# The Attorney General of Texas
November 24, 1980 MARK WHITE Attorney General Honorable Gerald Brown Executive Director Texas Industrial Commission 410East Fifth Street Capitol Station Austin, Texas 78711 Dear Mr.Brown: Opinion No.w-277 Re: Use of floating interest rates in the issuance’ofindustrial 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 inits bcmd approval function hasbeen 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, 405S.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 3for guidance inpoints not clearly covered under article 8isappropriate. See E.Fl Hutton &Co. v. Manufacturers National Bank ofDetroit, 259F.Sqr513, 517(E.D.
Problems Under the Uniform Commercial Code, Article Eight: APremise and Three Problems, 65 Mich. L. Rev. 1379, 1387 (1967). Further, the common law definition of a term remains inplace where the U.C.C. hasnot specifically displaced such definition and the common law definition of negotiability inTexas comports with the article 3definition. Bus &Comm. Code S1.103: See also Weisbart &Co. v.First National Bank, 568F. 2d391 i;854;ir. 1978mexs.s Banking &his. Co. v. Tumley, 61Tex. 365, 368
The court in Brazce River Authority based its holding on statutory interpretation; the issue mvolved 1snot constitutional. Instruments not qualifying under the common law may, of course, be declared negotiable by

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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 ipsojure 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 inany area which it isIssued ordealt in as a medium for investment.” Bus. &Comm. Code 58.102(a)(l)(B). Due to the Brazes River Authority case there isno basis for arguing that abond 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, 17Rutgers 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 ofinterest.

MARK WHITE Attorney General ofTexas JOHN W.FAINTER, JR. First Assistant Attorney General RICHARD E.GRAYIII Executive Assistant Attorney General Prepared bySusan L.Voss Assistant Attorney General

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APPROVED: OPINION COMMlTTEE &an L.Garrison, Acting Chairman Jon Bible Rick Gilpin Thomas M.Pollan Susan L.Vass

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