Honorable William A. Harrison Opinion No. WW- 561 

commissioner of Insurance 

State Board of Insurance Be: Sale of personal stock of 

Austin 14, Texas officers and 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 submitted with 

your opinion request, persons designated as Y and 2, who are directors and 

officers of a company designated as Company A, have breached their fiduciary 

duty to Company A. You have also asked US to rule as to whether under the 

facts‘ submitted there was a breach of fiduciary duty by the officers and 

directors of a company designated as Company B. The complexity and detail 

set out in the fact situation accompanying the opinion request and the breadth 

of the legal principals involved precludes a lengthy discussion of the facts 

and law in this opinion. We have, however, given careful consideration to all 

questions raisedand to the briefs and memoranda submitted by other interested parties. 

We understand that you desire this ruling in order to aid you in 

determining what 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 should be, for that is a matter committed to your sound discretion 

subject, of course, to review by the State Board of Insurance and the Courts. 

Nor can we rule that the fact situation submitted would 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 :of the public confidence" within the meaning 

of Section 3 Article 1.14 for that determinationis also a matter committed 

to the discretion of the Insurance Commissioner. 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 connection with the powers 

vested in him by Article 1.14 of Section 3 of the Insurance Code, 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 finding with respect to Y and Z could 

be sustained. The breach of duty, if any, occurred when Y and Z appropriated 
Honorable William A. Harrison, Page 2 (WW 561 ) 

from the general fund of the corporation payments aggregating $162,235.00 

made by subscribers on their installment contracts for stock in Company A, 

which contracts were 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 justification for 

a similar finding that the president of Company B breached his fiduciary 

duty to Company B in satisfying the subscription contracts (a copy of which 

is attached as Exhibit 3 to the opinion request) by delivering to the subscribers his personally held stock instead of delivering the un-issued but 

authorized stock of Company B. There are not sufficient facts submitted with 

the opinion request to determine whether a similar finding as to the other 

officers and directors of Company B could be legally sustained. The contention has been made that the transaction set out in your opinion request 

cannot be considered in. connection with any contemplated action under Art. 

1.14, Section 3, of the Insurance Code inasmuch as these transactions took 

place prior to the effective date of Chapters 117 and 307 of the Acts of 

the 54th Legislature, 1955 (adding to the Insurance Code the powers set out 

in Sec. 3, Art. 1.14). The ultimate determination of the Commissioner in 

connection with Sec. 3, Art. 1.14, is whether the "officers and directors 

or any of them, are not worthy of the public confidence" at the time the 

Commissioner has 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 

determination although the events actually occurred prior to the effective 

date of Chapter 117 or Chapter 307 of the Acts of the 54th Legislature in 

1955. It is not contended that these transactions are too remote and they 

are relevant evidence of management fitness. 

The conclusions herein expressed necessarily are limited to the 

peculiar fact situations accompanying this opinion request. 

SUMMARY 

The facts submitted in the opinion 

request would sustain a finding of 

the Commissioner of Insurance (in 

connection with the exercise of his 

powers under Section 3, Article 1.14) 

that Y and Z breached their fiduciary 

duty to Company A and that the Presi- 
__.- - 

Honorable William A. Harrison, Page 3 (~~-561) 

dent of Company B 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