Mr. KennethB. Ashworth opinionNo. ~~-583 Commissioner CoordinatingBoard Re: Whether a member of theboard Texas College andUniversity of trusteesof a community college System district must abstain from voting P. 0. Box 12788 on particularmatters under article Austin,Texas 78711 988b, V.T.C.S., where he is an officer in a bank affected by the vote and holds a substantial interest therein

Dear Mr. Ashworth:

On behalf of a commun:Ltycollege, you request atiopinion on the followingquestion:

Must a member tmf the board of trustees of a commniity college district abstain from voting on financialmatten affecting fund balances in the district depository bank if the member is an officer in the bank, and holds a substantial interest in thebank as definedby article 988b?

A brief submitted on behalf of the trustee in question states that he is a trust officer of the bank which servesas the depository bank for the community college. A letter from the community college states that the bank was chosen as its depositorybefore the trustee in questionwas elected to theboard.
Article 98813, V.T.C.S., applies to conflicts of interest involving local public officials. It applies to a member of the governing body of "any district (includinga school district)

. . . who exercises responsibilLties beyond those that are advisory in nature" and who has a substantial interest in a business entity that would be affected by an action of the governingbody. V.T.C.S. art. 988b, §l(l). The trustees of a community college exercise responsibilities that are not mere:Lyadvisory in nature. See, e.g., Educ. Code 5130.084; Letter Advisory No. 149 (1977) (trusteesof community collegedistrict are officers).

The trustee's salary from the bank exceeds ten percent of his gross income. Therefore, he has a substantial interest in the bank

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for purposes of article 98Eb. V.T.C.S. art. 988b, 62(a)(2). Article 988b.V.T.C.S.,provides inpart:

Sec. 3. (a)Ewept as providedby section 5 of this Act, a local public official commits an offense ifhe knaa:Lngly:.
(1)patticipat~a in a vote or decision on a matter involving a business entity in which the local public off:%ial has a substantial interest if it is reasonably foreseeable that an action on thematter would &nfer an economicbenefit to the business entity IGvolved;

. . . . (b)An offense under this section is a Class A misdemeanor.

Sec. 4. If a localpublic official or a person related to that official in the first or second degree by either affinity or consanguinity has a substantial 1nte:restin a business entity that would be peculiarly affected by any official action taken by the governing body, the local public official,before a vote or decision on the matter, shall file an affidavit stating the nature and extent of thr,interest ahd shall abstain from further participi~t:ion in the matter. The affidavitmust be filedwith the official recordkeeper of the governmentalentity.

Sec. 5. [Exwption for business that is only business within the jurisdiction which supplies the product or s?:tviceand that is sole bidder.] (Emphasisadded).

V.T.C.S. art. 988b.
The community college district board of trustees is concerned that the trustee in que~,tionmay be required by article 988b, V.T.C.S., to abstain from participationin anyvote which would result in an expenditure and thereby decrease the funds on deposit in the depository bank. The bank would be affected by such action, since a reduction of the amount on deposit could decrease the interest income earned by the bank on the deposit. See Attorney General Opinion JM-178 (1984). However, t:x letter frmThe community college board of trustees points out that section 23.75 of the Education Code, and not article 988b. V.T.C.S., may control the trustee's powers and duties toward the depositorybank. ?

?

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Section 23.75 of the Education Code is a provision of the School DepositoryAct. Educ. Code 1823.71-23.80. This officehas determined that the School Depository Act applies to community colleges as well as to independent school districts. Attorney General Opinions JM-13 (1983);MU-272 (1980). Section 23.75 of the Education Code states as follows:

In the event L. member of the board of trustees of a school district ~1sa stockholder, officer, director, or employee of a bank, said bank shall not be disqualified from bidding and becoming the schooldepositoryIofsaid schooldistrictprovided said bank is selected by a majority vote of the board of trustees of said school district or a majority vote of a quotum when only a quorum eligible to vote is present. Common law rules in conflictwith the termsand provisions of thisAct are hereby modii?.edas herein provided. If a member of the boaG:dof trustees of a school district is a stocz;holder,officer, director, or employee of a b&k that has bid to become a depository for s;zd school district, said member of said.board of-trustees shall not vote on the awarding of a.dep&itory contract to saidbank and said school depolz.torycontract shall be awarded by a majority vote of said trustees as above provided .who are not either a stockholder, officer,director,or employeeof a bank receiving
a school district: depository contract. (Emphasis added).

Educ. Code 523.75. This p:rt~vision was enacted as part of the School DepositoryAct of 1967. Acts 1967, 60thLeg., ch. 456, $4, at 1040.
Prior to 1967 this cffice on several occasions construed the predecessor to the School Jepository Act. Acts 1905, 29th Leg., ch. 124, 5165,at 263;repealedib Acts 1979, 66thLeg., ch. 829, at 2167. The opinions of this office determined that a stockholder, officer, director, or managing emplo:yeeof a corporation serving as a school district depository could not serve as trustee of that school district. See, e.g.,Attor,r.ey General OpinionsWW-161 (1957);O-7514 (1946); O-5158 (1943); O-Xi56 (1940); Attorney General Opinion (To Hon. S.M.N.Marrs, September 16, 1929), 1928-30Texas Attorney General Biennial Report 126. Most #ofthese opinions quoted the reasoning of
an opinion of September 16, 1929which concluded that a stockholderor director of the depository corporationwould not be eligible to serve as trustee of the school district contracting with the depository. The opinion stated as follaws:

[T]he two positi,onspresent such a conflict of interests as to prevent the holding of the two

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relationshins at one and the same time. The trustees of an ind,ependent schooldistricthave= part of their dr'iythe task of seeing that the treasurer or depczitory properlymanages the fund and moneys of 

### tlz: school district. It is also incumbentupon the trustees to see that the school funds areproperlyprotectedby bonds and that the solvencyof thebonds and also the solvency of the institution shou:?lbe watched after to the end that themoneys nz~yalways be properly protected. Innumerable instazcescouldbe recountedwhere the pecuniary interesesof a stockholderin a corporationwould sway the trustee to an act of favoritism, at least th;; an unbiased and non-interested trustee would resolve against such depository or treasurer; without attempting to enumerate these various objections we conclude that upon the grounds of public policy the two positions are incompatible.

. . . (Emphasisadded).
Attorney General Opinion ('Co Hon. S.M.N. Marrs, September 16, 1929),, 1928-30TexasAttorney GeneralBiennialReport 126.

.Theenactmentof section 23.75 of the EducationCodemodified the common law rule expressed in the September 16, 1929 opinion. The common law prohibition against such a contract applied not only to contract formation but to actions taken by the trustees that had a bearing on the contract. SeeAttorney General OpinionsO-7514 (1946); --- O-2656 (1940); Attorney General Opinion (To Hon. S.M.N. Marrs, September 16, 1929), -,. In our opinion, section 23.75 must be read to permit actions whLch the trustees must necessarily perform under an existing depository contract. Otherwise, the common law rulewould prohibit the entire board from acting in any matter involving the depositorycontract if one boardmember were pecuniarily interested in it. See Delt:aElectric ConstructionCo. v. City of San --- Antonio, 437 S.W.2d 602 (Tex.Civ.App. - SanAntonio 1969,writ ref'd n.r.e.);Attorney GeneralOpinion JM-424 (1986).
The detailed provisions of the School Depository Act limit, moreover, the board's discretion, thereby providing some protection from the favoritism against which the common law rule was directed. Section 23.77 of the EducatLon Code sets out the depository's duties in detail and expressly reserves the district's right to invest funds
as permitted by sections :20.42and 23.80 of the Education Code. Section 23.79 of the EducationCode provides that

[tlhebank or bauks selected as school depository
or depositories ,Lnaccordance with the terms and provisions of this Act, and the school district shallmake and enter into a depository contractor contracts,bond or bonds, or such other necessary

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instrumentssettiniz forth theduties. resuonsibilities, and agree&&s pertaining to-said-depository, in a form ard with the content prescribedby the State Board of Education, attaching to the contract and int~~rporatingin the contract by reference the bid of -the depository.

. . . (Emphasisadded).
Educ. Code 523.79(a).
Section 23.75 of the Education Code in effect allows an individual to be a school 'trusteedespite his role as stockholder, officer,director,or employeeof the school'sdepositorybank. We do not believe the legislaturl!intended to restrict.that board member's participation in thebusiness of theboard to the extent thathe would virtually be a non-voting trustee. In our opinion, since section 23.75 requires the trustee torecusehimself only from the decision to enter into the contract, t: impliedly authorizes a board member with
an interest in the d'eposj,tory to vote on expenditures that would decrease the amount of funds on deposit.

The depository bank js required by law to pay the checks and drafts written by the schocl board on its funds. Educ. Code 5923.77, 23.79. Such a provision is (central to the depositorycontract,and is set out in some detail in the contract and statute. A prospective bidder should be fully aware of the school board's right to withdraw funds. We.believe that thr,interested trusteemay participate in the routine exercise of theboard's right towithdraw funds as established by the contractand the statute.
The School Depository Act is a special statute which governs a particular kind of contract entered into by independent school districtsand communitycollegedistricts. Section 23.75modifies the
common law rule applicable to a specific conflict of interest that might arise in the context of school depository contracts. As a specific statute, it was ne>trepealed by.article 988b. V.T.C.S. The latter statute is a general provision, which applies to conflict of interest situations involving local officersas a class. The specific statute more clearly evi,dences the legislative intent, and is considered to be an exception to the more recently enacted general statute. Townsend v. Terra:Ll,16 S.W.2d 1063 (Tex. 1929); American Canal Co. v. Dow Chemically, 380 S.W.2d 662 (Tex. Civ. App. - Houston 1964,writ dism'd);Hallum v. Texas Liquor Co:trol Board, 166 S.W.2d 175 (Tex. Civ. App. - Dallas 1942, writ ref d). Therefore, article 988b, V.T.C.S., dolts not **govern** the trustee's conduct in the present case.
Briefs submitted in ,connectionwith your request refer to Attorney General Opinion N-331 (1969). This opinion construed the predecessor statute to sect,ion23.75 of the Education Code,which was essentially the same as the present provision. See Acts 1967, 60th -

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Leg., ch. 456, 94, at 1040, 1041 (formerly codified as V.T.C.S. art. 2832~. §4(b)(1925)) (recodiE:ied 1969). Attorney General OpinionM-331 concluded that the predecessor to section 23.75 of the Education Code allowed a school district to borrow money from the depository bank even though a school board member was also an officer or stockholder in that bank. Relying on znalogiesbetween a contract of deposit and a contract of loan expressed in an attorney general opinion and judicialauthorities,Attorloy GeneralOpinionM-331 concluded that

the legislature intended toremove the common law prohibitions which, in the past, had prevented a school board from borrowing from and/or choosing
as a depository, a bank in which one of its members also serves as a director or stockholder provided that the school district had adopted article 2832~ ar,dhad complied with section 4 thereof.
Attorney General OpinionM-331 (1969)at 4.

The reasoning and conclusion of Attorney General Opinion M-331 was criticized in Attorney General Opinion H-649 (1975). which determined that a citywas prohibitedfromborrowingmoney from a bank of which the mayor was director. Article 2529c. V.T.C.S., allowed state agencies and politicz.1subdivisions to choose a depository even though a member of its goyreming body was an officer, director, or stockholder of the deposi:ory corporation. Despite the similarity between article 2529c. V.T.C.S., and section 23.75 of the Education Code, Attorney General Opinion H-649 declined to follow Attorney General OpinionM-331, statingas follows:

Although Attor,neyGeneral Opinion M-331 found little difference between depositing public funds in a depositorybsnk andborrowing funds from that depository, there are numerous statutory requirements regarding the qualifications and selection of a depository and the security which must be provided to pr,,tect the governmental body's deposits. See Kducation Code, 523.71 et seq. These restr1ctior.sand requirements do not apply to other transactions such as the tw YOU describe. Compare, Attorney General Opinion V-640 (1948).
[W]e do not believe the Legislature intended that article 2529c shouldhave a wider application than its languageplainly indicates. We think a narrow exception to the clldand well established commonlaw rule against self-dealing was intended and that intent is reflected in the language of the statute where it provides that 'common-lawrules

p. 2611Mr. KennethH. Ashworth - P,Ige7 (JM-583)

in conflict ar,z hereby modified as herein provided.'
AttorneyGeneral OpinionH-549 (1975)at 3-4.

We agree with the criticisms of Attorney General Opinion M-331 which are expressed in Attorney General Opinion H-649. We do not believe section 23.75 of the Education Code removes common law prohibitionsagainst loan transactionsbetween the schooldistrict and its depositorywhere the s,me individual is a trustee of the school district that borrows themoney and a stockholder,officer, director,
or employee of the depository bank which lends the money. Attorney General Opinion M-331 incorrectly construes section 23.75 of the EducationCode and we hereby overrule it.

In view of our answer to. your first question;we need not answer your secondquestion.

SUMMARY

Section 23.75 of the Education Code.constitutes an implied exception to the provisions of article 988b,V.T.C.S. Under section 23.75of the Education Code, IItrustee of a community college district who is also a stockholder, officer, director,or employee of thedistrict'sdepository bank may vote on matters which would result in an expenditure and thereby decrease the funds on deposit in the depositorybank. Attorney General Opinion M-331 (196'9) is overruled.

JIM MATTOX AttorneyGeneral of Texas

JACK HIGHTOWER First AssistantAttorney General

MARY KELLER ExecutiveAssistantAttorney General

RICK GILPIN Chairman,Opinion Committee Preparedby SusanL. Garrison AssistantAttorney General

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