Honorable J. M. Falkper

Banking CommlsEiioner of Texas Austin, Texas ., No.
Re:

Deay Mr. Balkner:. c- ‘.4aa Under the given factual situation and the provisions of the Texas Trust Act, la the bank ~ln quektlon, as trustee, prohibited from depositing the '. !%Zc~e%~oslts lq its.de inatl- .iiatution

for a period .ofmore~than.one y.earand 'related ~questions.i
'Youhav&~reQueated.our opinlon:on certain,Quesflons undetithe following relevant facts:

.
‘!A6 &at& chartered.bank and trust.company has b.&nrx=&d:truatee tinder Varlou~;tri~st

inden; 'tures which auttibx$ze

the .bw-In its-.flduciary capacity,'

irrespectlve~of any proviklon..or pakt bf'thk.

%.xasTrust Act,..to'lnveat$r’shares of a savings- and loan tisociatlon located in ,the.s&nti zl$y and deposit money‘fn the trustee bank. The trustee Is &so given the right and ~1srequested to depdslt the income ftim the trust estates in the savlngs~and.loah asso&atlons'to earn the .curxentrate of Interest, "The tkstee~bank 'hasdeposllzed kth it&f on time c.ertiflcatea.of deposit.$37.500 which has been so deposited'for bn6 year. Trus'tee bank has alko deposited with a sayings and loan 'aasoc+atlon

various savings accounts which form part of the trust'--eetates,under sbeclflc authorization in the various trust -dentures ltitie,spect$ve PC any provlafon of the Texas Trust-Act.
. . .

: -2302-Honorable J.'M. Falkner, Page 2 ,(C- 488)

"The bank's directors own 85.4$ of the outstanding stock in the bank. The savings and loqn dlrectors own 97% of the outstanding stock In the savings and loan association. Mrectors of both the bank and the savings and loan association own 82.3% of the bank stock.and 77.6% of~the savings and loan stock." Under the foregoing facts you have.reqtieated our opinion to the following questions:

Is the trustee bank prohibited f’rom depositing the $& 500 In time certificate deposits In Its own lnstltutl& for a.perlod of more than'oneyear? .2,.Is the.trus$ke bank prohibited from.maklng deposits of trust f'inxia

In savings accounts ln.$he savings and loan assbclat$@ 3. If queatloti'number 2 ls.anawered,ln,$heaffirma-. tlve, then Uthe savings and loan asaociat~o~l~c~eaa~s its permanent reserve stock by selling shares-of additional stock,would.the trustee bank be prohibited from +ve%tlng tiuat funds In such'atock of the savings and loan asaoclalqion?
.Ir-some legal relatlonahlps, the.fiduclaryelement Is ‘inore

Intense than In others. It la pecullar.ly,lntense in the caae'of a trust. While this fiduclary~relatlonahlp createszi

number of duties, none Is more fundamental than the duty owed by the trustee .tothe beneficiaries In the nature of the dtityof loyalty. This duty Is.sometimes characterizedas.not permlttlng a trustee'to place hlmself fi'a position where,lt would be Sor-his own benefit to violate his duties to the beneficiaries. This duty 6f 'lojralty

Is based on‘a .generalprincipal~of'pollbyand moralitywhich forblds~ a fi'duclary

from placing himself' In a sltuatioti

where there is or could be 'confll.ct'b+ween his self-interestand his duty to others. See Scott on Trust, 8 170, Duty of $,yalty, et seq.. A number of .states.haveexpr&asly enacted statutes that set out the duty of loyalty.ln- clear and unambiguous terms. In Tegas; any dev$atlon.from this hi loyaltyIs exprkssly prohibited by Article 7 whichprovides:

-2303-.

Honorable J. Mi Falkner, Page-3 (C-488)

II

. . . but no act of the trustor shall relieve a corporate trustee from the duties, restrlctions,- .and llabllltles Imposed upon It by Sectldns 10, 11, and 12 of the Texas Trust Act." (Qnphasls added) Neither can the beneficiary relieve the trustee of the prohlbltlons contained in Sections 10, ll.and 12 of the Texag.Trust Act. See Article 7ti25b-23. However, pursuant' to Article 7425b-24 (E),V&nonls Civil Statutes, a court of competent jur$suict.ion may modify or entirely relieve any trustee from any or all of ~he'duties,~llmltatlonsand restrictions Imposed upon him by the Texas Trust Act,:to-wlt:

"E. A court of competent lurlsdlctionmay, for cause. shown and upon notice to the beneficlarlc s:eve.a' trustee fromany or all of the'dutlea, 'limitations,

and restrdotlona~whlch .would.otherwlse be placed upon .hlm'bythis Act, or.whol.ly'oroartly release.

and excu8e.a trustee..who .hasacted'honestls and reationably,'f*m llablil~y.for~~olatlorisof thk provisions of this Act." @nphasls .added)

.. ~_ Obviously.,the .princlpleswhich are applicable,to a corporate.truqteeare affiliated with.it. equally'applicable~to 'ocirooratiolis Bystatutory deflnltion, an affilllate IS .deflnedlti

Artlc,ie'7.425b-J+(E) to mean:

. . 11 any peraon.dlrectly or Indirectly controlil&'or controlled by.the person, or zanyoerson .underd1tiec.t

or Indirect common'control wlth another'person

. ;. V (Eknphaals added) The:aforementlbned SectionsXI,.lland ‘12of the Texas Trust Act; that are equally appllcable.to both the corporate trustee and~any affiliate, are as follows:
"Art. 74~5~io. Loan of.trust~funtis ~"Exkept

aa.&ovlded 'ln~Sectl& 11 oi:,+&ls.A&, a corporate trustee.shall not lend trust funds to Itself or an affiliate (as defined herein); or to at~,director,~offlcer, or employee of Itself 'orof an affiliate; nor.shall any noncorporate trustee lend trust funds to hImseLf, or to his relative, emplbyer,.employee, parttier, or.other business zy3oclate.

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.Honorable J. M. Falkner, Page 4 ,(~-488)

'"Art.7$25b-11. Corporate trusteedepositing trust

funds with self
"A corporate trustee may deposit with Itself trust funds which are being held Cendlng lnvestment, distribution,or to pay debts, provldedt maintains under control of Its trust department (If It .h+sa trust department separate from its banking department)as securlty'for such deposit a separate.fund consisting of securities legal for trust Investments which have at all times durlng the deposit a total market .valueequal to the' .amountof the deposit. No such security shall be requlred to the extend said deposit Is Insured or otherwlse.securedby or under state or federal law. The separate fund of securltles.shallbe marked as.such. Withdrawals from or additions to It may be made from time to time, as long as the required value.lsmalntalned. The~lqcome of such securities shall belong to thencorporate trustee.
"A& 7&2$b-12. ,mstee buying from orselld~ng to

sel'f
"A:trustee shaxl~not buy nor sell. either dlrectly or indlrectly,~ any property owned by or .-belonging

to the.trust ,estate;: from or .to'ltaelf or an affiliate; or from orto ,adirector, officer, or.emolcvee of such trustee..~dr of an affiliate: or from &to himself, a relative, employer,..partner or caner business associate; provlded,.a:natlonal banking assdclation, or a state chartered bank andltrust company, or a statechartered trust company, or a state:.chartered bank having ~trust n~owetis, or any other.state chartered corporation having the Fight to exercise trust powers. when acting or~servlng as ~executor,administrator,.guarolan, trustee, or receiver,may sell-shares of the xapltal stock o.fltself'so owned .orheld by Itself, -forany estate, to one.~o.r more of Its officers, stockholders or directors, upon a court of comnetent jurisdiction .findlng that any such sale will be to the best interest ofthe estate owning such shares; flxlng or approving the price to be paid .therefor,and tlieterms of sale, upon entering an order,'.decpee o,rjudgment, authorizing, approving and'dlrectlng such sale to'be made; and provided furtherthat a corporate trustee, executor,

-230%:Honorable J..,M.Falkner,. Page 5 (C-488 )

In the absence of a court of competent jurisdiction relieving the trustee bank of the proi%slons of Sections 10, 11 and 12. '~upra,‘lt~ 1s the oplnlon'of this office <hat + corporate trustee, .oraffiliate, Is absolut'ely prohlblted from disregarding the provlsibns of the.Texas TrmBt Act and mu& strlctlv compls theiewlth:'Under these restrict$ons;.,such a,&xstee mai &ly,depoqit trust finds with itst?lf-%endlng lrivestmeht, distrlbixt%in,

br.to'pay debts."We,doi%iude;.'under,the:'facts presented, that-,the depositing of .asum ifi-timecertlf@ate'deposits for more than-one gear would not fall tithin'th~.aforetiald pemlsslve category of deposit. Such common owner&hip of,stpck ln~the bank and savings and loan association as‘ set forth~in.your lettdr'clearly demonstr&5es'that~the sa\i&igs,tid

~loar.~ssciclat~on~l,s; ~by.statutes,

&~,al~Yllate of.t@e trustee~~bankfqr~'the purposes of the TetiadTrust Act. TheSefore, the savings an4 lGan assoddatlon is &o;oirr:med

by the.s+me ~res~.rlCtlons as the trustee bank. Thus;, deposits of trust funds tnayonly be made ln.ttie savings+d loan association "~etidlng~lnvestment, tiistrlbu- .tlon,or to'pay debts!"

. If the.trust'cor&&. originally contained shares of stock of the afflllate;.then the tru&ee can,'lf,consistent wlth.the~prucjent

man r&..ptirchase-addltion~l~shares of -suchstqck when increases In said stock are offered on a pro rata basis to all stockholders alike. If .thetrust corpusdid not.ofigina&ly contain such .atocki.thenthe trustee 1s:prohibited,from purchasing shares of.its affiliate's stock for the trust;
It should alsO be observed that this question has not mlsen by vlrtue,of any $ntentlonal wrongdoings by a trusteebank or that any loss has resulted. ,,Infact,,the

-2306:Honorable J. M. Falkner, Page 6 (C-488)

numerous saving accountsare .a11In amounts less than the current Insurance limitof llabllltyof the Federal Savings and Loan Insurance Corporation..We also aopreclate having the benefitof the full exolanatlon of this matter and.of your policies.

S U M M.A R Y ------- Artlcie 7425b-22,V.C.S., provides that no act of the trustor shall relieve a corporate trustor from the restrictions,duties and llabilltles lmposed on It by Section 10, 11 and 12 of.the Texas Trust Act. :’ .However,a court of competent jurlsdlctlon may modlfy..or

'entirely

relieve any .trusteefrom any or all of .theduties, llmltatlons and restrlctlons imposed.

upon-him by the Texas -&.A&.
In the absence of such judlclaireIlef, It Is our. opinion that:,. 1.. A .trustee.bank lsprob$blted.~~from depositing trust funds ln time certificate deposits ln.lts'own 'lnstltutlon,,~

unless.such depoaltls made "Rending Investment, dlstrlbutlon,or.to oay debts.. 2. The savlngs'and loan assoclatlon, under‘the stated'facts, ,lsan affiliate with the trustee.bank, and as such is prohibited~fromhaving trust funds .deposlted~lnIt except "nendlng-Investment,distrlbutlon or to oay debts." -.--.-. .3:~,:The

.trustee~.bankmay

purchase additional sharesof, permanent reserve stock of the affiliate savings and loan association If thent.rustcorpus originsilly

contained shares of such stock,' and the additional shares' constitute 1ncreases“In the.capl- 'tai stock offered DM rata to ail &ockholders.

-2307-Honorable J. M. Faikner, Page 7 (c-488 )

Tours.very truly;
WAGGONER CARR Attorney General of Texas

RRJ:nr

APPROVED BY: OPINIONCOMMITTEE
W. V. Geppcrt,Xhalwan J&mes Strock John Pettlt. John Bapke Gordon Rouser

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