Honorable Robert E. Stewart

Deputy Commissioner Department of Banking OpinionNo. M-273

John H. Reagan State Office Building Austin, Texas 78711 Re: Branch Banking; Machines for the purpose of accepting and receipting off-premisesbank Dear Mr. Stewart: deQO8it8.

In connectionwith your request for an opinion on whether Texas banks may use off-premisemachine8 for the purpose of accepting and receipting off-premisebank deposits,you etate that machine8 for accepting and receipting off-premisesbank deposits are currently In use In Arizonaand possibly elsewhere.
Under one plan of service about which you inquire, a national bank In Arizona contractswith owner8 of such machines to place them in selected location8 in the banking area, The bank retains the owner to lease, service, and supply the maChlne8,and to pick up and deliver deposits from the machines to the bank. In this regard, the owner purports to act as an outside independent contractor and to "absolve the bank" from any direct connectionwith the operation,maintenanceand collection from the machines. The depositsare accepted in the machine by it8 ownerwho purport8 to act as agent for the depositor. The machine owner carries knSuranCe covering the equipment and deposit8 until their delivery to the bank. A special bank deposit receipt Is used which specifies that the deposit ha8 been received by the machine owner for deposit in the,bank. &posit8 vice retained bank,and the "In the bank" the delivery, are collected daily by an armored oar aerby the machine owner for delivery to the deposits are not designated as being offlcirlly until 80 delivered to the bank. In maklng the machlne owner purports to act as agent ror the depositor and not for the bank. Time of colleotion Is posted at the machine. The physical locations for the

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machines In shopping center8and elsewhere are negotiatednot by the machine owner or operator but by the participating bank,

Your Inquiry relates to whether theabove described plan Is Qermi8Slble to stateand national banks in Texae.
A national bank has offeredadditional or alternatlvd proposal8 to see If the Department of Eanklngwould challenge either or both. Under alternate plan (l), the bankwould own (or lease from the distributor, In the bank's name), these deposit boxes. The bank's name would be prominently displayed on the boxes where ever they are placed, but therewould be a form of notificationat some place on the box that the bank Isnot actually accepting any depoalt until the deposited Items are presentedat the bank. Siml-. lar languageand notice would be printed on the deposit ticketor receipt received by the depositor from the machine. The bank would employ personnel to service the boxes and to pick up and transfer to the bank any ltema therein. Also, the bank’s fldelltyand theft insurance coverage would extend to Itemsplaced in the box and would pay any loss SUBtalned by a deposit customer through employeedefalcatlon or through robbery.
Alternate plan (2)provides that'the, ,boxe&,wouId

be,.' ...".' ~.' owned or leaeed from the distributorby a third party (In this specific case, the bank's stockholder company.) The bankwould contractwith thls thlrdparty for the Qlacement of the machines In varloua locationa. The ownerwould be reSQOn8lble for servicing the boxes and for QlCk-Up and delivery of Itemsdeposited therein to the bank. Language concerning the bank's acceptance of the deposit only upon receiptat It8 bankinghouse would be located on the boxes and on the deposit tloket issued to the depositor, and It would be stated that the box ownerwould be acting In the capeclty of agent for the depositor. The Insurance against losswould be providedby the bank, however,aa in the otheralternate plan.

Your lnqulr relatesalso to whether such alternate plans (1) and (2

T are Qermleslble to stateand national banks in Texas.
A state bank ha8 asked your officewhether such machine8 would be legal for use if the boxesare owned or leased

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from the distributorby a third party (probably the bank's stockholder company), serviced by that third Qarty, and insuredagalnet lossby the thirdparty. The bank would contractwith the owner for placementof the machines,and the bank's name would be prominentlydisplayed on the face' of the machine. There would be notification to depositors, however, on the face of the machineand on the degoslt receipt Issued to the depositor that the owner la acting as agent for the depositorand that the bank will not give credit for deposits made In the machines until the Items are receivedat the bankinghouse. The machine ownerwould accept full responsibility for items depoelted therein and would provide fidelityand robbery Insurance from the time Items are placed in the mechlne until delivery Is made to the bankinghouse.

You have Inquiredalso a8 to whether the Immediately precedingproposal by the statebank la Qermlsslble to stateand national banks In Textis.

Your preclae questionshave been stated aa follows:
"(1) Can the bank own or lease In Its own name these machines,and provide fidelity lnaurance protection?
"(2) Can the bank contractwith a thlrdparty owner, but provide insuranceprotection? “(3) Can the bank contractwith a thlrdparty owner as above, if the third party Qrovldes the Insuranceprotection?
"(4) Can bank personnelbe Used In the servicing, or pick-upand delivery of Items depoalted? “(5) Can bank personnelbe employed at the site of the machines to aeelst depositors In theiru8e of the mBChlneB?"

Pursuant to the dlSCuS8lon set out below,your questions 1 through 5 are an8Wered In the negative, and you are advised that not any of the variousproposals summarizedabove are compatiblewith state law.

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The extent, If any, to which branch bankingwill be pcrmlttedwithin the varloua state8 Is a matter which IS prlnclpellywithin the control of the Individual states. Each state 18, of course, permitted to decide for itself whether banks operating under state Charter8will be permitted to branch; and with regard to nationally cha~rtered banks, the Federal Congress has provided that such restrictionsa8 pertain to branching by banks chartered by the statesaleo apply to nations1 bank8 operatingwithin such states. Section 36(c) of the National Bank Act (12 U.S.C. 8 s(c)) provides, In part:

"A national bankingaseoclatlonmay, with the approval of the Comptroller of the Currency, establish and operate new branches: (1)Within the limits of the city, town or village in which said aseoclatlon 18 situated, if such establlehment and operationare at the time expreealy authorized to State bank8 by the law of the State In question;and (2)at any pointwithin the State In which said association Is situated, If such eatabllshmentand operationare at the time authorized to State banks by the statute law of the State In queatlonby language specifically granting such authority affirmatively and not merely by lmQllcatlonor recognition, and subject to the restr,lctlons as to loCatiOn Imposedby the law of the State on State banka.”
The Texas Constitution,ArticleXVI, Section 16, provides for the supervision,regulationand control of corporatebodlee with bankingand discountingprivileges. Ithas bten expressly stated therein that such corporatebodies

. . . shall not b$ authorized to engage In business In more than one place

. . . Article 3, Chapter IX of the Texas Banking Code (Article 342-903,Vernon’s Civil Statutes),which was enacted pursuant to the quoted constitutionalprohibition,provides:

“No state, national or privatebank shall engage In buaineas In more than one place,maintainany branch office, or cash check8 or receive deposit8 except in it8 own bankinghouse. For purpose of this Article ‘bankinghouse’ means tlie building

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Inwhose office8 the bU8ineSS of the bank 18 conducted and which Is functionally one place of business, including office facllltle8 whose nearest wall Is locatedwithin five hundred (500) feet of the nearest wall of the central building and 18 physically connected to the central building by tunnel, paeaageway or hallway providingdirect aCCe8S between the central building and the connected office facility or by pneumatic tube or other almllar carrier. The entire banking house shall for all purposesunder the law be considered one Integral bankinghouse."

From theabove quoted prohibitions, It 1s clear that Texas law doe8 not favor the U8e of multiple banking facilitiesby a single banking lnetltutlon. Accordingly, It Is the opinion of this office that Texas lawwould not permit the Implementationof any of the various proposals hereinabove set forth,

You have requested thatwe i,elate our discUS8lon to the following ruling Issued In 1965 by the Comptroller of the Currency, to-wit:

"7491. Deposit Machines

"A national bank may utilize at any location
a machinewhich receives checka, currency, or coin for deposit. The machine shall provide documentaryevidence of the transactionwhich state8 that the transactionwill become a deposit upon verificationand crediting at the main office or a branch office of the bank. Utilization of 8UCh machine8 at locationaother than themain office or a branch office of the bank does not constitute branch banking. A bank may provide Insurance protectionunder Its bonding program for transactions Involving euch machines."
The above quoted ruling ha8 not yet been passed upon by the courts, and the Comptroller of the Currency has cited no legal authority In support thereof, The Administrator's recent rulingswith regard to branch banking facilitieshave been said to be largelywithout supporting statutoryauthority

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Honorable Robert E. Stewart, page 6 M-273

and open to serious question. See 32 University of Chicago Law Review 148; 31 Law and Contemporary Problems 749, 765, and cases cited.

In our opinion, no substantialdifference exists between that plan approved by the above quoted rulingand any other plan which may be designed for theacceptance of bank deposits In branch locations. The use of a mechanical contrivance to perform these operationswill not render them non-banking operationswhich are outside the general and usual rules governing and restrictingbranch banking. “Branching” Is defined by both state and federal law In terms of end resultsand not In terms of any Instrumentalityor agency by which such results are accomplished. Section 36(f) of the NationalBank Act (12U.S.C. 8 36(f))provides, In part:

"The term branchas used In this section shall be held to Include any branch bank, branch office, branch agency, additional office, or any branch place of business located In any state

. . , at which depositsare received, or checks paid, or money lent."

In a recent federaldeclslon, Itwas observed In connectionwith the above quoted federaldefinition of "branching":

"'

9,

. .'/A7n additional office' or 'branch place if bueTnrssswill be considereda 'branch' for the purposes of B 36 If any one of the three specified condltlons 18 met, I.e., If deposits are received or checks are peld or money Is lent." Jackson v. FIi%t National Bank orValdosta, 246 F s 134 138 (M D Q 

## pia8Fj ' . . a. . (OriginalemThO8e planswhich have been proposedwhich would deslgnate third parties to be the operator(s) of the machines are likewisesubject to attack on several fronts. Initially,we observewith respect to these so-called "Independentcontractorarrangements' that from the manner In which these plans have been formulatedand proposed, It Is clear that the’ end result ssllghtIs a branch banking operation over which the parent bank will retain themaxlmum possibleactual controlwhich can be exercised and re-

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talned consistentwith the theory or pretense that legal control Is elsewhere. Legal control Is sought to be vested In a separate corporation solely for the purpose of circumventing the restrictions on branch banking operations as theymay apply to restrict the parent bank. Such an arrangement may be held to be, In and of Itself,a Sufficient basis for attacking the agreement between the bank and “the third party Independent contractor.‘ISee 1 Fletcher, Corporations (1963 revised ed.) 240, 241, wherein it Is concluded that,

“Where the corporate form of organlzatlon Is adopted or a corporate entity Is aaserted In an endeavor to evade a statute or ‘tomodify Its Intent, courts will disregard the corporation or ita entity and look at the substanceand reality of the matter.”
The above stated principlehae been recognized and applied In numerous fact sltuatlonBand haa been held to extend to the use of separate corporations created for the sole or main purpose of circumventingprohibitionsagalnet branch banking, tlonalBank of Jefferson Parish F 26 2m C Cl lgbj’) reU.S. 411, 1; i.edG 386, b5 Sict. 551 (1965). In the Whitney National Bank oaee,‘Bupra,, the Waehlngton D.C. Clroul Vote, In part at 323 F 2d 303:

11 BJhe corporate veil should be pierce; ihinever one bank &or corporation Is doinn buelnesa through e Instrumenta YT lty of the other or in the same way as If the InstitutlonBwere one. The unitary type of operation said

. . . to be charaoterlstlo of branch banking Is presenthere. In such circumstances the relationship of parent and branch exlsta, even though the banks are separate corporate organlzatlons.”
The application of legal terminology or languagewhich woul .dIn form designate the owner or operator of the machines the agent of the depoeltor of the bank Se of no legal slgnlflcance,nor would there be any legal Blgnlfloance to the creation of a dual agency relationship. Such fiotionalarrangementswill not alter the actual situation, since the

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courts look to substance rather than mere form.

In our opinion the facllltlesdescribed Inyour letter are clearly banking facllltles. It Is equally clear that under each proposedasrangementwhich you have described for operating these facllltles, the party operating the same would ‘bedoing so largely for the benefit of the bank and as agent of the bank, regardless of protestations to the contrary. It Is our opinion that under each proposed arrangement the participatingbank would In effect be “engaging In businessat more than one place” In violation of the applicable provisions of State and Federal Law. Secondly, even If It could be concluded that the third partywho operates the machines Is not the agent of the participatingbank, such third partywould himself be engaging In the banking business without a charter In vlolatlon of Section 902 of the Banking Code (Article 342-902, V.C.S.). The provisions of the TeXBB Constitutionand statutes contemplate the regulation of the, banking business from the very Instant that public money Is deposited. The devicehere propoaed, If held not to be subjeot’to these provisions,would leave the public completelyunprotected, Insofaras “Bupervlslon,regulationand control”are concerned from .thetime that the deposlt Is made with ‘the “box”until the deposit reaches the confines of the partlclpatlng bank.

SUMMARY ------- (1) The use of machines to performacts which would otherwise constitutebranch banking within the prohibitionsof Sta,telaw (asmade applicable to national banks by Congress) has no legal effect Insofar as the nature of such acte are oonoerned, -- Bald acts continue to oonetltute branch banking.

(2) The uBe of an “Independentoontractor’arrangementwith the owner or operator of such maohlnes for the attempted purpose of circumventingprohlbltlonsagainst branch banking should be disregarded and the substance of the arrangement (theparticipating Interest of the bank) should be looked to to determinewhether the bank Is In fact engaging In branch banking.

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party(Z TE such extent, If any, as the third

fact a separate entity or lnde-

. . penaenc contractorhe would himself b,e engaging In unregulated banking In violation of state law.

YOJ& very truly, 

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. rney General of Texas Preparedby Larry J. Craddock Assistant Attorney Qeneral

APPROVED: OPINION COMMITTEE
Hawthorne Phillips,Chairman Kerns Taylor, Co-Chairman Fielding Early Jim Swearlngen Fisher Tyler Malcolm Quick

A. J. Carubbl, Jr, Executive Assistant Attorney General

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