, 241, wherein it Is concluded that, “Where the corporate form of organlza- tlon Is adopted or a corporate entity Is aaserted In an endeavor to evade a statute or ‘to modify Its Intent, courts will dis- regard the corporation or ita entity and look at the substance and reality of the matter.” The above stated principle hae been recognized and applied In numerous fact sltuatlonB and haa been held to extend to the use of separate corporations created for the sole or main purpose of circumventing prohibitions agalnet branch banking, tlonal Bank of Jefferson Parish F 26 2m C Cl lgbj’) re- U.S. 411, 1; i.edG 386, b5 Sict. 551 (1965). In the Whitney National Bank oaee, ‘Bupra,, the Waehlngton D.C. ClroulVote, In part at 323 F 2d 303: 11 BJhe corporate veil should be pierce; ihinever one bank or corporation Is doinn buelnesa through & e InstrumentaYT lty of the other or in the same way as If the InstitutlonB were one. The unitary type of operation said . . . to be charaoterlstlo of branch banking Is present here. In such circumstances the relationship of parent and branch exlsta, even though the banks are separate corporate organlzatlons.” The application of legal terminology or language which woul.d In form designate the owner or operator of the machines the agent of the depoeltor of the bank Se of no legal slgnlfl- cance, nor would there be any legal Blgnlfloance to the creation of a dual agency relationship. Such fiotional ar- rangements will not alter the actual situation, since the - 1325- Honorable Robert E. Stewart, page 8 M-273 courts look to substance rather than mere form. In our opinion the facllltles described In your letter are clearly banking facllltles. It Is equally clear that under each proposed asrangement which you have described for operating these facllltles, the party operating the same would ‘bedoing so largely for the benefit of the bank and as agent of the bank, regardless of protestations to the contrary. It Is our opinion that under each proposed arrangement the participating bank would In effect be “en- gaging In business at more than one place” In violation of the applicable provisions of State and Federal Law. Secondly, even If It could be concluded that the third party who operates the machines Is not the agent of the participating bank, such third party would himself be en- gaging In the banking business without a charter In vlola- tlon of Section 902 of the Banking Code (Article 342-902, V.C.S.). The provisions of the TeXBB Constitution and statutes contemplate the regulation of the,banking business from the very Instant that public money Is deposited. The device here propoaed, If held not to be subjeot’to these provisions, would leave the public completely unprotected, Insofar as “Bupervlslon, regulation and control” are con- cerned from .the time that the deposlt Is made with ‘the “box” until the deposit reaches the confines of the partl- clpatlng bank. SUMMARY ------- (1) The use of machines to perform acts which would otherwise constitute branch banking within the prohibitions of Sta,telaw (as made applicable to national banks by Congress) has no legal effect Insofar as the nature of such acte are oonoerned, -- Bald acts continue to oonetltute branch banking. (2) The uBe of an “Independent oon- tractor’ arrangement with the owner or opera- tor of such maohlnes for the attempted pur- pose of circumventing prohlbltlons against branch banking should be disregarded and the substance of the arrangement (the participating Interest of the bank) should be looked to to determine whether the bank Is In fact engaging In branch banking. - 1326 - Honorable Robert 6. Stewart,,page 9 M-273 such extent, If any, as the third party(Z . . TE fact a separate entity or lnde- penaenc contractor he would himself b,eengaging In unregulated banking In violation of state law. YOJ& very truly, ‘& if Od t%%f=- . At rney General of Texas Prepared by Larry J. Craddock Assistant Attorney Qeneral APPROVED: OPINION COMMITTEE Hawthorne Phillips, Chairman Kerns Taylor, Co-Chairman Fielding Early Jim Swearlngen Fisher Tyler Malcolm Quick A. J. Carubbl, Jr, Executive Assistant Attorney General - 1327-