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 furtheranceof the lOan3 either as principal, co-rincipal,agent .orbeneficiaryin such loan,

OFFICE OF TRE ATTORREY GENERLL January 6, 1940 Iion: Walter C. Wood;ilard, Chairman Board of InsuranceCommissioners ;fnion NO. O-1586 : Constructionof 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 opinionArticle 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 receivingno 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 transactingbuslncss in or organizedunder theHon. 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 insurancecorporation 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 transactingbiness in this State ized under the laws of this State, shali ~~~~$0" any money or valuable thing for negotiating,procuring, recommendingor aiding in any purchase or sale by such company of any property~orloan from such company,nor be pecuniarilyinterestedeither 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 corporationfrom 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. begfined 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- .isedunder the laws of this State, shall receive any money or valuable thfng for negotiating,procuring, recommendingor aiding in any purchase or sale by such company of any property or any loan from such cornpan:?,

nor be pecuniarflyinterested 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 corporationilrom uiak3.s~ a loar, GpoIl a policy held therein,by the boxover not in excess of the reserva valua t!121’eof. .-Al’/ perS’-‘3

‘:i.Q:;.j,+i,nS

a:,y p;:a.. risior-;

cf t::ij

Sei:tion

sha11 be guilty of a misdemeazort and upon convIction thereof, shall be punishedHon. ualter C. Moodward, January 6; 1940, page 3

by a fine of not less than $330.00 nor more than $19000000~)'
At the outsetwe 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 directorsand 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.

-Atthe expense of repetitionwe again call attention to the explicit and unambiguous language of the articlesabove quoted:
JINo

director or officer of any insurance company... shall receive any money or valuable t$..iIf;;negotiating,procuring, recommendingor

. '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 receivingany money or valuable thing for their part in negotiatingthe loan, and also from'beingpecuniarily 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,thousanddollars. But neither the inhibitionnor the penalty can be stretched to prevent an insurance company from makIng a loan to a corporationwhere 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 corporateentity, has commletedno offense under Articles 4727 and 577$ and cannot be punished by fine.

The prohibition,by the clear language of the statutes, being operativeagainst individual officers and directors and not the company itself, a life insurance companymay make loans in accordancewith the provisions of Section 2 of lirticle

472s9 vernon9.s

nnnotated Civil Statutes, and subject to the regulatorypoi!crs of the Board of InsuranceCoiMXCSSiOners as set out'in Chagtsr I, Title 78, Insurance,A rticles b679-4698, Vernon's i¬atedCivil Satute~.Hon. Walter C. Woodward,January 6, 1940, page 4

In this opinionwe are not concerneri with the relationship of the diraotor or officer to the loan or the degree .of interest,’

direct or indirect,vhich the directormay or may not have in the loan, The question,however, is whether or not the life insurancecompanymay make a loan to aqother corporationtrhere Ita director or officer of the life insurance company is also a dire&or :oran officer of the borrowing co:- poration, the officer or directorhaving no. personal interest in the loan and receivingno money or valuable thing for negotiating,procuring,reoommendingor 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 companywhich makes a loan to a corporationof which he is also a director falls within the prohibitionof the civil and criminal statutes.

It is to.be noted that in the questionpropounded.to ;~us:; director or officer-in-common is given a clean bill of

. The Board of InsuranceCommissioners, using the language of the statute, states that none of the prohibitionsof the statute are v:oLated. The statutoryphrase "nor be decuniarily interested"is not incorparatedspocificzLl.y in the
s uestion,but the director or officer-in-common is said to have no per.sonal

interest in the loan and reoeiringno money or valuables

thing.

. 2' ‘where, under the language of the articles,there is a serious question that a directorof. a life insurance company is 8~pecuniarily

interested

. 0

. as o 0 o beneficiary”in a loan made to a corporationof which he is also a director, it would indeed be doing violence to the language of the statutesunder consideration

to hold that the prohibitiontherein operated as a bar against the insurance cornpanG, as well as against the directors.andofficers.

,Thequestionpropoaded presents the weakast situation imaginablefor extending the statutoryprohibitionto a loan by a life insurancecompany to a corporationwith which it has a directorin common.

The common law in respec, f to Irraffic

between two corporationsui%h one or more identicald2roct6rs or officers supports our constructionof Artif;les 6727 ,z?d

577. The foUowdrig statementi.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 6onstituteda part of that in the other at the same time, and participatedin the dealings between the two; .birt it is only when their dealings are shown to be prejudicial to one of the corporationsrepresentedby 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 transactionbe authorizedby competent,disinteresteddirectors, and that it passes the test of fairness to the corporation,the interesteddirector may not be deprived of the profits of the transaction.11 and
table,

VhiJ.e the transaction,if otherwiseunassailis not void because interesteddirectors con-. stitutinga minority use their.positionfor the purpose of advancingtheir own interests,any want of good faith, reflected in the unfairness of the transactionto the corporation, will render it voidable even though sanctionedby "f qualifiedmajority of the directors." The same reasoning is applicableto officers as well as directors.

it is not that your The contemplated Loan would be valid at common law; preventedby 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 corporationif 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 companyhas no personal interest in the loan and receives no money or valuable thing for negotiating,procuring,recommending? or aiding in the furtheranceof the loan: either as principal!., co-principal,

agent or beneficiary in such 105:~. Referencewas made in your letter of re+cst'to eil ~Piir. i.cn of this departmentby the \Jriter under date of September17,aon. tjalter C. Woodward,January 6,,1940, page 6
1937, to Honorable R. L. Wiiiel, Chairman of the Board of InsuranceCommissioners,gustingTexas. In that opinion the main questionurder 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 questionsheld 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 emphasizethe 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 situationin which a director or officer of the lending insurancacompany is also a director or officer.of the borrowing corporation.-

~Trusting

that we have answeredyour inquiry satisfactorily, we are Yours very truly ATTORXEY GENERbI,

GF TEIUS By /s/ Dick Stout Dick Stout, Assistant DSaLWtwb This opinionhas been considqed in conference,approved, and ordered recorded.