The Attorney General of Texas 

November 24, 1980 

MARK WHITE 

Attorney General 

Honorable Gerald Brown 

Executive Director 

Texas Industrial Commission 

410 East Fifth Street 

Capitol Station 

Austin, Texas 78711 

Dear Mr. Brown: 

Opinion No. w-277 

Re: Use of floating interest rates 

in the issuance’ of industrial revenue 

bonds 

You request cur opinion as to whether the board of directors of an 

industrial revenue corporation, when Issuing revenue bonds, may set interest 

rates for the bends which vary cr float according to certain economic 

indicators such as a percentage of the prime rate charged by a particular 

bank. The traditional position of the Attorney General’s Office in its bcmd 

approval function has been that such bonds are not negotiable. 

The Texas Supreme Court has clearly held that floating rates do 

destroy negotiability in bonds. Brazes River Authority v. Cam, 405 S.W. 2d 

689. 695 (Tex 1966). The ruling is DmblematiC in that the court based its 

holding on article 3 of the U.&Z. (Commercial Paper), which, by its own 

terms is inapplicable to investment securities. Bus. & Comm. Code S3.103. 

See also S8.102. However, there is authority to the effect that while article 

8 provisions govern securities and diect application of article 3 to 

investment securities is clearly precluded, recourse to article 3 for guidance 

in points not clearly covered under article 8 is appropriate. See E. Fl Hutton 

& Co. v. Manufacturers National Bank of Detroit, 259 F. Sqr513, 517 (E.D. 

Problems Under the Uniform Commercial Code, Article Eight: A Premise 

and Three Problems, 65 Mich. L. Rev. 1379, 1387 (1967). Further, the 

common law definition of a term remains in place where the U.C.C. has not 

specifically displaced such definition and the common law definition of 

negotiability in Texas comports with the article 3 definition. Bus & Comm. 

Code S1.103: See also Weisbart & Co. v. First National Bank, 568 F. 2d 391 

i;854;ir. 1978mexs.s Banking & his. Co. v. Tumley, 61 Tex. 365, 368 

The court in Brazce River Authority based its holding on statutory 

interpretation; the issue mvolved 1s not constitutional. Instruments not 

qualifying under the common law may, of course, be declared negotiable by 

.p. 885 
Honorable Gerald Brown - Page Two @g-277) 

legislation. The argument has been advanced that article 8 &es in fact define 

negotiability for investment securities; that if such securities meet a certain form 

they are ipso jure negotiable instruments. The pertinent statutory definition includes a 

requirement that the instrument be “of a type commonly dealt in upon securities 

exchanges or markets or commonly recognized in any area which it is Issued or dealt in 

as a medium for investment.” Bus. & Comm. Code 58.102(a)(l)(B). Due to the Brazes 

River Authority case there is no basis for arguing that a bond or note with a fiinterest rate can fit this part of the definition, thereby qualifying as a negotiable 

instrument under article 8. See Folk, s. See also Bsnkhaus Hermsnn, slgra; 

Zamore v. Whitten, 395 A. 2d 435 (Me. 1978); Guttmsn, Article 8 - Investment 

Securities, 17 Rutgers L. Rev. 136, 138 (1962). 

Industrial development corporations are not limited by statute to issuing 

negotiable paper. There is no difficulty in such a corporation issuing non-negotiable 

paper with.a floating interest rate. However, absent a clear legislative determination 

that industrial development corporations may issue negotiable paper tied to floating 

rates, we feel that Brazes River Authority controls in its holding that securities with 

float@ rates are non-negotiable. 

SUMMARY 

Under present Texas law an investment security tied to a 

flcating interest rate is not a negotiable instrument. Thus an 

industrial development corporation may issue its non-negotiable 

paper tied to a floating rate, but it must Issue its negotiable 

paper with a fixed rate of interest. 

MARK WHITE 

Attorney General of Texas 

JOHN W. FAINTER, JR. 

First Assistant Attorney General 

RICHARD E. GRAY III 

Executive Assistant Attorney General 

Prepared by Susan L. Voss 

Assistant Attorney General 

p. 886 
Honorable Gerald Brown - Page Three (W-277) 

APPROVED: 

OPINION COMMlTTEE 

&an L. Garrison, Acting Chairman 

Jon Bible 

Rick Gilpin 

Thomas M. Pollan 

Susan L. Vass 

p. 887