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# The Attorney General of Texas

December 21, 1982 MARK WHITE Attorney General

Supreme Court Building P. 0. BOX 12546 Austin, TX. 76711. 2548 512,475.2501 Telex 9101874-1367 Telecopier 51214750266

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An Equal Opportunity/ Affirmative Action Employer HonorableOscar H. Mauzy Chairman OpinionNo. MI.&524
Senate Committeeon Jurisprudence Texas State Senate State Capitol Austin, Texas 78711 Ret Regulation by credit union connnissionerof credit union loans

Dear SenatorMauzy:
You have inquiredabout article 2461-7.02,V.T.C.S., of the Texas CreditUnion Act, which limits the lendingpowers of credit unions as follows:
No creditunionmay make a loan or aggregate of

loans to any one member in an amount greater than 10 percent of the unimpaired capital and surplus of the creditunion.
You pose the following questions regarding the application of this article:
1. Is the creditunion commissionerallowed to

pierce the corporate veil in determining whether the ten percent limitationon loans to an official of a creditunion has been reached;and 2. Must the commissionconsidereach loan to a corporation,whether controlled by an officer of the credit union or not, as a separate and distinct transaction subject to the ten percent limitation?
YOW questions concerning article 2461-7.02 arise in circumstancewhere a creditunion officerand a corporationcontrolled by that officer receive credit union loans, the total amount of which exceeds ten percent of the unimpaired capital and surplus of the creditunion. You ask generallywhether the creditunion commissioner has the power to disregard the controlled corporate entities and aggregate the loans in enforcing the ten percent limit of article 2461-7.02.

p. 1898Honorable Oscar H. Mausy - Page 2 (MW-524)

Initially,we note that the article 2461-7.02 limitationapplies to loansmade to "members" of a creditunion. Indeed, a credit union is authorized to make loans only to its members. V.T.C.S. art. 2461-7.01. Consequently,we answer your inquiriesmore generally as that article applies to loans to any credit union member, not just memberswho are officers. It shouldbe noted, however, that loans to officers are subjected to special scrutiny under the act. See V.T.C.S. art. 2461-7.05. The creditunion commissionerhas specific statutoryauthority to determinewhether a particularpracticeby a creditunion violates the Credit Union Act. V.T.C.S. art. 2461-5.09(a)(l), (2). This power to find violations necessarily implies the power to decide whether a particular practice is, in fact, violating the act, and consequently involves interpretationof the act itself. As with all administrative adjudications, the commissioner's decision as to whether article 2461-7.02 is violated involves interpretation of the scope of that article. Therefore, it falls under the primary jurisdiction of the commissionerto determinewhether, under applicable standards of law, an aggregation of loans to a member and a corporation controlled by thatmemberviolates article 2461-7.02. Disregarding the corporate entity is an equitable doctrine invoked to protect matters of public policy. Pacific American Gasoline Company v. Miller, 76 S.W.2d 833, 851 (Tex. Civ. App. - Amarillo 1934, writ ref'd); Roylex, Inc. v. Langson Brothers Construction Company, 585 S.W.2d 768, 771 (Tex. Civ. App. - Houston [lst Dist.] 1979, writ ref'd n.r.e.). Among the reasons justifying the application of this doctrine is frustration of a statute's purpose. Particularlywith regulatory statutes,whenever theuse of a corporation circumvents the statutory purposes, it is proper to disregard the corporate entity in enforcing the statute. Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543, 546 (Tex. 1975); Sapphire Homes. Inc. V. Gilbert, 426 S.W.2d 278, 283 (Tex. Civ. App. - Dallas 1968, writ ref'd n.r.e.); Beneficial Finance Companyv. Miskell, 424 S.W.2d 482, 484 (Tex.Civ.App. - Austin 1968,writ ref'dn.r.e.). Turning to the present inquiry, itwould be proper to disregarda corporation'sexistence if itwas determined thatuse of the corporate entity resulted in circumvention of the purposes of the ten percent loan limit of article 2461-7.02. One of the primary purposes of that article is to insure credit union solvency and viability by prohibiting a concentrationof loans in a single entity. Due to the inherent limitations on capital infusion available to credit unions, it is important to minimize lending risks by diversifying loans among borrowers. A high level of concentration of loans in a single responsible entity could have severe financial consequences to a creditunion should that entity go intodefault.

p. 1899. - HonorableOscar H. Mausy - Page 3 (NW-524)

In the case of loans to a controlled corporation, it may be determined that actual or ultimate responsibilityfor those loans lies with the controllingmember. In light of the risk preventionpurpose of article 2461-7.02, the corporate entity could be ignored and the loans could be treated as loans of the member in calculatingwhether the tenpercent loan limithas been exceeded. Many factors are relevant to a decision to aggregate such corporate loans under article 2461-7.02, including the degree of control by the member, the capitalization and current financial position of the corporation,the use of the loanmoney, the collateral for the loan, and guarantors or co-signers of the loan. In light of these and other relevant factors, if the commissionerdetermines that the use of the corporate entity would frustrate the statutorypurpose he would have authority to aggregate the corporate loans with those of the controlling member in enforcing the ten percent loan limit. See generally Hamilton, The Corporate Entity, 49 Tex. L.Rev. 979, 997-998 (1971). Therefore,we conclude thatwhen the commissionerdetermines that the purpose or effect of loans to a member and a corporation controlledby thatmemberviolate the policies of the ten percent loan limit of article 2461-7.02, he has authority to disregard the corporate entities and aggregate the loans for purposes of enforcing that article.
SUMMARY

The creditunion commissionerhas the authority to disregard a corporate entity and aggregate credit union loans to a corporationwith loans to the member controlling the corporation, for purposes of determining whether the ten percent loan limit of article 2461-7.02, V.T.C.S., has been violated.

MARK WHITE Attorney General of Texas
JOHNW. FAINTER,JR. FirstAssistantAttorney General
RICHARD E. GRAY III ExecutiveAssistantAttorney General

p. 1900.. .
HonorableOscar H. Mauzy - Page 4 (MW-524)

Preparedby ThomasM. Pollan AssistantAttorney General
APPROVED: OPINION COMMITTEE
SusanL. Garrison,Chairman Rick Gilpin PatriciaHinojosa Jim Moellinger ThomasM. Pollan

p. 1901