Honorable John J. Gavin

Chairman Opinion No. JM-1245

Insurance Committee Re: Whether an individual Texas Rouse ofRepresentatives surety may file **a** letter of P. 0. Box 2910 Austin, Texas credit for bail bond pur70769-2910 poses under article 2372p-3, V.T.C.S. (RQ-1966)

Dear Representative Gavin:

You askwhether an individual applicant for **a** license to execute bail bonds may satisfy the financial security 

### requirementsofarticle 2372p-3, V.T.C.S, letter of credit. Subsection **by** submitting a 

### provides inpart: 6(f)(l) of article 2372p-3

(F) Upon notice from the [county bail bond] board that the application has been tentatively approved, the m shall then: (1) deposit with the county treasurer of the county inwhich the license isto be issued a cashier's check, certificate of deposit, cash, or & a- in th.2 amount indicated by them under subdivision (5)of Subsection (a)**of** Section 6 of thisAct but inno

### eventless than $50,000 except incounties with populations of less than 250,000 persons by the **most** recent federal census, the amount for applicants in said counties shall be $10,000 tobeheld in
a special fund tobe called **the bail**  

### security fund. (Rmphasis added.)1

1. Section 6(a)describes the information thatmust be included inthe application. Section 6(a)(5) requires the applicant to include a statement of "theamount of cash or cashvalue of any certificate ofdeposit or cashier's checks which the applicant intends toplace ondeposit
. . .ifthe license is granted.' Instead of complying with section (Footnote Continued)

p. 6630Honorable John J.Gavin -Page 2 (JM-1245)

We conclude that an individual aswell as corporate cants may submit certain letters ofcredit as "cash applilents." eguivaTo qualify, the letters ofcredit must be irrevocable, must limit inquiry into the underlying transactions between the county and the bondsman, must provide for payment thereunder on sight orwithin areasonably brief period of time after presentation of all required documents, andmust notmake such payment contingent upon the consent of, or any other action **by,** thebondsman or other party.

Article 62523-3 does not define the **word** "applicant." Section 6(a), however/ ' requires act as abondsmann "any **person** desiring to to file anapplication **for** a license. "Personm isdefined by section 2(l) **of** the act tomean an individual or corporation. Consequently anapplicant may be either an individual or acorporation who desires to act as abondsman. Since the section 6(f)(l) financial security requirements of and (2) of article 6272p-3 apply to any applicant whose application hasbeen tentatively approved, they apply toboth individual and corporate applicants.2

Article **6252p-3** also does not define "cash eguivalent.n The statute as originally enacted in 1973did not contain that phrase. Section 6(d)(l) of the 1973 act **required** the applicant upon tentative deposit either "acashier'sapproval of his application to check, certificate **of** deposit,
or cash inthe amount of $S,OOO,w orexecute intrust adeed to nonexempt realty worth at least $10,000. Acts 1973, 63rd

(Footnote Continued) 6(f)(11, an applicant may satisfy the requirements of section 6(f)(2) and execute **in** trust a deed to nonexempt realty equal invalue to the applicable minimum described in section 6(f)(l).

**2.** This conclusion is consistent with the cases applying the financial Security **requirements** insection 6as originally enacted and later amended toboth individual and corporate applicants. **See. e.a,,**  **Texas Fire**  &Casualtv Co, v., 684 S.W.Zd 177 (Tax.App. - Houston [14thDist.] 1984,writ **ref ’** **d** n.r.e.) (local rule invalid to extent that itrequires corporate surety to deposit pursuant to section 6(f) **of** 1981 act **more** than $5,000): Bexar Countv aail Bond Bd. Decw **604** S.W.Zd 214 (Tex.Civ.App. -SanAntonio 198:, nowrit; (individual surety is not required by section 6(d) of 1973 act to deposit more than $5,000). m Attorney General Opinion JM-799 (1987) (section 7(a) of the act expressly makes section 6(g) inapplicable to corporate sureties).

p. 6631Honorable John J. Gavin -Page 3 (JM-1245)

Leg., ch. 550, 56,at 1523.3 The 1973 actwas substantially amended **by** the legislature in 1981. **Acts** 1981, 67th Leg., ch. 312, 51,at 075-05. The 1981 amendments added section 6(a)(5), renumbered section 6(d)(l) as 6(f)(l), and amended the renumbered provision to include the phrase "cash equivalent" and the reference to subsection 6(a)(5). Neither the testimony at the legislative hearings nor the bill analyses clarify this **amendatory** language.4

In **Attorney General**  Opinion JM-935 (1988),we construed the phrase "cash equivalent* to “be something commercially
as good as cash, or, as we take it, something that could readily be converted into cash at a **fixed** price.' La at 2 (quoting frommoau v.w, 4 S.W. 361 (Tex. 1887)). We further described *cash eguivalentw inthat opinion as an instrument convertible into cashwithin areasonable time andwith reasonable effort. &at 3. Applying those definitions, we'noted that an assignment ofa life insurance policy without transfer of the **power** to surrender the policy for its cashvalue would require the county to obtain the

3. In 1987 the legislature increased theminimum cash
or cash equivalent amount required by section 6(f)(l) from $5,000 to $10,000 **or** $50,000 depending on the population of the county. Acts 1987, 70th Leg., ch. 921, 52. at 3110.

4. The 1981 amendments also added section 6(f)(3), which **requires** a corporate bondsman to furnish the county sheriff an irrevocable letter ofcredit as acash equivalent to satisfy any final judgment of forfeiture. The legislative history is silent with regard to this addition. Article 22.14 of the Code of Criminal Procedure makes a judgment in
abond forfeiture case final after atrial during which insufficient cause is shown fortheprincipal's failure to appear. The section 6(f)(3) requirement applies after the issuance of bonds in **contrast** to the financial security requirements of section 6(f)(1) and (2). which must be satisfied upon tentative approval of the application to issuebonds. Thus we interpret section 6(f)(3) as an additional financial requirement on corporate bondsmen rather than as an indication that individual bondsmen may not use letters of credit to satisfy section 6(f)(l).

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bondsman's express consent to surrender and concluded that such a limited assignment did not constitute a "cash eguivalent."5

No other opinion or judicial decision affords us insight into themeaning **of** "cash equivalent." However, in Attorney General Opinion H-430 (1974),which interpreted the 1973version of the statute, we stated the purpose of the financial security requirements to be the placement of Wresources inthehands of the County with which to satisfy
a forfeiture without having to resort to court proceedings.W & at 2 (holding that certificate ofdeposit, whether or not negotiable, must bepayable to the county so that it could be reduced to cashwithout any action by the bail bondsman). InAttorney General Opinion JH-935, we confirmed this earlier interpretation of the statute's purpose by denying a **bail** bondsman the right to submit as financial security an instrument that required action on the bondsman's part prior to conversion of the instrument into cash.

(1955:.isOur holding in **Attorney**

consistent with the cardin?% of Opinion JM-935 construction **that** effect be given to every part of a statute. SW 67 Tex. Jur. 3d Status 5124. We did not therein restrict the phrase 'cash eguivalentm to the security devices listed in section 6(a)(S) of the act: cash, cashier88 checks, and certificates of deposit. The legislature included the phrase "cash eguivalentn along with all three of those devices in section 6(f)(l), and **thereby** indicated its intent not to restrict the submission of security devices to those listed in section 6(a)(5). Thuswe give little weight to the omission of the phrase "cash equivalent* in section 6(a)(S) and construe that section as requiring an applicant todescribe in his application the amount and type of qualifying security that he will submit on tentative approval of his application. This will achieve the purpose ofproviding the financial security information that the board needs to assess the qualifications ofthe applicant without restricting the type of security inamanner that violates the intent of section 6(f)(l).

p. 6633Honorable John J. Gavin - Page 5 (JM-1245)

Section 5.103(a)(l) of the Texas Business and Commerce Code defines "letter ofcredit"forpurposes of chapter 5of the code6 concerning letters ofcredit as

an engagement by abank orother person made at the request of a **customer** and of a kind within the scope **of this**  **chapter (Section**  5.102) that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified * the credit. **A**credit may be either revo&e or irrevocable.

Section 5.102 **states that**  chapter 5applies to the following: (1)a letter ofcredit issued by abank ifthe credit requires a documentary draft or documentary demand7 for payment, (2)a letter of credit issued by aperson other than abank ifthe credit requires that the demand for payment be accompanied **by** adocument of title. or (3)a letter of credit issued by ;bank or other person states **that** it isa letter ofcredit or is entitled as such. ifthe credit conspicuously

6. your request does not refer to chapter 5of the Texas Business and Commerce Code. We limit our opinion, however, to letters of 

### creditwithin the scope of chapter 5, since chapter 5establishes the framework 

### fordevelopment of the lawof letters of credit by codifying the fundamental concepts underlying letters of credit. m Bus. GCorn.Code 55.102(c), comment 2 (Tex.UCC) (Vernon 1968); **UQ** p& Commercial Coru. v. Hvn&& Inc.- 705 S.W.Zd 713, 715 (Tex. APP. -Dallas 1986, no writ) (in&ument outside the scope of chapter 5 **cannot** be a letter of credit).

7. A wdocumentary draft" or "documentary demand for payment" refers to adraft ordemand whose honor is conditioned upon thepresentation of anypaper including a notice ofdefault, invoice, or **document** of title. Bus. G **Corn.** Code f5.103(a)(2). **A** draft refers to a bill of exchange. XL 5 3.104(b)(11, Cc):ass &it) (bill - State 6600;.W;;18;;L 055 (Tex.App. 1sany written requirement fZ payment of a specified sum to athird person at a stated time or ondemand); see also Black's LawDictionary 149 (5th ed. 1979) (billofexchange isathird **party** instrument by
one **party** ordering payment by another party of a sum certain to athird party).

p. 6634Honorable John J. Gavin - Page 6 (JM-1245)

Letters of credit have traditionally been used as security devices in international sales transactions. Foreign sellers inthose transactions ensured payment by requiring their buyers to obtain letters ofcredit authorizingdraws against the credits upon presentation ofdocuments of title such as bills of lading. &G &st Girard Sa % 593 F.2d 598 (5thCL. 1979); **Annot.,** 35A.L:R.3d 1404 (19;l). Traditional sales credits **are ofton**  

### referred to **as** sccmmercial credits." Letters of credit inrecent years have also been used to secure the payment of various financial obligations or the performance of

### realestate, construction, orother nonsales contracts. m Annot., 44A.L.R.4th 172 (1986); Mueller,

**Attornev.** 38 Baylor L. Rev. 109 (1986) (hereinafter Mueller); These credits are often referred.to as nstandby credits" or "guaranty credits."

A letter of credit, whether it isa commercial or a standby credit, concerns

three actors engaged in three related con

### tracts. The three parties
. . . are: the customer; which
. . .causes ittobs issued: the issuer [usually a financial institution], which is the **party** who executes the credit; and the beneficiary, which is the **party** entitled to payment pursuant to the 

### credit. Typically, the first contract entered into involves the underlying obligation between the beneficiary and the customer. . . . Pursuant to this underlying obligation, the customer will next contract with the issuer to execute the credit. In performance of the contract with the customer, the issuer executes the credit which embodies the issuer's 

### contracttopay thebeneficiary when the beneficiary satisfies the conditions 

### for payment expressed inthe letter of credit. (Citations omitted.)

Mueller, m, at 110-11. These contracts are independent of one another in the case of a true letter of credit.

acts as aprincipal andnot as the agent ofthe customer, and it assumes a primary obligation **to** the beneficiary independent of the performance of the contract between the customer and thebeneficiary. The issuermust therefore pay thebeneficiary if the beneficiary's demand for payment conforms to the terms of the letter of credit "without reference to the rights and obligations of theparties to

p. 6635Honorable John J. Gavin -Page 7 (JM-1245)

theunderlying contract." & at 114;pee am Bus. & Corn. Code 8 5.114(a); 49Tex. Jur. 523.8 3dvoil, at

Conforming presentation requires that the beneficiary strictly comply with the conditions forpayment described in the credit. Westwind m, 696 S.W.2d 378 (Tex. 1985). The cou*s, howeve: will not construe mere **promises to**  be conditions and **wili** resolve ambiguities against the issuer. Furthermore, absolute perfection of presentation is not a requirement.

Ft ,

Few Braunfels 780 S.W.2d I316-17 (Tex.App. - Austin 1989,writ denied); m

,722 S.W.2d 12, 14 (Tex.App. -Dallas 1986,writ ref'd n.r.e.).

Either a commercial or a standby credit may be a wdocumentaryn credit, a credit whose terms require that the draft or demand for payment be accompanied by certain documents, or a Vleana credit, acredit whose terms require only the presentation of thedraft ordemand for payment.

8. Even though the issuer has a primary and not secondary obligation to thebeneficiary, the issuer may refuse tohonor aconforming **draft** or demand for payment under section 5.114(b) of the Business and Commerce Code where there is "fraud inthe transaction." The customer may also seek an injunction against payment by the issuer where there is such fraud. Texas courts discussing this exception topayment, have upheld injunctions only iftherewas fraud
so egregious that it destroyed the legitimate reason for maintaining the independence of the credit from the underl- ‘ ying obligation. ) W 730 S.W.2d 355, 359-64 (Tex.App. - Dallas 1967,writ dism'd) (cattleproduction below thehoped for but not guaranteed quality was unintentional and did not constitute fraud for

.114purposes) ; -OS.. Inc. v. Oil CounQy ts. Ltd, 709 S.W.2d 262, 264-65 (Tex. Houston [lst Dist.] APP. - 1986, writ dism#d) (beneficiary's intentional shipment of tot~ll~rw~Uess pipe destroyed legitimate purposes of and justified an injunction): see al.SGAnnot., 25A.L.R.4th 239 (1983) 0-v courts including Texas courts refuse to give broad construction to section 5.114). The limits of this exception to payment may not **be** avoided by an issuer filing an interpleader action todetermine the respective rights of the beneficiary and the issue??8 customer. Dallas Bank & TNS~ Co.v. Commonwealth Dev. CQZP, 686 S.W.2d 226 (Tex.App. - Dallas 1984,writ ref'd n.r.e.i.

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Annot., 44 A.L.R.4th 172, 176 (1986);see also Anex Oil. Co. v.Arch-m Co,, 770 F.2d 1353, 1355 (5thCir. 1985) (a credit may be both "documentary" and wstandbyw); w **zJoint 748**  S.W.Zd 316 (Tex. APP. - Eastland 1988, writ denied) (standby credits are often documentary credits since they generally require a statement there has been a default). **A** commercial or standby credit may also be a "sight" credit under which the beneficiary may demand **payment** onpresentation of a draft **and** all other conforming documents or **a** wtimew credit that isnot payable until a specified **time** after presentation of all required documents. Mueller, m, at 116; see a&~ **722 S.W.?d**  **at 12**  **(draft** payable on sightwas payable on **&and). Letters**  of **credit,** 

### however, arenot negotiable instruments, although the underlying drafts for payment may be either negotiable or nonnegotiable. Reritaae He 651 S.W.Zd 272 (Tex.App. -Dallas 1983, nowrit) (sin& letters of credit are not payable to bearer they **are** not negotiable):
m 660 S.W.Zd 851, 855 (Tex.App.

-Austin 1983, nowrit) (u&s credit otherwise 

### specifies, draft may be

### eithernegotiable ornonnegotiable).

Credits may also be either revocable or irrevocable. BUS* 61Corn. Code f5.103(a)(l). According to section' 5.106(b) of the Business and Commerce Code, once an 

### irrevocable credit isestablished with regard to the beneficiary itcan **be** modified or revoked onlywith the beneficiary's consent. **A**credit isestablished with regard to a beneficiarywhen he either receives the credit or an authorized **advice** 

### ofitsissuance. L 55.106(a)(2). Incontrast, a revocable credit may generally bemodified or revoked by the issuer without either notice to or consent from the customer
or thebeneficiary. IQr S5.106(c).9

Given our review of these fundamental concepts 

### of the law of letters 

### ofcredit, we conclude #at 

### notall letters of credit will satisfy the requirement 

### for "cash

**9. Neither**  section 5.103(a) nor section 5.106 provides which status should be presumed ifthe credit does not state whether it is revocable 

### or irrevocable. In at least one case concerning anundesignated credit, acourt hasheld a standby credit irrevocable since to do otherwise would 

### frustratethe basic purpose of the credit -- the making certain of the right topayment independent ofdisputes over the performance of the underlying contract. Rueller, m, at 117-18 (citingWest Virmd v. Srok& 415 F.Supp. 1107 **(W.D.** Pa. 1975)).

p. 6637Honorable John J. Gavin -Page 9 (JM-1245)

eguivalentsw that they be readily convertible into cash within areasonable time andwith reasonable effort without resort to consent by the bondsman or to other outside action. To satisfy that requirement and thus constitute a "cash eguivalentw forpurposes of section 6(f)(l) of article 2372p-3, V.T.C.S., wehold that a standby letter 

### of credit **used to**  secure the **bail** bond obligations of an individual or corporate bondsman must possess the following characteristics: (1) the credit must be irrevocable, (2) the credit must be **a** true letter of **crsdit** that **dces not**  require examination of.the performance of the underlying transaction absent "fraud inthe transaction,w (3)the drafts or demands **for** payment under the credit must be payable to the county
on sight **or** within **a** reasonably brief period of time after presentation of all required documents, (4)the credit must not include any condition that makes payment to the
asbeneficiary contingent county upon the consent of or other action by thebondsman or other party, and (5)the credit must be 

### issued by an institution **or entity**  which financially responsive inthe amount of the credits, in opinion of the county bail bond board. However, conclusion does not foreclose other *cash eguivalentsw long as the standards of **Attorney** General Opinion JM-935 **satisfied.**

The credit must **be** irrevocable to ensure that

.- . __ -.
_ 

### tii:
our as are

the issuercoos notunuaterauy mociryor revokethe credit prior to a county88 demand **for** payment **under** the credit. The three named security devices in section 6(f)(l) --cash, cashier's checks, and certificates ofdeposit -- are not revocable: thus qualifying letters of credit must not be revocable. Furthermore, tohold otherwise would not ensure that the necessary resources would be available to satisfy bond forfeitures.

Second, aqualifying credit must be a

### trueletter of **credit.** 

### A trueletterof credit limits the circumstances in which the underlying transactions between thebondsman and the county may be **examined.** WC Nat 1B8& of Dal&8 I 578 S.W.2d at 115. If the credit requires as a conditio; for

### paymentthat there be a factual determination of forfeiture **or** default, the county outside action, would **likely** have to resort to such as acourt proceeding, to establish its rights topayment under the **credit.** the credit may Thus even though require adocumentlo be submitted prior to

**10.** Asmentioned earlier, a wdocumentaryw credit ora credit may be either a wcleanw letter ofcredit.

(Pootnote Continu3

p. 6638Honorable John J. Gavin -Page 10 (JM-1245)

payment that states the bondsman has defaulted in his underlying obligations to the county, the credit may not require as acondition forpayment proof ofdefault or other examination of the performance of the underlying obligations. . --

See., iaarm-Olson-stordahlJoint Ventuzz 748 S.W.2d 316 fsummarv iudwent reversed on anneal since &edit subject toperfon&Ge -incompliance with-underlying contract and thus was not true letter of credit but guaranty contract): w. Co. ofNew YQ@ v. Central Nat 1E&j gf Houstpn, 624 S.W.2d 222 (Tex.Civ. APP- -Housto; [lst Dist.] 1981,writ ref*d n.r.e.) (trueletter of credit may contatn references to underlying obligations but those references may not create conditions forhonoring drafts).

**Third,** drafts or **other** demands forpayment under a qualifying letter of credit must be payable on sight or within a reasonably **brief** period of time after proper presentation of all required documents so that the credit is readily convertible into cash. What is areasonable time may vary depending on individual and local circumstances, andwe are not in a position to address **these varying**  circumstances as a part of the opinion **process.** Furthermore, section 6(f)(l) sanctions theuse of certificates of deposit without prohibiting the use **of** time deposits. &% 

### AttorneyGeneralOpinion H-430 (1974) (onmaturity bondsman may withdraw certificate if substitute security is provided). We **therefore** conclude **that** county bail bond boards may establish reasonable time periods **for** payment under letters of credit submitted as "cash eguivalentsw pursuant to section 6(f)(l) ofarticle 23723-3.
Finally, the terms of aqualifying letter of credit must not make payment contingent upon anyaction by the bondsman or other individual orentity. To satisfy this standard, the credit must not include any condition for payment that the county cannot satisfy without the consent of, or other action by, thebondsman or **other party.**  For

(Footnote Continued) infm, at 11. Although awcleanw letter of credit, a credit that requires only adraft ordemand for payment, limits the risk that it will be construed as **a** guaranty, standby credits **are** frequently documentary credits since the terms of the credits usually require that the draft ordemand for payment be accompanied by a statement that the customer is indefault. A cautious beneficiary can limit his risk by avoiding any reference to guaranties and unnecessary reference to the underlying obligations. M Mueller, =I at 113 n.22 (various advice to cautious beneficiaries).

p. 6639Honorable John J. Gavin -Page 11 (JM-1245)

instance, the credit may not require the county as beneficiary to submit adocument signed by thebondsman that he has defaulted onhis underlying obligations to the Neither the terms county. of a cashier#s check or certificate of deposit payable to the county requires consent of **or** other action by anyone else prior to conversion into cash. Thus‘ the terms of a **qualifying** letter of credit must not condition payment on such consent or action.

Individual aswell as corporate applicants **may** submit certain letters ofcredit as "cash **eguivalsntsw** for purposes of section 6(f) (1) of article 2372p-3, V.T.C.S. To qualify as "cash eguivalents,w letters of credit must be irrevocable, must limit inquiry into the underlying transactions between the county and thebondsman, must provide forpayment of drafts ordemands forpayment thereunder on sight orwithin areasonably brief period of time after presentation of all required documents, and must notmake payment **con** tingent upon the consent of, or other action by, the bondsman or other party.

JIM MATTOX **Attorney** General of Texas

~YNRLLHR First Assistant Attorney General

LouMCCREARY Executive Assistant **Attorney** General

JUDGEZOLLIESTRAHIHY Special Assistant **Attorney** General

RENEA HICKS Special Assistant Attorney General

RICK GILPIN Chairman, Opinion Committee
Prepared by Celeste A. Baker Assistant Attorney General

p. 6640