August 2, 1961
Hon. J. M. Falkner W-1102
Commissioner
Department of Banking Re: Whether a bank and trust company,
Austin 14, Texas as trustee of funds contributed
to by the bank and its employees
under submitted profit-sharing
and savings plan and trust agree-
ment, may lawfully make loans
from this fund to its employees
Dear Mr. Falkner: who are beneficiaries of the trust.
You request the opinion of this office as to whether a
bank and trust company, under a Profit-Sharing and Savings Plan
and TrustAgreement for its employees may lawfully make loans
from this fund to its employees who are the beneficiaries of the
trust.
Your request states that the bank and trust company has
adopted a profit-sharing and savings plan and trust agreement for
its employees. Under this plan the bank, called employer, and the
employees of the bank make contributions to a fund from which re-
tirement, disability and death benefits may be paid to employees,
their beneficiaries or their estates in accordance with the terms
and conditions thereof. The bank, in addition to being the em-
ployer under this plan, also acts as the trustee of the funds so
contributed. It has been the practice of the bank acting in this
capacity as trustee to permit employees who are members under the
plan and trust agreement to borrow against their equities in such
trust funds, the amounts loaned to such borrowers being limited
in each instance to the extent of the borrowers' vested interest
in the plan.
Paragraph 8.06(C) of the agreement is as follows:
'"Loansto Member&t Anything to the contrary herein
contained notwithstanding the Committee may, in its
sole discretion permit a Plan member to borrow
against his equ1ty to the extent of his vested in-
terest in the Plan. The decision of the Committee
as to the approval or disapproval of the loan shall
be final, subject only to the qualification that
all applicants similarly situated shall be treated
by the Committee in a uniform and non-discriminatory
manner. If the Committee approves an application
Hon. J. M. Falkmr, page 2 (W-1102)
for a loan, it shall so notify the Trustee,
whereupon the Trustee shall make the stipu-
lated loan to the member with annual interest
thereon at such rate as shall have been ap-
proved by the Committee for the Plan year in
which the'loan is made, in accordance with the
provisions of Section 10.03. In the event
that the said member terminates his membership
for any reason before the loan is repaid, any
unpaid balance Including interest thereon
shall constitute a aharge against his interest
as of the date of such termination, but, for
purposes of allocation of employer contribu-
tions under Section 7.01 and allocation of
increment and decrement under Section 7.02,
the loan shall be considered as having never
been made. Payment shall be in accordance
with Section 8.07.”
The profit-sharing and savings plan in question is, in
fact, a pension trust as defined in Section 1 Article %25d,
Vernon's Civil Statutes. Section 2, Article $k25d, V.C.S. spe-
cifiaally provides that a pension trust shall be a trust w ithin
the meaning of Section 2 of the Texas Trust Act, whiah is codified
as Article 7425b-1, et seq.
Article 7425b-10 of the Texas Trust Act is as follows:
*Except as provided in Se&ion 11 of this
Act, a corporate trustee shall not lend trust
;E~;~.o itself or an affiliate (as defined
or to any director, efficer, or employ-
ee of i&self or of an affiliate; nor shall any
noncorporate trustee lend trust funds to himself.,
or to his relative, employer, employee, partner,
or other business associate."
The powers of the Trustor, the bank and trust company,
and the beneficiaries,'its employees, under the profit-sharing
plan and agreement are further restricted by the following provi-
sions of the Texas Trust Act:
"Art. 742!5'b-22.Power of trustor
"The trustor of any trust affected by this
Act may, by provisions in the instrument creating
the trust, or by an amendment of the trust if the
trustor reserved the power to amend the trust,
relieve his trustee from any or all of the duties,
Hon. J. hi.Falkner, page 3 ('&i-1102;
restrictions, and liabilities which would other-
wise be imposed upon him by this Act; or al.ter
or deny to his trustee, any or all of the privi-
leges and powe?s co&erred upon the trustee by
this Act; or add duties, restrictions, liabLli-
ties, privileges, or powers to those imposed or
granted by this dct; but no act of the trustor
&g&l relieve n- coraorate trustee from the duties,
restrictions. and liabilities i&gosed uuon It &
&tions 10, 11, and 12 of this Act. . . .'l
(Emphasis supplied)
"Art. @25b-23. Power of beneficiary
"Any beneficiary of a trust affected by this
Act may, if of full legal capacity and acting upon
full information, by written instrument delivered
to the trustee, relieve the trustee as to such
beneficiary from any or all of the duties, restric-
tions, responsibilities and liabilities which would
other-&se be imposed on the trustee by this Act,
in&uding the release of the trustee from any or
a11 liability to such beneficiary for past viola-
tions of any of the provisions of the Act;,except
as to the duties. restrictions. and liab& i.p.al
imnosed on coruorate trustees bv Sections 1 , ,
and 12 herein. . . .'I (Emphasis supplied)
Tne restrictive provisions of Articles 7425b-10, 7425b-
22, and 7425b-23, V.C.S. have not been officially construed by
any of the appellate courts of this State. However, under the
clear and unambiguous language of Article 2425b-102 Sec. 8.06(C)
of the profit-sharing and savings plan, which permits an empl~oyee
of the 'bankand trust company, 2s trustee of the plan, to borrow
money as a plan member to the extent of his vested interest in the
pi,an,is violative of the provisions of Articles 7425b-10, '&25b-
22, and 7425b-23, V.C.E., and is therefore unlawful.
A bank and trust company, as trustee of funds
contributed to by the bank and its employees under
a profit-sharing and savings plan and trust agree-
ment, is prohibited from making loans from the fund
- -
Hon. J. H. Falkner, page 4 (WW-ll@f)
to its mployees whbo are beneficiaries of the trust
plan by the provvisionsof Articles %25b-10, 7k2fi-
22, e!ad 7425b23, V.C.S.
APPROVED:
OPIlVICW COMMITTEE
W.~V. Geppert Chairman
Fred Werkesth~n
Themas Burras
W. Ray Saruggs
BEVIEbM3 FOR TBE ATTQFtlfEY
OEIOEBAL
BY: Morgan Nesbitt