HonorableWilliam A. Harrison Opinion No. WW- 

### 561

commissioner

### of Insurance State Board of Insurance Be: Sale of personal stock of Austin 14, Texas officersand directors of an insurance company and the duty owed by such officers and directors to the insurance company.
Dear Mr. Commissioner:

You have asked us to rule whether, under the facts submittedwith your opinion request,persons designatedas Y and 2, who are directorsand officers of a company designatedas CompanyA, have breached their fiduciary duty to Company A. You have also asked **US** to rule as to whether under the facts‘submittedthere was a breach of fiduciary duty by the officers and directors of a company designatedas Company B. The complexityand detail set out in the fact situationaccompanyingthe opinion request and the breadth of the legal principals involvedprecludes a lengthy discussion of the facts and law in this opinion. We have, however, given careful considerationto all questions raisedand to the briefs and memoranda submittedby other interested parties.

We understand that you desire this ruling in order to aid you in determiningwhat action, if any, you might take pursuant to Section 

### 3, Art. 1.14 of the Insurance Code. We cannot, of.course; advise you as to what your decision shouldbe, for that is a matter committedto your sound discretion subject, of course, to review by the State Board of Insuranceand the Courts. Nor can we rule that the fact situation submittedwould or would not legally justify a finding that Y or Z or the officers or the directors of Company B or any of them "are not worthy :ofthe public confidence"within the meaning of Section 

### 3Article 1.14 for that determinationis also a matter committed to the discretion of the InsuranceCommissioner. Furthermore,we have not been asked to rule on either of these questions. Thus the only 'question this department could rule upon would be whether a finding of the Commissioner, embodied in an order or orders issued in connectionwith the powers vested in him by Article 1.14 of Section 3 of the InsuranceCode, to the effect that Y or Z or the officers or directors of Company B or any of them breached their fiduciary duty under the fact situation submitted could be legally sustained.

It is our opinion that such a findingwith respect to Y and Z could be sustained. The breach of duty, if any, occurredwhen Y and Z appropriatedHonorable William A. Harrison, Page 2 (WW 561 )

from the general fund of the corporationpayments aggregating $162,235.00 made by subscriberson their installmentcontracts for stock in CompanyA, which contractswere executed on the form attached as Exhibit 1 to the opinion request and which contracts contracted for the purchase of stock aggregating 38,430 shares.

It is our further opinion that there is legal justificationfor a similar finding that the president of CompanyB breached his fiduciary duty to Company B in satisfyingthe subscriptioncontracts (a copy of which is attached as Exhibit 3 to the opinion request)by deliveringto the subscribershis personally held stock instead of deliveringthe un-issuedbut authorized stock of CompanyB. There are not sufficient facts submittedwith the opinion request to determinewhether a similar finding as to the other officers and directors of Company B couldbe legally sustained. The contention has been made that the transaction set out in your opinion request cannotbe considered in. connectionwith any contemplatedaction under Art. 1.14, Section 3, of the InsuranceCode inasmuchas these transactions took place prior to the effectivedate of Chapters 117 and 307 of the Acts of the 54th Legislature, 1955 (addingto the InsuranceCode the powers set out in Sec. 3, Art. 1.14). The ultimate determinationof the Commissioner in connectionwith Sec. 3, Art. 1.14, is whether the "officersand directors or any of them, are not worthy of the public confidence"at the time the Commissionerhas the matter under consideration. It is the opinion of this office that the Commissioner can take into consideration in this respect transactions such as those set out in the opinion request in making this determinationalthough the events actually occurredprior to the effective date of Chapter 117 or Chapter 307 of the Acts of the 54th Legislature in 1955. It is not contendedthat these transactionsare too remote and they are relevant evidence of management fitness.

The conclusionsherein expressednecessarilyare limited to the peculiar fact situationsaccompanying this opinion request.

SUMMARY The facts submitted in the opinion requestwould sustain a finding of the Commissionerof Insurance (in connectionwith the exercise of his powers under Section 3, Article 1.14) that Y and Z breached their fiduciary duty to CompanyA and that the Presi-__.- -

HonorableWilliam A. Harrison, Page 3 (~~-561)

dent of CompanyB likewise breached his fiduciary duty to Company B.

Very truly yours,

WILL WILSON Attorney General of Texas

WPF:aw
APPROVED:
OPINION COMMITTEE:
Geo P. Blackburn, Chairman ,L. P. Lollar Leonard Passmore Henry G. Braswell
REVI?XED FORTKEATTORNEY GENERAL BY: W. V. Geppert