NO. 3097 

Article 4727, Revised Civil Statutes ‘of 

Texas, 1925, and Article 577$ Penal Code of 

Texas, 1925, do not prohibit a life insurance 

company from making a,loan to another corporation if a director or officer of the insurance 

company is also a director or officer of the 

borrowing corporation, where the officer or.director of the insurance company has no personal 

interest in the loan and receives no money or 

valuable thing for negotiating, procuring, recommending, or adding in.the furtherance of the 

lOan3 either as principal, co-rincipal, agent 

.or beneficiary in such loan, 

OFFICE OF TRE ATTORREY GENERLL 

January 6, 1940 

Iion: Walter C. Wood;ilard, Chairman 

Board of Insurance Commissioners 

;fnion NO. O-1586 

: Construction of ArtiAustin, Texas cle 4727, Revised Civil 

Statutes of Texas, and ArDear Sir: 

tic&e 577, Penal Code of 

Texas. 

We are in receipt of your letter in which you quott 

Article 4727 Revised Civil Statutes of Texas end Article 577, 

Penal Code oh Texas, and request an opinion 0; the following 

questibn: 

8, whether in your opinion Article 4727, 

supra,*pGoi&bits a life insurance c6mpany from 

making a loan to another cprporation if a diroc,- 

tor or officer of the life insurance conpany is 

also a director or an officer of the borrozting 

corporation, the officer or director having no 

personal interest in the loan and receiving no 

looney or valuable thing for negotiating, procuring\ r,ecomnending, or aiding in the furtherance 

of the loan, either as princl.pal, co-princLpa.l;l, 

agent or beneficiary in such loanli." 

Arrticlc 4727, supra; rezds as follzsz 

"No dlroctor or officer of any l.nsurance COW 

pany transacting buslncss in or organized under the 
Hon. kklter C. Moodward, January 6, 1940, page 2 

shell receive any money ._ s- laws of this State, or 

valuable thing for negotlatlng, procurlng, 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 

as principal, co-principal, agent or beneficiary 

in any such purchase, sale or loan. Nothing in 

this article shall prevent a life insurance corporation from making a loan upon a policy held 

therein, by the borrower, not in excess of the reserve value thereof." 

Article 577 of the Penal Code provides: 

%o director or officer of any insurance company transacting biness in this State 

ized under the laws of this State, shali ~~~~$0" 

any money or valuable thing for negotiating, procuring, recommending or aiding in any purchase or 

sale by such company of any property~or loan from 

such company, nor be pecuniarily interested either 

as principal, co-principal, agent or beneficiary, 

in any such purchase, sale or loan. Nothing con- 

: tained in this article shall prevent a life insurance corporation from making a loan upon a policy 

held therein, by the, borrower not in excess of,.the 

reserve value thereof.. hny person violating any 

provision of this article shall. beg fined not les8 

than three hundred nor more than ohe thousand dollars." 

?I& 

Both articles stem from Senate Bill 291, Chapter 108, 

Legislature,.approved Karch 22, 1909, which reads as fol- 

: 

Wo director or officer of any insurance company transacting business in this State, or organ- 

.ised under the laws of this State, shall receive 

any money or valuable thfng for negotiating, procuring, recommending or aiding in any purchase or sale 

by such company of any property or any loan from such 

cornpan:?, nor be pecuniarfly interested tither as principal, co-princ3.pa1, 

such purchase, 

agent or beneficiary, in any 

sale or loan; provided, that nothing 

contained in this Section shall prevent a life icsuram0 corporation ilrom uiak3.s~ a loar, GpoIl a policy 

held therein, by the boxover not in excess of the 

reserva valua t!121’eof. .-Al’/ per S’-‘3 ‘:i.Q:;.j,+i,nS a:,y p;:a.. 

risior-; cf t::ij Sei:tion sha11 be guilty of a misdemeazor t and upon convIction thereof, shall be punished 
Hon. ualter C. Moodward, January 6; 1940, page 3 

by a fine of not less than $330.00 nor more than 

$19000000~)' 

At the outset we call your attention to the fact 

that Article ~4727 and Article 577 do not prohibita life 

insurance company from doing anything. 

The two statutes, civil and criminal, do contain an 

express prohibition, but it is directed at the directors and 

officers of insurance com&anies, and in no manner can it be 

construed as a restraint upon the power and authority of insurance companies to make valid loans. 

-At the expense of repetition we again call attention 

to the explicit and unambiguous language of the articles above 

quoted: 

JINo director or officer of any insurance company... shall receive any money or valuable 

t$..iIf;; negotiating, procuring, recommending or 

. 'any loan from such company nor be 

pecuniaril; interested, either as principd, cog;ictpal, agent or beneficiary in any such . . . 

a 

The directors and officers of insurance companies 

are inhibited from receiving any money or valuable thing for 

their part in negotiating the loan, and also from'being pecuniarily interested, either as principal, co-principal, agent 

or beneficiary in such loan. Any director or officer who violates the law in this respect is subj,ect under the criminal 

statute to a fine of not less than three hundred nor more than 

one,thousand dollars. But neither the inhibition nor the penalty can be stretched to prevent an insurance company from 

makIng a loan to a corporation where a director or ~officer of 

the lending insurance company is also a director or an officer 

of the borrowing corporation. Whatever the guilt of the director or officer-in-common the insurance company, i.e., the 

corporate entity, has commleted no offense under Articles 4727 

and 577$ and cannot be punished by fine. 

The prohibition, by the clear language of the statutes, being operative against individual officers and directors and not the company itself, a life insurance company may 

make loans in accordance with the provisions of Section 2 of 

lirticle 472s9 vernon9.s nnnotated Civil Statutes, and subject 

to the regulatory poi!crs of the Board of Insurance CoiMXCSSiOners as set out'in Chagtsr I, Title 78, Insurance, A rticles 

b679-4698, Vernon's i¬ated Civil Satute~. 
Hon. Walter C. Woodward, January 6, 1940, page 4 

In this opinion we are not concerneri with the relationship of the diraotor or officer to the loan or the degree 

.of interest,’ direct or indirect, vhich the director may or 

may not have in the loan, The question, however, is whether 

or not the life insurance company may make a loan to aqother 

corporation trhere Ita director or officer of the life insurance 

company is also a dire&or :or an officer of the borrowing co:- 

poration, the officer or director having no. personal interest 

in the loan and receiving no money or valuable thing for negotiating, procuring, reoommending or aiding in the furtherance 

of the loan, either as principal, co-principal, agent or beneficiary in such loan.” 

The question is not whether a director of an insurance company which makes a loan to a corporation of which he 

is also a director falls within the prohibition of the civil 

and criminal statutes. 

It is to.be noted that in the question propounded.to 

;~us:; director or officer-in-common is given a clean bill of 

. The Board of Insurance Commissioners, using the language of the statute, states that none of the prohibitions of 

the statute are v:oLated. The statutory phrase "nor be decuniarily interested" is not incorparated spocificzLl.y in the 

s 

uestion, but the director or officer-in-common is said to have 

no per.sonal interest in the loan and reoeiring no money or 

valuables thing. . 2' 

‘where, under the language of the articles, there is 

a serious question that a director of. a life insurance company 

is 8~pecuniarily interested . 0 . as o 0 o beneficiary” in a loan 

made to a corporation of which he is also a director, it would 

indeed be doing violence to the language of the statutes under 

consideration to hold that the prohibition therein operated as 

a bar against the insurance cornpanG, as well as against the directors .and officers. 

,The question propoaded presents the weakast situation 

imaginable for extending the statutory prohibition to a loan by 

a life insurance company to a corporation with which it has a 

director in common. 

The common law in respec, f to Irraffic between two corporations ui%h one or more identical d2roct6rs or officers supports our construction of Artif;les 6727 ,z?d 577. The foUowdrig 

statement i.n 2 Thompson. on Corporations, page 842, is persuasive 

and illuminating: 
Hon. Walter C. Woodward, January 6, 1940, page 5 

corporations, from the mer'e fact that a portion, 

less than a quorum, of the board of directors in 

the one 6onstituted a part of that in the other 

at the same time, and participated in the dealings 

between the two; .birt it is only when their dealings are shown to be prejudicial to one of the corporations represented by them that they will be 

set aside by the courts." 

The rule acted on in Texas, in respect to benefit to 

directors as individuals, as stated in 10 Texas Juri,s., p. 958, 

IS: 

'(. . i assuming that the transaction be authorized by competent, disinterested directors, 

and that it passes the test of fairness to the 

corporation, the interested director may not be 

deprived of the profits of the transaction.11 

and 

table, 

VhiJ.e the transaction, if otherwise unassailis not void because interested directors con-. 

stituting a minority use their.position for the 

purpose of advancing their own interests, any want 

of good faith, reflected in the unfairness of the 

transaction to the corporation, will render it voidable even though sanctioned by "f qualified majority 

of the directors." 

The same reasoning is applicable to officers as well 

as directors. 

it is not 

that your 

The contemplated Loan would be valid at common law; 

prevented by the statutory law of this State. We feel 

question is answerable in the negative. 

It is our opinion, and you are so advised that Artiale 

4727 Revised Civil Statutes of Texas' 1925 and Ar?Scle 577t Penal &ode of Texas, 1925, do not prohi6i.t a iife insurance company 

from makin& a loan to another corporation if a director or officer of the insurance company is also a director or officer of the 

borrowing corporation, where the officer or director of the insurance company has no personal interest in the loan and receives 

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 105:~. 

Reference was made in your letter of re+cst'to eil ~Piir. 

i.cn of this department by the \Jriter under date of September 17, 
aon. tjalter C. Woodward, January 6,,1940, page 6 

1937, to Honorable R. L. Wiiiel, Chairman of the Board of Insurance Commissioners, gusting Texas. In that opinion the 

main question urder consideration was whether the provisions 

of Articles 4727 and 577, supra, extended to fire and casualty insurance com?annies: and it was held that they did. Insofar as said opinion in answer to rel&ted questions held 

that Articles 4727 and- 577 prevents an Insurance company from 

maldng a loan to a corporation with which it has a director in 

common,-it is overruled. 

Wewish to emphasize the fact that this opinion is 

U$ed strictly to the circumstances described in your reThere Is no attempt on.our part to lay down a universal 

rule &pllcable to every situation in which a director or officer of the lending insuranca company is also a director or officer.of the borrowing corporation.- 

~Trusting that we have answered your inquiry satisfactorily, we are 

Yours very truly 

ATTORXEY GENERbI, GF TEIUS 

By /s/ Dick Stout 

Dick Stout, Assistant 

DSaLWtwb 

This opinion has been considqed in conference, approved, and ordered recorded.