Honorable John J. Gavin 

Chairman 

Opinion No. JM-1245 

Insurance Committee Re: Whether an individual 

Texas Rouse of Representatives 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 ask whether an individual applicant for a license 

to execute bail bonds may satisfy the financial security 

requirements of article 2372p-3, V.T.C.S, 

letter of credit. Subsection 

by submitting a 

provides in part: 

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 in which the license is to be 

issued a cashier's check, certificate of 

deposit, cash, or & a- in th.2 

amount indicated by the m under subdivision (5) of Subsection (a) of Section 6 

of this Act but in no event less than $50,000 

except in counties 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 to be held in 

a special fund to be called the bail security 

fund. (Rmphasis added.)1 

1. Section 6(a) describes the information that must be 

included in the application. Section 6(a)(5) requires the 

applicant to include a statement of "the amount of cash or 

cash value of any certificate of deposit or cashier's checks 

which the applicant intends to place on deposit . . . if the 

license is granted.' Instead of complying with section 

(Footnote Continued) 

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

We conclude that an individual as well as corporate 

cants may submit certain letters of credit as "cash 

applilents." 

eguivaTo qualify, the letters of credit must be irrevocable, must limit inquiry into the underlying transactions 

between the county and the bondsman, must provide for 

payment thereunder on sight or within a reasonably brief 

period of time after presentation of all required documents, 

and must not make such payment contingent upon the consent 

of, or any other action by, the bondsman or other party. 

Article 62523-3 does not define the word "applicant." 

Section 6 (a) , however / ' requires 

act as a bondsmann 

"any person desiring to 

to file an application for a license. 

"Personm is defined by section 2(l) of the act to mean an 

individual or corporation. Consequently an applicant may be 

either an individual or a corporation who desires to act as 

a bondsman. Since the 

section 6(f)(l) 

financial security requirements of 

and (2) of article 6272p-3 apply to any 

applicant whose application has been tentatively approved, 

they apply to both individual and corporate applicants.2 

Article 6252p-3 also does not define "cash eguivalent.n 

The statute as originally enacted in 1973 did not contain 

that phrase. Section 6(d)(l) of the 1973 act required the 

applicant upon tentative 

deposit either "a cashier's 

approval of his application to 

check, certificate of deposit, 

or cash in the amount of $S,OOO,w or execute in trust a deed 

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 in value to the applicable minimum described in 

section 6(f)(l). 

2. This conclusion is consistent with the cases 

applying the financial Security requirements in section 6 as 

originally enacted and later amended to both individual and 

corporate applicants. See. e.a,, Texas Fire & Casualtv Co, 

v., 684 S.W.Zd 177 (Tax. App. - 

Houston [14th Dist.] 1984, writ ref’d n.r.e.) (local rule 

invalid to extent that it requires 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. - San Antonio 198:, no writ; (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. 6631 
Honorable John J. Gavin - Page 3 (JM-1245) 

Leg., ch. 550, 5 6, at 1523.3 The 1973 act was substantially amended by the legislature in 1981. Acts 1981, 67th 

Leg., ch. 312, 5 1, 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 from moau v. w, 4 S.W. 361 (Tex. 1887)). 

We further described *cash eguivalentw in that opinion as an 

instrument convertible into cash within a reasonable time 

and with reasonable effort. &at 3. Applying those 

definitions, we'noted that an assignment of a life insurance 

policy without transfer of the power to surrender the policy 

for its cash value would require the county to obtain the 

3. In 1987 the legislature increased the minimum 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, 5 2. 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 of credit as a cash 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 

a bond forfeiture case final after a trial during which 

insufficient cause is shown for the principal'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 

issue bonds. 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). 

p. 6632 
Honorable John J. Gavin - Page 4 (JM-1245) 

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 the meaning of "cash equivalent." However, in 

Attorney General Opinion H-430 (1974), which interpreted the 

1973 version of the statute, we stated the purpose of the 

financial security requirements to be the placement of 

Wresources in the hands of the County with which to satisfy 

a forfeiture without having to resort to court proceedings.W 

& at 2 (holding that certificate of deposit, whether or 

not negotiable, must be payable to the county so that it 

could be reduced to cash without any action by the bail 

bondsman). In Attorney 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:.is 

Our 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 5 124. 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). Thus we give little weight to 

the omission of the phrase "cash equivalent* in section 

6(a)(S) and construe that section as requiring an applicant 

to describe 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 

of providing the financial security information that the 

board needs to assess the qualifications of the applicant 

without restricting the type of security in a manner that 

violates the intent of section 6(f)(l). 

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

Section 5.103(a)(l) of the Texas Business and Commerce 

Code defines "letter of credit " for purposes of chapter 5 of 

the code6 concerning letters of credit as 

an engagement by a bank or other 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 5 applies to the following: (1) a letter of credit issued by a bank if the credit 

requires a documentary draft or documentary demand7 for 

payment, (2) a letter of credit issued by a person other 

than a bank if the credit requires that the demand for payment be accompanied by a document of title. or (3) a letter 

of credit issued by ; bank or other person 

states that it is a letter of credit or is 

entitled as such. 

if the credit 

conspicuously 

6. your request does not refer to chapter 5 of the 

Texas Business and Commerce Code. We limit our opinion, 

however, to letters of credit within the scope of chapter 5, 

since chapter 5 establishes the framework for development of 

the law of letters of credit by codifying the fundamental 

concepts underlying letters of credit. m Bus. G Corn. Code 

5 5.102(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 a draft or demand whose honor is conditioned upon the presentation of any paper including a 

notice of default, invoice, or document of title. Bus. G 

Corn. Code f 5.103(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. - 

1s any written requirement fZ 

payment of a specified sum to a third person at a stated 

time or on demand); see also Black's Law Dictionary 149 (5th 

ed. 1979) (bill of exchange is a third party instrument by 

one party ordering payment by another party of a sum certain 

to a third party). 

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

Letters of credit have traditionally been used as 

security devices in international sales transactions. 

Foreign sellers in those transactions ensured payment by 

requiring their buyers to obtain letters of credit authorizing draws against the credits upon presentation of documents 

of title such as bills of lading. &G &st Girard Sa % 

593 F.2d 598 (5th CL. 

1979); Annot., 35 A.L:R.3d 1404 (19;l). Traditional sales 

credits are ofton referred to as sccmmercial credits." 

Letters of credit in recent years have also been used to 

secure the payment of various financial obligations or the 

performance of real estate, construction, or other nonsales 

contracts. m Annot., 44 A.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 is a commercial or a 

standby credit, concerns 

three actors engaged in three related contracts. The three parties . . . are: the 

customer; which . . . causes it to bs 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 contract to pay the beneficiary when 

the beneficiary satisfies the conditions for 

payment expressed in the 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 a principal and not as the agent of the customer, 

and it assumes a primary obligation to the beneficiary 

independent of the performance of the contract between the 

customer and the beneficiary. The issuer must therefore pay 

the beneficiary if the beneficiary's demand for payment 

conforms to the terms of the letter of credit "without 

reference to the rights and obligations of the parties to 

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

the underlying contract." & at 114; pee am Bus. & Corn. 

Code 8 5.114(a); 49 Tex. Jur. 

523.8 

3dvoil, at 

Conforming presentation requires that the beneficiary 

strictly comply with the conditions for payment 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 

I 316-17 (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, a credit whose terms require 

only the presentation of the draft or demand for payment. 

8. Even though the issuer has a primary and not 

secondary obligation to the beneficiary, the issuer may 

refuse to honor a conforming draft or demand for payment 

under section 5.114(b) of the Business and Commerce Code 

where there is "fraud in the transaction." The customer may 

also seek an injunction against payment by the issuer where 

there is such fraud. Texas courts discussing this exception 

to payment, have upheld injunctions only if there was 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) 

(cattle production below the hoped for but not guaranteed 

quality was unintentional and did not constitute fraud for 

.114 purposes) ; -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.SG Annot., 25 A.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 to determine 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. 

p. 6636 
Honorable John J. Gavin - Page 8 (JM-1245) 

Annot., 44 A.L.R.4th 172, 176 (1986); see also Anex Oil. 

Co. v. Arch-m Co,, 770 F.2d 1353, 1355 (5th Cir. 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 on presentation of a draft 

and all other conforming documents or a wtimew credit that 

is not 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 

sight was payable on &and). Letters of credit, however, 

are not 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, no writ) (sin& letters of 

credit are not payable to bearer they are not negotiable): 

m 660 S.W.Zd 851, 855 (Tex. App. 

- Austin 1983, no writ) (u&s credit otherwise specifies, 

draft may be either negotiable or nonnegotiable). 

Credits may also be either revocable or irrevocable. 

BUS * 61 Corn. Code f 5.103(a)(l). According to section' 

5.106(b) of the Business and Commerce Code, once an irrevocable credit is established with regard to the beneficiary 

it can be modified or revoked only with the beneficiary's 

consent. A credit is established with regard to a beneficiary when he either receives the credit or an authorized 

advice of its issuance. L 5 5.106(a)(2). In contrast, a 

revocable credit may generally be modified or revoked by the 

issuer without either notice to or consent from the customer 

or the beneficiary. IQr S 5.106(c).9 

Given our review of these fundamental concepts of the 

law of letters of credit, we conclude #at not all 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 if the credit does not state 

whether it is revocable or irrevocable. In at least one 

case concerning an undesignated credit, a court has held a 

standby credit irrevocable since to do otherwise would 

frustrate the basic purpose of the credit -- the making 

certain of the right to payment independent of disputes over 

the performance of the underlying contract. Rueller, m, 

at 117-18 (citing West Virmd v. Srok& 

415 F.Supp. 1107 (W.D. Pa. 1975)). 

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

eguivalentsw that they be readily convertible into cash 

within a reasonable time and with reasonable effort without 

resort to consent by the bondsman or to other outside 

action. To satisfy that requirement and thus constitute a 

"cash eguivalentw for purposes of section 6(f)(l) of article 

2372p-3, V.T.C.S., we hold 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 in the 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 

as beneficiary contingent 

county 

upon the consent of or other 

action by the bondsman or other party, and (5) the credit 

must be issued by an institution or entity which 

financially responsive in the 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 

issuer coos not unuaterauy mociry or revoke the 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 of deposit -- are not 

revocable: thus qualifying letters of credit must not be 

revocable. Furthermore, to hold otherwise would not ensure 

that the necessary resources would be available to satisfy 

bond forfeitures. 

Second, a qualifying credit must be a true letter of 

credit. A true letter of credit limits the circumstances in 

which the underlying transactions between the bondsman and 

the county may be examined. WC Nat 1 B8& of Dal&8 I 

578 S.W.2d at 115. If the credit requires as a conditio; 

for payment that there be a factual determination of forfeiture or default, the county 

outside action, 

would likely have to resort to 

such as a court proceeding, to establish 

its rights to payment under the credit. 

the credit may 

Thus even though 

require a documentlo be submitted prior to 

10. As mentioned earlier, a 

wdocumentaryw credit or a 

credit may be either a 

wcleanw letter of credit. 

(Pootnote Continu3 

p. 6638 
Honorable 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 a condition for payment proof of default or other 

examination of the performance of the underlying obligations. . -- 

See., iaarm-Olson-stordahl Joint Ventuzz 748 

S.W.2d 316 fsummarv iudwent reversed on anneal since &edit 

subject to perfon&Ge -in compliance with-underlying contract and thus was not true letter of credit but guaranty 

contract): w. Co. of New YQ@ v. Central Nat 1 E&j 

gf Houstpn, 624 S.W.2d 222 (Tex. Civ. APP - - Housto; [lst 

Dist.] 1981, writ ref*d n.r.e.) (true letter of credit may 

contatn references to underlying obligations but those 

references may not create conditions for honoring drafts). 

Third, drafts or other demands for payment 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 a reasonable time 

may vary depending on individual and local circumstances, 

and we are not in a position to address these varying 

circumstances as a part of the opinion process. Furthermore, section 6(f)(l) sanctions the use of certificates of 

deposit without prohibiting the use of time deposits. &% 

Attorney General Opinion H-430 (1974) (on maturity 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) of article 23723-3. 

Finally, the terms of a qualifying letter of credit 

must not make payment contingent upon any action by the 

bondsman or other individual or entity. 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, the bondsman or other party. For 

(Footnote Continued) 

infm, at 11. Although a wcleanw letter of credit, a credit 

that requires only a draft or demand 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 or demand for 

payment be accompanied by a statement that the customer is 

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

instance, the credit may not require the county as beneficiary to submit a document signed by the bondsman that he 

has defaulted on his 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 as well as corporate applicants 

may submit certain letters of credit 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 the bondsman, must provide for payment of 

drafts or demands for payment thereunder on 

sight or within a reasonably brief period of 

time after presentation of all required 

documents, and must not make payment contingent upon the consent of, or other action 

by, the bondsman or other party. 

JIM MATTOX 

Attorney General of Texas 

~YNRLLHR 

First Assistant Attorney General 

Lou MCCREARY 

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