### JOEINI.. a*ra. Arre-. T~BXAR T@3'11

Nl-roRNIy OMIPII. May 11, 1973

The Honorable James H. Whitcomb County Attorney, Colorado County P, 0. Box 867 Columbus, Texas 78934 Opinion No. H- 38 Re: May Commissioners Court accept abid as depository bank either with an illegal rate ofinterest or providing that the bank will pay “the legal rate of inDear Mr. Whitcomb: terest” and related ques - tions. You have requested an opinion on questions regarding applications submitted under Article 2546, V.T. C.S., which sets out the procedures for the selection of county depositories. Article 2546 provides:

“It shall be the duty ofthe Commissioners Court at ten o’clock a.m. on the first day of each term at which banks are tobe selected as county depositories,- to consider all applications filed with the County Judg.e, cause such.ap>lications to be entered upon the minutes ofthe Court and to select those applicants that are acceptable and who offer the most favorable terms and conditions for the handling of such funds’ and having the power to reject those whose management or condition in the opinion ofthe Court, does not warrant placing of county funds in their, possession. The County Commissioners Court shall have the power to determine and designate the character and amount of county funds which will be deposited by it in said depositories that shall be ‘demand deposits, ’and what character and amount of funds shall be ‘time deposits, ’and maycontract with said depositories in regard to the payment ofinterest on ‘time deposits’ at such rate 

### or rates as may be lawful under any Act ofthe Congress ofthe United States and any rule or

p. 153Honorable James H. Whitcomb, page 2 (H-38)

rerzulations that may be promulgated by the Board of Governors of the Federal Reserve System and the Board of Directors ofthe Federal Deposit Insurance Corpora- & When the selection of adepository or depositories
. has been made, the checks ofthose applicants which have been rejected shall be immediately returned. ‘The check or checks ofthe applicant or applicants whose, applications are accepted shall be returned when said depository or depositories enter into and file the bond required by law and said bond has been approved by the Commissioners Court and the State Comptroller, and not until such bond is filed and approved. The term
‘demand deposits’, as used herein, shall mean any deposit which is payable on demand, and the term
‘time deposits’, as used herein, shall mean any deposit with reference towhich there is in force a contract, that neither the whole nor any part of such deposit may be withdrawn by check or otherwise prior to the expiration ofthe period of notice which must be given in writing in advance ofwithdrawals. ‘I (Emphasis added) According to your request, only two banks submitted applications
. or bids. The application from bank H contained varying interest rates ‘on certificates of deposit of less than $100,000, depending on,t-hematurity period ofthe 

### certificate:

“We submit to you **mr** bid as your County Depository for all funds as follows: We will pay interest on Certificates of Deposit on denominations of less than $100,000. 00as follows: C.of D. with three month maturity .4 l/2% C.of D. with six month maturity 5%interest payable quarterly. C.of D. with twelve month maturity 5-l/2% interest payablequarterly C.of D. with maturity oftwelve months or longer 5-314% interest payable quarterly C.of D. in denominations of $100,000. 00or more issued for one 

### year or longer lO..lZ% interest payable quarterly ’
. Enclosed is our last published statement ofthe financial condition ofthis bank. Also enclosed is our Houston Exchange in.the.amount. of $1,000. 00guaranteeing that this bank will make the required bond according to the law and ruling of this Honorable Court. ‘I p. 154The Honorable James H. Whitcomb, page 3 (H-38)

~The maximum allowable interest rate of certificates set by the Federal Deposit Insurance Corporation and the Federal Reserve System is 7 - l/2% per annum except that no maximum is prescribed for certificates of deposit maturing in 30to 89 days. The bid ofbank Cwas: “We will pay the legal rate of interest on certificates of deposit according to your request, and/or wishes, depending on maturities during this two year contract .’
. . .” A deposit of $1,000 was submitted with each bid. The Commissioners Court has accepted the bid ofbank Hbut its bond has not been approved. Five questions have been presented. The first two are:

“(1) Does the Commissioners Court have the authority to accept this bid? ‘I

“(2) Assuming the Court does not have the authority to accept the bid because of the unlawful rate in the written bid, would the entire bid be illegal, or only the one provision?” Under Article 2564, the Commissioners Court has considerable discretion in selecting a depository. Citizens State Bank of Roby v. McCain, 274 S.W. 2d 184(Tex. Civ. App., 1954, nowrit). A contract that violates avalid statute is illegal. Woolsey v. Panhandle Refining Co., 116S.W. 2d 675 (Tex. Sup. 1938) and Lewis v. Davis3 199S.W. 2d 146(Tex. Sup. 1947). The Commissioner 8.Court may not enter into an illegal contract. Ifthe bid ofbank H is construed to be an offer to issue certificates of deposit in amounts of $100,000 or more, with maturities of one 

### year or more, and to pay 10.12% interest on such certificates. then the proposed contract would be clearly illegal. If, on the other hand, the bid may be construed to be an offer to issue certificates of deposit, with maturities of 30to 89 days, but with the understanding that suchamounts of money would be held by the bank for periods of

### oneyear or longer, with the certificates being renewed from time to time within the year, ,

p. 155The Honorable James H. Whitcomb, page 4 (H-38)

then the offer to pay 10.12% interest for that period would not be illegal,
. inasmuch as interest rates on 30to 89day notes are not regulated. We are informed that performance in this manner to avoid an illdgai rate of interest is not uncommon. It is not possible for us to determine, from the bid itself, which ofthe above two alternatives was intended by the bank. It is significant that in its bid, with regard to certificates of deposit for less than $100,000, the bank consistently used the word “maturity” in conjunction with the time periods di,scussed. However, in connection with the bid for denominations of $100,000 or more, the word “maturity” is not used, and the bank simply offered to pay 10.12% on such certificates

“issued for one year or longer”
. The term “issue” is defined in 53.102 ofthe Business and Commerce Code, as follows:

” ‘Issue’ means the first delivery of an instrument to a holder or a remitter.” The term “maturity”, on the other hand, means the date onwhich anegotiable instrument is due and payable. Vestal v. Texas Employers Insurance Association, 285 S.W. 1041(Tex. Comm. App., 1926). Without more info’rmation than we have been provided about the intentions ofthe parties in this instance, and without any information as to the past custom and usage ofthese parties, we are unable to resolve the ambiguities inbank H’s bid, and are unable to say whether or not it is avalid bid. Inanswer to the second question, bank H’s application was submitted
“as your County Depository for al.1funds. I’ There is noprovision indicating that the bid is for anything less than all items listed in the bid. Fessman v. Barnes, 108S.W. 170(Tex. Civ. App. ,*1908, no writ); Ifthe portion is illegal, it is apart of the entire bid and both it and the legal portions should be considered as one and the entire bid should be rejected. The Texas rule on “competitive bidding” has been stated in the following manner:

p. 156The Honorable James H. Whitcomb, page 5 (H-38)

I’ ‘Competitive bidding’ requires due advertisement, giving opportunity to bid, and contemplates abidding

‘on the same undertaking upon each ofthe same material items covered by the contract; upon the same thing. It requires that all bidders be placed upon the same plane

‘of equality and that they each bid upon the same **terms** and conditions involved in all the items and parts of the contract . . . . Its purpose is to stimulate competition, prevent favoritism
. . . for the best interests and benefit ofthe taxpayers . . . .“(emphasis added). Sterrett v. Bell, 240 S.W. 2d 516, 520 (Tex. Civ.App., 1951, nowrit). See also, Texas Highway Commission v. Texas Association of Steel Importers, 372S.W. 2d 525 (Tex.Sup., 1963). Until the bond is approved, there is no final contract and the County can withdraw its approval. The Citizens State Bank of Roby v. I&Cain, supra. The third question is:

“Assuming the court does not have the authority to accept the bid because ofthe unlawful rate in the written bid, ran the county keep the $1,000. 00 submitted with the bid? ” The statute requires the county to return the deposits of all rejected bidders when a successful bidder is selected. To construe it to allow the county to retain the deposit of abidder who is selected and then rejected would result in the unequal treatment between unsuccessful bidders and would have characteristics of aforfeiture. not favored by the law. Manton v. City of San Antonio, 207 S.W. 951(Tex. Civ. App. , 1918, err. reftd. )and Mogren v. Goetze, 71S.W. 2d 950 (Tex. Civ.App., 1934, err. dislm. ). It is, therefore, our opinion that the County cannot keep the deposit submitted with the bid in question. The fourth question presented is:

p. 157The Honorable James H. Whitcomb. page 6 (H-38)

“Once a Commissioners Court has accepted abid as county depository, **subject** to bond (or pledge contracts) approval., would the county be subject to any liability if the court rescinded its order and selected another bank? ‘I In the Citizens State Bank case, supra, suit was brought by the ‘, State bank selected by the Commissioners Court for damages for loss of profits due to the depositing of county funds in aNational bank. The court specificaUy stated:

II

. . . Inthe absence of a showing that appellant’s bond or security was approved, there was no final contract between the parties and appellant acquired novested rights which would prevent the Commissioners Court from rescinding its prior order. ” (274 S.W. 2d at 186). See also, Liquidation of People’s Bank of Butler, 127S.W. 2d 669 (Ma. 

### Sup. 1939). We are ofthe opinion that the County would have noliability under the facts stated and the cases cited. The fifth and remaining question is: “Would abid based upon ‘the legal rate of interest’ on Certificate8 ofDeposit be avalid bid? ,‘
. Article 2564, supra, allows the Commissioners Court to contract in regard to the payment of interest on “time deposits” at “such rate or rates as may be lawful: under regulations of the Federal Reserve System and the Federal Deposit Insurance Corporation. Ifthe bid in question is abid based upon the maximum legal interest rate, the bid would bind the applicant to pay the maximum rate on each category of certificates of deposit. However, 

### oncertificates for $100,000 or more for 30to 89days, there is nomaximum interest rate specified by federal law. In this area, the bid would be incomplete. It sets no rate for such certificates of deposit and does not specify whether the , applicant is bidding on 

### every category of certificate.

p. 158.

. The Honorable James H. Whitcomb, page 7 (H-38)



### SUMMARY Where abank submits an application to be the county depository under Article 2546, Vernon’s **Texas** Civil Statutes, and purports to bid for all funds, the bid must state alegal rate of interest for time deposits of all amounts and lengths of time. **Resort.** may be,had to custom and usage to determine the scope and terms of abid. When such a‘bid is construed to omit relevant items, or to call for illegal terms, it cannot 

### be later corrected and cannot be accepted. Very truly yours,



### DAVID M, KENDALL, Chairman Opinion Committee

p. 159