. - 

Honorable M. 0. Flowrs 

Secretary of state 

Austin, Texas 

Ibar Sir: Attention; bW. Will Mann Richardson 

Opinion No. O-2644 

Rer Admissibility of contract as 

property for payment of capital 

stock. 

This will acknowledge receipt of your letter of July 13, 1940, in 

which you seek an opinion of this department upon the question of whether 

or not ycu should approve an amendment to the oharter of Texas Guarantors, 

Incorporated, whereby the capital stock of such aompany is being increased 

from #26,000.00 to 10,000 shares of no par value class "A" stook and 2,500 

shares of class "B" stook of the par value of $10.00 per share. It appears 

that all the class "A" stock has been subscribed and that 6,000 shares 

thereof have been paid for at the rate of $10.00 per share. All class "B" 

stock has been previously subscribed and paid for. 

The amendment reflects that the $50,000.00 paid for the 5,000 

shares of class "A" stock is being paid for out of surplus. It further eppears that the assets of such company consist of $2,954.39 cash and an aesignmsnt of the proceeds of en opsratjng contract upon which a value of 

$250,000.00 has been placed. The surplus, therefore, is represented by 

such assignment of the proceeds under the contract involved. 

The specific question submitted for cur consideration is whether 

or not the contract involved is of such character as to be admissible for 

the purpose'for which it is proposed to be used. 

As to the nature and character of the contract here involved, ws 

quote from the affidavit of the Board of Directors of Texas Guarantors, 

Incorporated, as followsr 

"The contract referred to in said financial statement is a 

contract whereby Texas Guarantors. Incorporated, has guaranteed to Texas 

Independence Life Insurance Company the performance by F. D. Glass, Jr. of 

his contractual obligations to said Texas Independence Life Insurance Company as its President and bonded officer. That in consideration for such 

guarantee, said P. D. Glass, Jr. assigned and transferred to Texas Guarantors, Incorporated, all net profits, all net proceeds accruing to him as 

President of said Texas Independence Life Insurance Company. That under 
. , 

Honorable M. 0. Flowers, Page 2 O-2544 

the law he, as such President, would be entitled to receive 4% of the 

gross premium income, and such income, less operating expenses, is what is 

assigned and transferred to Texas Guarantors. Incorporated, That for the 

last 8 months of 1939 this 40% amounted to $42,580.28, and for the first 6 

months of 1940 it amounted to $37,661.60 or a total of @30,241.86 for the 

last 14 months and from this amount there would be deductable only the 

operating expenses, Because this has been a period of expansion and aoquisiticn of other companies, the operating expenses have been somewhat 

above what they would normally be, and it is estimated that these operating expenses hereafter will amount to approximately )2,300.1X per month. 

Since this assignment was made in February, 1939, Texas Independence Life 

Insurance Company has expanded its business to a great extent by the purchase and merger of numerous other mutual life insurance ccmpanies, so 

that now its gross monthly premium income is approximately $23.000.00. 

"That the three affiants are familiar with the manner of dealing 

with the purchase and sale of mutual life insurance companies in Texas and 

know the prices paid for such companies, where the company is in a sound 

condition as the Texas Independence Life Insurance Company is, and the 

fair and reasonable market value for such a company is from ten to twelve 

times its gross monthly premium income, and sales frequently are made on 

that basis. That the above mentioned contract results in all net profits 

from the operat on of Texas Independence Life Insurance Company passing to 

Texas Guarantors, Incorporated, for its own use and benefit, and therefore 

said contract itself has a value comparable with what would be the value 

of the Texas Independence Life Insurance Company. and said contract not 

being canoellable, but running for the life of the Texas Independence Life 

Insurance Company, has a value of at least the amount of $26,000.00. 

(That, as a matter of fact, one of the companies purchased and merged into 

the Texas Independence Life Insurance Company and having a gross monthly 

premium income of approximately $7,300,00 was purchased at a price of 

$80,000,00)" 

We quote from a letter frcm Mr, James P. Markham, Jr., the attorney for Texas Guarantors. Incorporatadr 

"Texas Independence Life Insurance Company is operating as a statewide mutual life insurance company and is subject to Article 4859-f, On 

February 10, 1939 Texas Guarantors, Incorporated entered into an agreement 

with Texas Independence Life Insurance Ccmpany by which agreement the 

former company guaranteed to the latter ccmpany that the President of the 

latter company would faithfully and truly perform all his obligations to 

Texas Independence Life Insurance Company. This agreement was in the following language : 

"'State of Texas; 

County of Harris: Know All Men 9y These Presents3 

"That the undersigned Texas Guarantors, Incorporated, acting herein by and through its duly authorized officers, and for a good and valuable 
Honorable M. 0. Flowers, Page 3 o-2544 

consideration this day received by it from F. D. Glass, Jr., and from 

Texas Independence Life Insurance Company, receipt of which oonsiderations 

is hereby acknowledged and confessed, does hereby guarantee to said Texas 

Independence Life Insurance Company that F. D. Glass, Jr., will faithfully 

and truly perform all his obligations to the said Texas Independence Life 

Insurance Company arising out of his contract with said oompany in his 

position as its President, and said Texas Guarantors, Incorporated, shall 

be fully accountable to said Texas Independence Life Insurance Company for 

any omission or breach by said F. D. Glass, Jr. of any of his said obligations to said Texas Independence Life Insurenoe Company. 

"'One of the considerations for this guarantee is a transfer by 

the said F. D. Glass, Jr. unto said Texas Guarantors, Incorporated of all 

his right, title and interest in and to any and all net profits, net rsvBXlUfZS, or net proceeds accruing or resulting to said F. D. Glass, Jr., 

by reason of his office as President of Texas Independence Life Insurance 

Company and any rights or emoluments accruing tc him as such officer. 

"IIt is expressly understood that this contract of guarantee, as 

well as the transfer of the above mentioned net profits, net revenues and 

net proceeds, and any other emoluments, shall endure for the entire life 

of Texas Independence Life Insurance Company, and shall inure to the 

benefit of and be enforceable against the heirs or suocessors in interest 

of said F. D. Glass, Jr. and Texas Guarantors, Inoorporated, respectively, 

during the entire life of the Texas Independence Life Insuranoe Company. 

"1 WIT?ZXSS the corporate seal and signature of Texas Guarantors, 

Inoorporated, at Houston, Texas, on this the 10th day of February.1939.'" 

The contract between F. D. Glass, Jr. and the Texas Independence 

Life Insurance Company was made and entered into by virtue of tha aooeptanae by the said Glass of the presidency of such aompany and under the 

applicable portion of Artiole 2.6 of the company's by-laws. Such Article 

reads: 

"ARTICLZ XXVI: DUTIES Ji- .WYLCh'RS 

Section 1. 

PRUIDSW: - The President shall preside at all meetings of the 

Company, the Board of Directors, and the Executive Committee. He shall 

sign ail membership certicicates or polioies, eontracts, and other written 

undertakings entered into by the Company. He shall see that all lam and 

regulations of the Company are faithfully and impartially executed. The 

President shall own all office furniture, fixtures, supplies, and the general agency contract of the Company, and in event of his death or removal 

from office for cause, his interest shall revert to his estate. He shall 

recejve and disburse all funds accumulating to the Expense Fund and it 

shall be his duty to record accurately in the books of the Association all 

receipts and disbursements of every chars&w of the Expense Fund the same 

as the Mortuary Fund. After all expenses have been paid, any excess in 

the Expense Fund shall belong to the President and oan be used by him as 

personal funds. The President shall be elaoted by the Board of Directors 

for an unlimited time and shall oontinue in office until he is removed for 
Honorable M. 0. Flowers, Page 4 O-2544 

c*use* He can be removed from office only for wilful negleat of duty, 

misappropriation of funds or malfeasance of office. In case of his rsmoval from office, he shall be compensated for the good will and the assets 

built up by him; the amount of said compensation to be determined by the 

Board of Directors and/or Executive Committee." 

Reference has been made to our Opinion No. O-1625 previously aritten to you in which we dealt with a somewhat similar situation. In stroh 

opinion we considered the effect of Article 5064 of the Revised CivilStatutes upon the situation there presented, We think that suah opinion would 

unquestionable control the present situation unless it oan be said that 

Article 4859f, Section 19, of the Revised Civil Statutes relieves the present company form the terms and provisions of Article 5064. 

The Texas Independence Life Insurance Company is operating as a 

mutual insuranae company under the provisions of Chapter 8a, Title ,78, of 

the Revised Civil Statutes., Article 4859f, Section 19 thereof, reads in 

partr 

n . . . Except as herein expressly provided, no insurance law of 

this state shall apply to any corporation operating under this act, and no 

law hereafter enacted shall apply to them unless they be expressly designated therein." 

Your request does not oall on us to pass upon the question of 

whether or not Artiale 5064, supra, is violated in the instant case and 

for that reason me do not undertake to decide such question. 

Vie are here concerned with the sole question of whether or not the 

property involved is property within the purview of the pertinent oonstitutional provisions so as to be admissible for the payment of capital 

stock. 

Section 6 of Article 12 of the Texas Constitution reads9 

"No corporation shall issue stock or bonds except for money paid, 

labor done or property actually reoeived, and all fictitious inorease of 

stock or indebtedness shall be void." 

We think the correct test for the determination of whether or not 

property is of such character as to be oapable of being accepted by a oorporation in payment of capital stook was set forth by Judge Phillips of 

the Supreme Court in the case of Washer vs. Smyer, 211 S. PI. 985, 4 A.L,R. 

1320. The question involved in such case was whether or not a note was 

property within the purview of the above quoted aonstitutional provision. 

The court saidr 

"Undeniably, in the broad sense a note is property in the hands of 

the payee* So, in a literal sense, is everything property which is capable 

of ownership. All forms of chows in a&ion are property in the ssme sense 
Honorable M. 0. i"lcwers, Fage 5 O-2544 

--the right to racover a debt, the right to recover damages for breach of 

a contract, unsatisfied judgments, and other similar kinds of actionable 

demands. But the framers of the Constitution never intended that property 

of that nature should constitute the capital of a corporation. The term 

'property' was used in this section of the Constitution in no such sense. 

It means property readily capable of being applied to the debts of the 

corporation. As a rule, it should be property of the kind adapted to the 

charter uses of the corporation and which it may legally acquire. There 

ara some classes of property which are so staple in character and so 

easily convertible into money as to be in actual commerce the ready 

equivalent of money, and it is possible that a corporation in its formative period would be authorized to receive such property in payment for 

stock though not, in a strict sense, adapted to its purposes. The different forms of valuable property and the different purposes for which 

corporations may be created, make it impossible to lay down other than general rules upon the subject. 

"The integrity of a corporation and the interests of the public 

demand, however, that the assets of a corporation consist of something more 

than its stockholders' debts. Its capital cannot be thus constituted, and 

therefore it cannot accept a stock subscriber's note in payment for his 

stock. There is authority opposed to this holding, as there is authority 

which support8 if. But it seems to us no authority is needed to establish it." 

Viewing the contract involved in the light of the foregoing well 

established principles of law, we do not believe it constitutes property 

tithin the purview of the Constitution and consequently the charter amendment does not warrant your approval. 

There are other serious questions involved in connection with the 

contract between Texas Independenoe Life Insuranoe Company and F. D. 

Glass, Jr,, one of whioh is the right of the Board of Directors of such 

company to bind the corporation by contract for the personal services of 

Glass for a period of time longer than the term for which such directors 

are elected, Such, however, are questions not necessary for us to deoide. 

The proposed amendment and supplemental affidavits are returned 

herewith. 

Very truly yours 

ATTORREY GEbERAi OF TEXAS 

By s/Lloyd Armstrong 

Lloyd Armstrong 

LA : jm/wc Assistant 

Encl. 

APPROVED Opinion Ccmmittee By s/R.W.F. Chairman 

;i;,';;;d Aug. 12, 1940 S/Grover Sellers First Assistant Attorney