Court Opinion

ID: 4130224
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:01:45.738324+00
Date Added: 2024-06-11T14:31:54.521093
License: Public Domain

Honorable John J. Gavin             Opinion No.   JM-1245
Chairman
Insurance Committee                 Re: Whether an individual
Texas Rouse of Representatives      surety may file a letter of
P. 0. Box 2910                      credit for bail bond pur-
Austin, Texas   70769-2910          poses under article 2372p-3,
                                    V.T.C.S.   (RQ-1966)

Dear Representative   Gavin:

     You ask whether an individual applicant for a license
to execute bail bonds may satisfy the financial    security
requirements of article 2372p-3, V.T.C.S, by submitting a
letter of credit.   Subsection 6(f)(l) of article   2372p-3
provides in part:
            (F) Upon notice   from the     [county bail
        bond] board that the application       has been
        tentatively   approved,   the m            shall
        then : (1) deposit with the county treasurer
        of the county in which the license is to be
        issued a cashier's      check, certificate    of
        deposit, cash, or &         a-           in th.2
        amount indicated by the m            under sub-
        division (5) of Subsection     (a) of Section  6
        of this Act but in no event less than $50,000
        except in counties with populations of less
        than 250,000 persons by the most recent
        federal census, the amount for applicants     in
        said counties shall be $10,000 to be held     in
        a special fund to be called the bail    security
        fund.   (Rmphasis added.)1

     1. Section 6(a) describes the information that must be
included in the application.   Section 6(a)(5) requires  the
applicant to include a statement of "the amount of cash or
cash value of any certificate of deposit or cashier's checks
which the applicant intends to place on deposit . . . if the
license is granted.'    Instead of complying with    section
                                        (Footnote Continued)

                                 p. 6630
Honorable John J. Gavin - Page 2     (JM-1245)

We conclude that an individual   as well as corporate  appli-
cants may submit certain letters of credit as "cash eguiva-
lents." To qualify, the letters of credit must be irrevoca-
ble, must  limit inquiry into the underlying     transactions
between the county and the bondsman, must provide          for
payment thereunder  on sight or within a reasonably     brief
period of time after presentation of all required documents,
and must not make such payment contingent upon the consent
of, or any other action by, the bondsman or other party.
     Article 62523-3 does not define the word       "applicant."
Section 6 (a) , however /' requires "any person    desiring    to
act as a bondsmann   to file an application     for a license.
"Personm is defined by section 2(l) of the act to mean         an
individual or corporation.    Consequently an applicant may be
either an individual or a corporation who desires to act as
a bondsman.    Since the financial security requirements       of
section 6(f)(l) and (2) of article       6272p-3 apply to any
applicant whose application    has been tentatively    approved,
they apply to both individual and corporate applicants.2

     Article 6252p-3 also does not define "cash eguivalent.n
The statute as originally enacted in 1973 did not contain
that phrase.  Section 6(d)(l) of the 1973 act required    the
applicant upon tentative    approval of his application    to
deposit either "a cashier's   check, certificate of  deposit,
or cash in the amount of $S,OOO,w or execute in trust a deed
to nonexempt realty worth at least $10,000. Acts 1973, 63rd

(Footnote Continued)
6(f) (11, an applicant may satisfy the requirements       of
section 6(f)(2) and execute in   trust a deed to nonexempt
realty equal in value to the applicable minimum described in
section 6(f)(l).

     2.  This conclusion    is consistent with the        cases
applying the financial Security requirements   in section 6 as
originally enacted and later amended to both individual     and
corporate applicants.  See. e.a,,   Texas Fire & Casualtv   Co,
v.,                               684 S.W.Zd 177 (Tax. App. -
Houston [14th Dist.] 1984, writ ref’d     n.r.e.) (local rule
invalid to extent that it requires corporate        surety to
deposit pursuant  to section 6(f) of      1981 act more    than
$5,000): Bexar Countv aail Bond Bd.       Decw     604  S.W.Zd
214 (Tex. Civ. App. - San Antonio 198:, no writ; (individual
surety is not required by section 6(d) of 1973 act to
deposit more than $5,000). m          Attorney General Opinion
JM-799 (1987) (section 7(a) of the act expressly          makes
section 6(g) inapplicable to corporate sureties).

                                p. 6631
Honorable John J. Gavin - Page 3    (JM-1245)

Leg., ch. 550, 5 6, at 1523.3 The 1973 act was substan-
tially amended by the legislature in 1981. Acts 1981, 67th
Leg., ch. 312, 5 1, at 075-05.     The 1981 amendments   added
section 6(a)(5), renumbered section 6(d)(l) as 6(f)(l),     and
amended the renumbered provision to include the phrase "cash
equivalent"  and the    reference   to subsection     6(a) (5).
Neither the testimony  at the legislative   hearings nor the
bill analyses clarify this amendatory  language.4

     In Attorney General   Opinion JM-935 (1988), we construed
the phrase "cash equivalent*    to “be something   commercially
as good as cash, or, as we take it, something that could
readily be converted into cash at a fixed     price.' La at 2
(quoting from moau       v. w,      4 S.W. 361 (Tex. 1887)).
We further described *cash eguivalentw in that opinion as an
instrument convertible into cash within      a reasonable  time
and with reasonable    effort.    &at     3.    Applying  those
definitions, we'noted that an assignment of a life insurance
policy without transfer of the power to surrender the policy
for its cash value would require the county to obtain the

     3. In 1987 the legislature increased the minimum    cash
or cash equivalent amount required by section 6(f)(l)    from
$5,000 to $10,000 or $50,000 depending on the population   of
the county. Acts 1987, 70th Leg., ch. 921, 5 2. at 3110.

     4. The 1981 amendments       also added section  6(f) (3),
which requires    a corporate bondsman to furnish the county
sheriff an irrevocable letter of credit as a cash equivalent
to satisfy any final judgment of forfeiture.     The legisla-
tive history is silent with regard to this addition. Article
22.14 of the Code of Criminal Procedure makes a judgment     in
a bond   forfeiture case final after a trial during which
insufficient cause is shown for the principal's failure to
appear. The section 6(f)(3) requirement applies after the
issuance of bonds in contrast       to the financial security
requirements of     section 6(f) (1) and (2). which must be
satisfied upon tentative      approval of the application    to
issue bonds.      Thus we interpret section 6(f)(3) as an
additional     financial  requirement  on corporate  bondsmen
rather than as an indication that individual bondsmen       may
not use letters of credit to satisfy section 6(f)(l).

                               p. 6632
Honorable John J. Gavin - Page 4    (JM-1245)

bondsman's express consent to surrender and concluded   that
such a limited assignment did not constitute a "cash eguiva-
lent."5

     No other opinion or judicial        decision  affords us
insight into the meaning of "cash equivalent."    However, in
Attorney General Opinion H-430 (1974), which interpreted the
1973 version of the statute, we stated the purpose of the
financial security   requirements   to be the placement    of
Wresources in the hands of the County with which to satisfy
a forfeiture without having to resort to court proceedings.W
&   at 2 (holding that certificate     of deposit, whether or
not negotiable, must be payable     to the county  so that it
could be reduced to cash without      any action by the bail
bondsman).   In Attorney General Opinion JH-935, we confirmed
this earlier   interpretation   of the statute's   purpose by
denying a bail   bondsman the right to submit as financial
security an instrument   that required action on the bonds-
man's part prior to conversion of the instrument into cash.

         Our holding   in Attorney              Opinion JM-935
(1955:.is consistent with the cardin?%         of construction
that effect be given to every part of a statute. SW           67
Tex. Jur. 3d Status     5 124. We did not therein      restrict
the phrase 'cash eguivalentm to the security devices      listed
in section 6(a)(S) of the act: cash, cashier88 checks,       and
certificates   of deposit.    The legislature     included   the
phrase "cash eguivalentn    along with all three of those
devices in section 6(f)(l), and thereby indicated its intent
not to restrict the submission of security devices to those
listed in section   6(a)(5). Thus we give little weight       to
the omission   of the phrase    "cash equivalent*   in section
6(a)(S) and construe that section as requiring an applicant
to describe   in his application the amount and type of
qualifying   security  that he will submit on         tentative
approval of his application.   This will achieve the purpose
of providing   the financial security information     that the
board needs to assess the qualifications     of the applicant
without restricting the type of security      in a manner   that
violates the intent of section 6(f)(l).

                               p. 6633
Honorable John J. Gavin - Page 5      (JM-1245)

     Section 5.103(a)(l) of the Texas Business and Commerce
Code defines "letter of credit " for purposes of chapter 5 of
the code6 concerning letters of credit as

        an engagement by a bank or other person made
        at the request of a customer    and of a kind
        within the scope of this     chapter  (Section
        5.102) that the issuer will honor drafts      or
        other demands   for payment upon compliance
        with the     conditions  specified    *     the
        credit. A credit may be either revo&e         or
        irrevocable.

Section 5.102 states  that  chapter 5 applies to the follow-
ing:   (1) a letter of credit issued by a bank if the credit
requires a documentary     draft or documentary   demand7   for
payment, (2) a letter of     credit issued by a person    other
than a bank if the credit requires that the demand for pay-
ment be accompanied by a document of title. or (3) a letter
of credit issued by ; bank or other person      if the credit
states that it is a letter of credit or is conspicuously
entitled as such.

     6. your request does   not refer to chapter   5 of the
Texas Business  and Commerce Code. We limit our opinion,
however, to letters of credit within the scope of chapter 5,
since chapter 5 establishes the framework for development of
the law of letters of credit by codifying the fundamental
concepts underlying letters of credit. m    Bus. G Corn. Code
5 5.102(c), comment 2 (Tex. UCC) (Vernon 1968); UQ         p&
Commercial Coru. v. Hvn&&    Inc.- 705 S.W.Zd 713, 715 (Tex.
APP. - Dallas 1986, no writ) (in&ument    outside the scope
of chapter 5 cannot be a letter of credit).

      7. A wdocumentary     draft" or "documentary demand      for
payment" refers to a draft or demand whose honor is con-
ditioned upon the presentation       of any paper    including    a
notice of default,    invoice, or document    of title.    Bus. G
Corn. Code   f 5.103(a)(2).    A   draft refers to a bill of
exchange.   XL 5 3.104(b) (11, Cc): ass
    State 6600;.W;;18;;L     055 (Tex. App. -
&it)   (bill                  1s any written     requirement   fZ
payment of a specified sum to a third person at a stated
time or on demand); see also Black's Law Dictionary 149 (5th
ed. 1979) (bill of exchange      is a third party instrument    by
one party ordering payment by another party of a sum certain
to a third party).

                                 p. 6634
Honorable John J. Gavin - Page 6     (JM-1245)

     Letters of credit have traditionally         been used as
security   devices     in   international  sales   transactions.
Foreign sellers      in those transactions ensured payment     by
requiring their buyers to obtain letters of credit authoriz-
ing draws against the credits upon presentation of documents
of title such as bills of lading. &G           &st Girard    Sa %
                                          593 F.2d 598 (5th CL.
1979); Annot.,    35 A.L:R.3d   1404 (19;l). Traditional    sales
credits are    ofton    referred to as sccmmercial credits."
Letters of credit      in recent years have also been used to
secure the payment of various financial obligations or the
performance of real estate, construction, or other nonsales
contracts.   m     Annot.,   44 A.L.R. 4th 172 (1986); Mueller,

Attornev.  38  Baylor L.    Rev. 109  (1986)   (hereinafter
Mueller);  These credits are often referred.to as nstandby
credits" or "guaranty credits."

     A letter of credit, whether     it is a     commercial   or   a
standby credit, concerns

        three actors engaged in three related con-
        tracts.  The three parties . . . are:        the
        customer; which . . . causes it to bs issued:
        the issuer [usually a financial institution],
        which is the party   who executes the credit;
        and  the beneficiary,    which   is the party
        entitled to payment pursuant to the credit.
        Typically, the first contract     entered   into
        involves the underlying    obligation    between
        the beneficiary    and the     customer.   . . .
        Pursuant to this underlying obligation,      the
        customer will next contract with the issuer
        to execute the credit.     In performance     of
        the contract with the customer,     the issuer
        executes  the credit     which embodies      the
        issuer's contract to pay the beneficiary when
        the beneficiary satisfies the conditions     for
        payment expressed   in the letter of credit.
        (Citations omitted.)

Mueller, m,    at 110-11. These contracts are         independent
of one another in the case of a true letter           of credit.

acts as a principal  and not as the agent of the customer,
and it assumes   a primary obligation   to   the beneficiary
independent of the performance  of the contract between   the
customer and the beneficiary.  The issuer must therefore pay
the beneficiary   if the beneficiary's  demand   for payment
conforms to the terms of the letter of credit        "without
reference to the rights and obligations    of the parties  to

                                p. 6635
Honorable John J. Gavin - Page 7    (JM-1245)

the underlying contract."  &     at 114; pee am    Bus. &   Corn.
Code 8 5.114(a); 49 Tex. Jur.    3dvoil,                      at
523.8

     Conforming presentation requires that the beneficiary
strictly comply with the conditions for payment described in
the credit. Westwind
m,      696 S.W.2d 378    (Tex. 1985).   The cou*s,    howeve:
will not construe mere promises    to  be conditions and   wili
resolve   ambiguities  against    the issuer.      Furthermore,
absolute perfection of    presentation is not a requirement.
            Few Braunfels     ,                     780 S.W.2d
Ft I 316-17 (Tex. App. - Austin 1989, writ denied);      m
                                                  , 722 S.W.2d
12, 14 (Tex. App. - Dallas 1986, writ ref'd n.r.e.).

     Either a commercial   or a standby credit may be a
wdocumentaryn credit, a credit whose terms require that the
draft or demand    for payment be accompanied    by certain
documents, or a Vleana credit, a credit whose terms require
only the presentation  of the draft or demand for payment.

       8. Even though the issuer has a primary          and not
secondary obligation    to the beneficiary,     the issuer may
refuse to honor a conforming      draft or demand for payment
under section   5.114(b) of   the Business and Commerce     Code
where there is "fraud in the transaction."      The customer may
also seek an injunction against payment by the issuer where
there is such fraud. Texas courts discussing this exception
to payment, have upheld injunctions only if there was      fraud
so egregious   that it destroyed the legitimate reason       for
maintaining the independence of the credit from the underl-
ying obligation.    )                        ‘      W        730
S.W.2d 355, 359-64    (Tex. App. - Dallas 1967, writ dism'd)
(cattle production below the hoped for but not guaranteed
quality was unintentional and did not constitute fraud for
          .114 purposes) ; -OS..           Inc. v. Oil CounQy
          ts. Ltd,    709 S.W.2d 262, 264-65      (Tex. APP. -
Houston   [lst Dist.] 1986, writ dism# d)         (beneficiary's
intentional shipment of tot~ll~rw~Uess           pipe destroyed
legitimate   purposes   of                  and justified     an
injunction): see al.SG Annot., 25 A.L.R. 4th 239 (1983) 0-v
courts including Texas courts refuse to give broad construc-
tion to section    5.114). The limits of this exception       to
payment may not be avoided by an issuer filing an inter-
pleader action to determine      the respective   rights of the
beneficiary and the issue??8 customer. Dallas Bank & TNS~
Co. v. Commonwealth Dev. CQZP, 686 S.W.2d 226 (Tex. App. -
Dallas 1984, writ ref'd n.r.e.i.

                                p. 6636
Honorable John J. Gavin - Page 8    (JM-1245)

Annot., 44 A.L.R. 4th 172, 176      (1986); see also Anex Oil.
Co. v. Arch-m Co,, 770 F.2d 1353, 1355       (5th Cir. 1985)    (a
credit may be both "documentary" and wstandbyw); w
zJoint                                    748 S.W.Zd 316     (Tex.
APP. - Eastland 1988, writ denied) (standby credits            are
often documentary  credits since they generally        require   a
statement there has been a default).           A   commercial   or
standby credit may also be a "sight" credit under which the
beneficiary may demand payment on presentation        of a draft
and all other conforming documents     or a wtimew credit that
is not payable until a specified time after presentation        of
all required documents.    Mueller, m,         at 116; see a&~
                         722  S.W.?d   at 12 (draft   payable   on
sight was payable on &and).       Letters  of credit,    however,
are not negotiable    instruments,    although   the underlying
drafts   for payment   may be either negotiable         or    non-
negotiable.  Reritaae He                              651 S.W.Zd
272 (Tex. App. - Dallas    1983, no writ)     (sin& letters     of
credit are not payable to bearer they are not negotiable):
m                              660 S.W.Zd 851, 855 (Tex. App.
- Austin 1983, no writ) (u&s      credit otherwise     specifies,
draft may be either negotiable or nonnegotiable).

       Credits may also be either revocable or    irrevocable.
BUS * 61 Corn. Code f 5.103(a)(l).      According  to section'
5.106(b) of the Business and Commerce Code, once an irrevo-
cable credit is established    with regard to the beneficiary
it can be modified or revoked only with the beneficiary's
consent.    A credit is established  with regard to a benefi-
ciary when he either receives the credit or an authorized
advice   of its issuance. L    5 5.106(a)(2).  In contrast,   a
revocable credit may generally be modified or revoked by the
issuer without either notice to or consent from the customer
or the beneficiary.    IQr S 5.106(c).9

     Given our review of these fundamental concepts of the
law of letters of credit, we conclude #at not all letters
of credit    will   satisfy the   requirement   for   "cash

     9.  Neither  section 5.103(a) nor section 5.106 provides
which status should be presumed if the credit does not state
whether it is revocable or irrevocable.     In at least one
case concerning an undesignated credit,   a court has held a
standby credit   irrevocable  since to do otherwise     would
frustrate the basic purpose of the credit -- the making
certain of the right to payment independent of disputes over
the performance of the underlying contract. Rueller, m,
at 117-18 (citing West Virmd                       v. Srok&
415 F. Supp. 1107 (W.D. Pa. 1975)).

                                p. 6637
Honorable John J. Gavin - Page 9         (JM-1245)

eguivalentsw that they be readily convertible          into cash
within a reasonable time and with reasonable effort without
resort to consent by the bondsman        or to other outside
action.    To satisfy that requirement and thus constitute      a
"cash eguivalentw for purposes of section 6(f)(l) of article
2372p-3,  V.T.C.S., we hold that a standby letter of credit
used to secure the bail   bond obligations of an individual or
corporate   bondsman   must possess    the following      charac-
teristics:     (1) the credit must be irrevocable, (2) the
credit must be a true letter of crsdit    that dces not require
examination of.the performance of the underlying transaction
absent "fraud in the transaction,w (3) the drafts or demands
for payment under the credit     must be payable to the county
on sight or within a reasonably brief period of time after
presentation of all required documents, (4) the credit must
not include any condition that makes payment to the county
as beneficiary    contingent   upon the consent of or other
action by the bondsman    or other party, and (5) the credit
must be issued by an institution          or  entity    which
financially responsive in the amount of the credits, in tii:
opinion   of the county bail bond board.            However,  our
conclusion does not foreclose other *cash eguivalentsw         as
long as the standards of Attorney    General Opinion JM-935 are
satisfied.

          The credit      .- .be __
                       must       irrevocable
                                         -. _ to      that the
                                                   ensure
issuer coos       not unuaterauy     mociry or     revoke the
                                                         credit
prior to a county88 demand   for payment  under the     credit.
The three named security devices in section 6(f)(l)    -- cash,
cashier's checks, and certificates   of deposit     -- are not
revocable: thus qualifying letters of credit must not be
revocable.  Furthermore, to hold otherwise would not ensure
that the necessary resources would be available to satisfy
bond forfeitures.

     Second, a qualifying   credit must be a true letter of
credit.  A true letter of credit limits the circumstances in
which the underlying transactions   between the bondsman    and
the county may be examined.   WC        Nat I1 B8& of Dal&8
578 S.W.2d at 115.   If the credit requires as a conditio;
for payment that there be a factual determination of forfei-
ture or default, the county would likely     have to resort to
outside action,  such as a court proceeding, to establish
its rights to payment under the credit.       Thus even though
the credit may require a documentlo     be submitted prior to

     10.  As mentioned earlier, a credit may be either a
wdocumentaryw credit or a wcleanw letter of credit.
                                      (Pootnote Continu3

                                    p. 6638
Honorable John J. Gavin - Page 10       (JM-1245)

payment that states the bondsman       has defaulted     in his
underlying obligations   to the county, the credit may not
require as a condition for payment proof of default or other
examination of the performance     of the underlying
                                             .    --    obliga-
tions. See.,         iaarm-Olson-stordahl Joint Ventuzz      748
S.W.2d 316 fsummarv iudwent reversed on anneal since &edit
subject to perfon&Ge    -in compliance   with-underlying    con-
tract and thus was not true letter of credit but guaranty
contract): w.           Co. of New YQ@ v. Central Nat 1 E&j
gf Houstpn, 624 S.W.2d 222 (Tex. Civ. APP - - Housto;     [lst
Dist.] 1981, writ ref*d n.r.e.)    (true letter of credit may
contatn   references  to underlying    obligations   but those
references may not create conditions for honoring drafts).

     Third,   drafts or other      demands   for payment   under a
qualifying letter of credit must be payable on sight or
within a reasonably       brief   period   of time after proper
presentation of all required documents so that the credit is
readily convertible into cash. What is a reasonable              time
may vary depending      on individual    and local circumstances,
and we are not in a position to address these                varying
circumstances as a part of the opinion process.            Further-
more, section 6(f)(l) sanctions       the use of certificates       of
deposit without prohibiting the use of time deposits.              &%
Attorney General Opinion H-430 (1974) (on maturity bondsman
may withdraw     certificate    if substitute    security  is pro-
vided).    We therefore   conclude that county bail bond boards
may establish     reasonable    time periods   for   payment    under
letters of credit submitted       as "cash eguivalentsw    pursuant
to section 6(f)(l) of article 23723-3.

     Finally, the terms of a qualifying     letter of credit
must not make payment contingent upon any action by the
bondsman or other individual   or entity.     To satisfy    this
standard, the credit must not include any condition          for
payment that the county cannot  satisfy  without  the    consent
of, or other action by, the bondsman    or other  party.     For

(Footnote Continued)
infm,  at 11. Although a wcleanw letter of credit, a credit
that requires only a draft or demand for payment, limits the
risk that   it will be construed    as a guaranty,     standby
credits are frequently documentary   credits since the terms
of the credits usually require that the draft or demand     for
payment be accompanied by a statement that the customer      is
in default.   A cautious beneficiary can limit his risk by
avoiding   any reference    to guaranties    and   unnecessary
reference   to the underlying    obligations.    M    Mueller,
=I       at 113 n.22    (various advice to cautious      bene-
ficiaries).

                                   p. 6639
Honorable John J. Gavin - Page 11        (JM-1245)

instance, the credit may not require the county as bene-
ficiary to submit a document signed by the bondsman that he
has defaulted on his underlying obligations to the county.
Neither the terms of a cashier#s check or certificate     of
deposit payable to the county requires consent of or   other
action by anyone else prior to conversion into cash.   Thus ‘
the terms of a qualifying  letter of credit must not condi-
tion payment on such consent or action.

           Individual as well as corporate applicants
        may submit certain letters of credit as "cash
        eguivalsntsw for purposes  of section 6(f) (1)
        of article 2372p-3, V.T.C.S.    To qualify as
        "cash eguivalents,w letters of credit must be
        irrevocable,  must limit inquiry     into the
        underlying transactions   between the county
        and the bondsman, must provide for payment of
        drafts or demands   for payment thereunder   on
        sight or within a reasonably brief period    of
        time after presentation     of all    required
        documents, and must not make payment       con-
        tingent upon the consent of, or other action
        by, the bondsman or other party.

                                     JIM        MATTOX
                                     Attorney    General of Texas

~YNRLLHR
First Assistant Attorney General

Lou MCCREARY
Executive Assistant Attorney     General

JUDGEZOLLIESTRAHIHY
Special Assistant Attorney     General

RENEA HICKS
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Celeste A. Baker
Assistant Attorney General

                                  p. 6640