OFFICE OF THE AlTORNEY GENERAL OF TEXAS
AUSTIN
Honorable 0. P. Lockhart, Chairman
Board of Insurance Commissioners
Austin, Texas
Dear Sir:
requesting the opin-
d question reads as
ty National Life In-
rance Company, Dallas,
City of Dallas which is owned by
another Texas corporation chartered through the of-
fice of the Secretary of State and known as Texas
Discount Company of Dallas, Texas.
"The Texas Discount Compang has a capital stock
of $lOO,OOO.OO divided into 10,COO sharss whose
owners are as follows:
222
Honorable 0. P. Lockhart, Page 2
YE. A. Strange - - - - - 10 shares
Leo Johann- - - - - - - - 5 shares
Jack Austin Titus - - - -10 shares
Robt. Elton Titus - - - -10 shares
E. W. Titus - - - - - 9965 shares
"The directors of the Texas Discount Company
are:
"E. A. Strange
Leo Johann
E. W. Titus
"The officers of Texas Discount Company are:
"E. W. Titus, President
Leo Johann, Vice President
Pauline Michael, Secretary and Treasurer
"The City National Life Insurance Company has
a capital stock of qb25,OOO.OOdivided into 2500
shares, The stockholders of this company are as
follows:
"D. L. Uayar - - - - - -100 shares
Bob Titus - - - - - - - 25 shares
Jack Titus - - - - - - - 25 shares
Jack Andrews - - - - - -100 shares
Fred Sheppard - - - - - 50 shares
Andrew Allison - - - - -100 shares
Nrrs.Wright Titus - - - -30 shares
K. P. Gifford - - - - - 100 shares
Vernon Singleton - - - - 1 share
Bill Weidler - - - - - - 10 shares
Wright Titus - - - - - - 10 shares
Texas Discount Company-1796 shares
A. H. Knepper - - - - - 2; ;",;;i;
J. H. Hickerson - - - -
Frank Cain - - - - - - - 10 shares
Albert Couchman - - - - -35 shares
J. P. Levigne - - - - - -10 shares
J. M. Cumby - - - - - - -21 shares
Tom Beckett - - - - - - -50 shares
H0noreble 0. P. Lockhart, Page 3
"The directors of City National Life Insur-
ance Company are as follows:
"Wright Titus
David L. Mayer
Albert Couchman
Frank Cain
Lt. A. V. Allison
Fred Sheppard
K. P. Gifford
James H. Hickerson
Thomas Beckett
"The officers of City National Life Insurance
Company are as follows:
"Wright Titus, Presidept
David L. Mayer, Vice Yresident 8~Treasurer
Frank Cain, Vice President
James H. Hickerson, Secretary
A. H. Knepper, Assistant Secretary
tiion end Cain, General Counsel
Dr. Ben R. Buford, Medical Director
M. B. Gammill, Actuary
*The City National Life Insurance Company
does not now own any reel estate of any kind, end
the properties sought to be acquired will be e
building site, and office building for its eccom-
modation in the transaction of its business end
for lease end rental.
"In view of the fact that PI.W. Titus (who
is the seme person es Wright Titus) is en officer
end a director of both the insurance company and
the other corporation; and in view of-the fact
that I&s, Wright Titus is the wife, end Jack Austin
Titus end Robert Elton (Bob) Titus are the minor
sons, of E. W. (Wright) Titus, and all re stock-
holders in one or both corporations, we would appre:
ciate having your opinion as to whether or not any
violation of Article 4727 of the Oivil Statutes or
Article 577 of the Penal Code, or of any other pro-
visions of the civil or criminal laws of Texas ap-
plicable to such transection, would necessarily be
involved in anv acquisition, and more especially
the outright purchase, by City National Life Insur-
ance Company from Texas Discount Company of the
honorable 0. F. Lockhart, Page 4
above mentioned Dallas reel estate for the purposes
end in the circumstances mentioned; end.if so,
wherein such violations would consist, end upon
whose pert they would be violations; and whether
such violations, if env, would make it unlawful for
us to approve the acquisition of such reel estate
by the insurance company for the ourposes end in
the circumstances above mentioned.*
Article 4727, Vernon's Annotated Civil Statutes
reeds es follows:
"No director or officer of any insurance
company transacting business in or organized un-
derthe laws of this State, shall receive any
money or valuable thing for negotiattng, procuring,
recommending or aiding in any purchase or sale
by such company of any property, or any loan from
such company, nor be pecuniarily interested, either
es principal, coprincipel, agent or beneficiary
in any such purchase, sale or loan. Nothing in
this article shell prevent a life insurance cor-
poration from making a loan upon e policy held
therein, by the borrower, not in excess of the
reeerve value thereor.**
Article 577, Vernon's Annotated Penal Code provides:
"IGodirector or officer of any insurance
company transacting business in this State, or
organized under the lews of this State, shell
receive any money or valuable thing for negotiat-
iw, procuring, reconunendingor aiding in any
purchase or sale by such company of any property
or any loan from such company, nor be pecuniarily
interested either as principal, co-principal,
agent or beneficiary, in any such purchase, sale
or loan. Nothihg contained in this article shell'
prevent a life insurance corporation from making
a loan upon e policy held therein, by the borrower
not in excess of the reserve value thereof. Any
person violating any provision of this article
shall be fined not less then three hundred nor
more than one thousand dollars."
Honorable 0. P. Lockhart, Page 5
In construing the foregoing articles this depert-
ment said in opinion No. O-1889:
"Article 4727 end Article 577, Penal Code,
1925, have as their combined objective the pro-
hibition end penalizing of a director end offi-
cer or directors and officers of corporations
in respect to certain personal acts. Both the
prohibition and the penalty apply to individuels.
They do not embrace the corporation itself as an
entity. The language is clear, unambiguous end
not subject to construction;
n . . . ."
It is further stated in said opinion (No. O-1889)
"The fact that e part or all of the directors
of one contracting corporation are directors of
the other contracting corporation affords a ground
for subjecting the contract into which they enter
to the strictest scrutiny by courts of equity.
2 THOMPSON ON CORPORATIONS 841; 10 TEX. JUR. 959.”
The true rule in this State with respect to oon-
tracts between corporations having interlocking directors
or officers in common generally may be found enunciated in
the case of City National Bank v. Merchants and Farmers
National Rank, 105 S. W. 338, to the effect that:
"It is not inherently wrong for two corpore-
tions, having all or a part of their controlling
officers in common, to contract with each other.
Even where a majority or all of the contracting
officers of two corporations are common to both,
that fact alone does not make e contract between
the two corporations, entered into by such contrect-
ing officers, absolutely void end incapable of
ratification. The current of modern authority
holds that the most that cen.be said against such
contracts is that thay will be subjected to cbse
judicial scrutiny when questioned et the proper
time, and will be set aside upon the appearance
of unfairness. But if it should appear, upon in-
vestigatioa, that the contract is fair and there
226
Honorable 0. F. Lockhart, Page 6
has been no abuse of the trust relation, the con-
tract will be pernitted to stand. . . . The sx-
tent to which the courts will go in refusing to
enforce contracts of this kind, es sho\;nby the
adjudicated cases, depends in a great measure upon
the facts of each particular case. No inftaxible
rule has been established."
It is stated in the case of Gaddes v. Anaconda
Copper Mining Company, 254 U. S. 590, 599, 41 S. Ct. 209,
45 L. Ed. /25;
"The relation of directors to corporations
is of such e fiduciary nature that transections
between boards having common members are regarded
as jealously by the law es are personal dealings
between a director and his corporation, and where
the fairness of such transections is challenged
the burden is upon those who would mainM.n them
to show their entire fairness end where a sale is
involved the full adequacy Of the consideration.
Ebpecially is this true where e common director
is dominating in influence Or in character. This
court has been consistently emphatic in the eppli-
cation of this rule, which, it has declared, is
founded in soundest morality, and we now add in
the soundest business policy."
This department held in OPiniOn No. O-1586 (Con-
ference Opinion No. 3097) that:
"Article 4727, Revised civil Statutes of Texas,
1925, end Article 577, Penal Code Or Texas, 1925,'
do not prohibit a life insurance C0mpen.vfrom mek-
ing e loan to another corporation if a director or
or officer of the borrowing corporation, where the
officer or director of the insurance company has
no personal interest in the loan end recaives no
money or valuable thing for negotiating, procuring,
recommending, or aiding in the furtherance of the
loan, either as principal, co-principal, agent or
beneficiary in such loan."
Honorable G. P. Lockhart, Page 7
What was said in the foregoing opinion with refer-
ence to a life insurance company making a loan to another
corporation where the same person was a director or officer
of both corporations Is equally applicable regarding the pur-
chase of real estate from one corporation by a life insurance
company where the same person is a director ordricer in
both corporations.
It is our opinion that Article 4727, Vernon’s Anno-
tated Civil Statutes, and Article 577, Vernon’s Annotated
Penal Code, do not prohibit a life Insurance company from
purchasing real estate rrom another corporation if a director
or officer of the Insurance company is also a dire&or or
off’icerof the corporation selling the real estate, where
the officer or director of the insurance company, who is also
an officer or director of the corporation selling the real
estate, has no personal interest in such transaation and re-
ceives no money or valuable thing for pegotiating, procuring,
recommending, or aiding in the furtherance of the transaation,
either as principal, co-prlnoipal, agent or beneficiary therein.
Article 4726, Vernon’s Annotated Civil Statutes sets
forth the purposes for which a life insurance oompnay may hold
real estate.
With reference to the first paragraph in your let-
ter as quoted above It is not clear whether or nbt the real
estate in question oonstltutes a part of the capital stock of
the City National Life Insuranae Company or is to be used for
the purpose of paying such stock increase. If it is the pur-
pose of the city National Life Insurance Company to use the
real estate for the purpose of paying its capital stock in-
crease your attention is directed to our opinion No. 0-4556
addressed to you wherein it is stated:
11 .by express statutory declaration, the
Commissioners must rind, as a condition precedent
to the issuance of a certificate of authority to
do business, that all of the capital stock of the
company has been fully paid up and is in the cus-
tody 0r the officers, ‘either in cash or securities
of the class in which such companies are authorized
by this chapter to Invest or loan their funds’.
“Article I+725lists the ‘securities’ in which
a life insuranoe company organized under the laws
228
Honorable 0. F. Lockhart, Fag8 8
of this State may invest or upon which it may loan
its funds.
1’. . .
“Of course, real estate acquired by the company
under the circumstances and for the purpose pro-
vided by Artiole 4726, is property which the oom-
pany is authorized to own, just as it my own per-
sonal property, such as furniture and fixtures and
office equipment and supplies, necessary to the
transaction of its business. But 'securities1 Is
a term of more restricted meaning than ‘property’,
and Article 4.720 expressly provides that the oer-
tifioate of authority shall be issued only if it
is round that the capital of the company is on hand
in the form or cash or ‘ssourities* in which it is
authorized to invest or loan its runds.
N~Seourltlesl are evidenoes of obligation for
the payment of money. See Words and Fhrases, Perm.
Ed., Vol. 38, ‘Securities*. In no proper sense
can real property, encumbered or unencumbered, owned
by the corporation be classed as a ‘security’ under
Artlole 4720.”
It is noted in your letter, as above mentioned,
that the wife and children of Mr. Titus may be stockholders
of one or both of the corporations. Neither of the statutes
(Article 4727, Vernon’s Annotated Civil Statutes, or Article
577, Vernon’s Annotated Penal Code) refers to stockholders,
consequently, the fact that the wife and ohildren of Mr.
Titus are stockholders of one or both corporations Is imms-
terial.
As all of the above mentioned opinions referred to
in this opinion have been addressed to the Chairman of the
Board of Insurance Commissioners we do not deem it necessary
to enclose copies of’ such opinions herewith.
Yours very truly
APPROVED
Opinion ATTORNEY GENEBAL OF TEUS
By (Signed)
Ardell Williams
Assistant