Court Opinion

ID: 4133192
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:35:05.995068+00
Date Added: 2024-06-11T14:34:09.696427
License: Public Domain

The Honorable    Jesse   James                         Opinion   No.   H-. 186
State Treasurer
Treasury   Department                                  Re:~   Are dividends     held by
Austin,  Texas 78711                                          a bank trust department
                                                              and credited    to a parti-
                                                              cular trust account or
                                                              trust accounts     subject to
                                                              being reported     as an
                                                              “inactive  account”     or a
                                                              “dormant    account, ”
                                                              pursuant to the provisions
                                                              of Article   3272b, V. T. C S ,
Dear   Mr.   James:                                           and related questions.

        You have asked for the opinion of this office    on a number of questions
concerning     the applicability of Articles  3272~~ and 3272b, V. T. C. S. , to
certain   dividends,    cash and stock, received   by the trust department   of a
bank from the sale of stock sold before the “ex-dividend        date. ” You advise       us:

                     “[A] bank trust.department        of a national banking
              association     with its principal    place of business   in a Texas
              city administers       many trusts,    estate*  and other fiduciary
              accounts.      Investments     for such trust accounts    frequently
              include corporate       stocks.   . . . [S]tock purchased      or
              acquired    for a trust account is usually registered         in the
              name of a trust department          nominee for the Bank, but a
              record    is carefully    maintained    to show the interest    of each
              trust account      i&shares    held in the name of a trust depart-
              ment nominee.        . . .

                      “Occasionally  corporate    shares sold before the ex-
              dividend   date are not transferred    before the dividend    record
              date.    Consequently,   the Bank will occasionally    receive
              dividends   in respect  of trust shares that have been sold. The

                                            p.   865
 The   konorable    Jesse   James,   page   2(H-186)

              records    of the Bank are kept in a~fasljion     that enabl.?s it
              to determine     how such a dividend    should   be allocated   to
              a particular    trust account or apportioned      among two or
              more trust accounts,      if the Saleminvolves    shares ~from
              more than one account.

                      “Although      it is infrequent,   the Bank will. scmetimes
              receive    certificates     for shares representing     a stock
              dividend    or a stock split in respect       of shares that were
              sold before the ex-dividend          date. . . .

                      “Under the procedure      followed   by the Ennk,
              dividends   in respect    of shares that have been disposed
              of are credited    to the selling   trust accounts,   and when
              a proper   claim is presented      for the amount of the divi -
              dend, the claim will be paid (or discharged         by transfer
              and delivery    in the case of dividend     shares)  and charged
              to the appropriate     trust account or accounts     to which the
              credit was made.

                      “In instances  where a meritorious     claim is filed,
              the Bank pays the amount of cash dividend         or transfers
              the dividend    shares to the account of the purchaser       and
              charges    the disbursement   or transfer  to.the trust account
              ~from.:which the original   shares were sold.

                    ‘!In some instances      no claim is ever mad,e by or on
              behalf of the purchaser       ;of the shares,  vfith the result. that
              the dividend    remains    credited   to the selling  trust account
              without diminution      on account of disbursement       or transfer
              in response    to the meritorious      claim ti,mely filed by or on
              behalf of the purchaser.      ”

        The “ex-dividend     date” is best understood     in reference    to another impor-
tant date in the dividend process.        The record    date is the date determined         by
the bpard of directors      as the date to determine     which shareholders       will receive
a dividend based onstock ownership         up to and including     that date.    The ex-
dividend   date is set by the stock exchange      or by the National    Association     of
Securities    Dealers   (for over-the   counter-stocks)    and generally    precedes     the
record    date by four business     days.   Trades    made on the ex-dividend       date nor-
mally settle one day after the record   date which means that the shares of a
purchaser   cannot be transferred  into his name and on the books of the company

                                              p.   866
The Honorable          Jesse   James,   page   3 (H-186)

miime      to receive    the dividend.     Therefore,     ~stock sold on or after the ex-
dividend date is “without dividend, ” and the seller              would be entitled to
 receive    the dividend.     The price of stock seliing        on its ex-dividend   date is
nor~mally reduced by the amount of the dividend.                 Zarb and Kerekes,     The
Stock
--_      Market    Handbook,     at p. 708-709    (1970);   The   New  York   Stock ExGge,
 “The Language       of Investing,   ” at p. 12-13 (1973).

       In the situation you describe the rightful   owner of the dividends which
were sent to the bank would be the purchaser      of the stock, and the fact that
the dividends   were sent to the bank would be the result of a mistake     on the
part of the issuing corporation.

      ..Your   first    two questions    are   as follows:

               “1. Under the facts         here presented,    are the dividends
               held by a bank trust        department   and credited     to a par-
               ticular trust account        or trust accounts    subject to or
               not subject to being       reported   as an ‘inactive    account’ or
               a ‘dormant   account,      ’ pursuant to the provisions       of Arti-
               cle 3272b, Revised         Civil Statutes of Texas?

               “2
                  . Under the facts here presented,      are the dividends
               held by a bank trust department     and credited   to a par-
               ticular  trust account or trust accounts    subject to or ,not
               subject to escheat under Articles     3272a and/or 3272b of
               the Revised    Civil Statutes of Texas?”

        This office    answered   similar    questipns   for your department     in Attorney
General    Opinion M-563 (1970), the only differences          being that (1) in your present
opinion request you advise that the bank is depositing            these dividends     to its
beneficiary’s     account,   whereas   in connection     with Opinion M-563 you advised
that “the bank’s trust department         is unable to allocate    such dividends     to any
particular    trust account, ” and (2) the prior request        did not make it clear that
the stocks involved      were sold before     the ex-dividend    date and, thus, itcould
be assumed      that the bank or its beneficiary       had some character     of title to the
dividends.

                                               p.   867
The Honorable     Jesse   Jaires,   page   4 (H-186)

       Under the~facts ,you preseht      the bank receives     stock and cash divi-
dends which righ.tfully      belong to the person to whom the stock which
formed    the basis of the dividends     had been’sold.     Apparently    the rightful
owner can be located by refe~rence’ to the corporation’s           stock transfer
records;    however,    instead of returning    the dividends   to the corporation
for distributiw     to the ri.ghtfuT owner,   the bar;k distributes    them to the
trust  accounts   which previofisly    owned the stock.

       Although     we make no judgment        on the potential   criminal    liability
caused by the set of facts described          to us, we feel we must call your atten-
tion to Articles     1410, 1413, Vernon’s      Texas Penal Code; $31.03,         Vernon’s
Texas Penal Code, (eff.” Jan. 1, 1974); and see Byrd v. State, 235 S. W. 891
(Tex. Grim.     1921); &dge _..-_I-
                                 v. State, 229 S. W. 862 (Tex. Grim.         1921); Campos
V. State,   207 S:W.      931~~(Tex. Crjm.   1918); Flilcher   V. State, 25 S. W. 625
(Tex. Grim.      1894); --’
                        ac~cord ‘Williams      v. State, 268 S. W. 2d 670 (Tex. Grim.
1954) ; see, Worthi_ngtton
               --.          _-- V. State,  109  S. W. 187 (Tex. Grim.      1908); Reg v.
Middleton,     L.R.    2 Cr. Cas.Res.      38 (1873).

       If the ban!c:s policy bf distributing    dividends     to its trust accounts when
neither the~bank nor tlx twst beneficiaries          have any claim of equitable       owner-
ship constitutes   a penal offense,    the dividends     will be subject   to handling
under Texas C.&e of Crimi:.znl Procedure,           Article    47.01, et seq. If, on the
other hand,~ there is no a&ion or omission          which constitutes     a criminal    offense,
the ques~tion woul~d be controlled     by Vernon’s     Texas Civil Statutes,     Articles
3272a &nd~ 3272b,. Article     3.272a, 5 1, provides      in part:

                       “Se.ctioti 1 I . . . Every person who holds personal
               propertywhi       ch becomes     subject to escheat under Article
              .,3272:after    the effective  date of this Act,       shall, within
                sixty (60) days thereafter,       file a report    thereof with the
            -. State Treasurer,        as specified    in Section   2 of this Article:
                provided   that after one report has been made under this
               Article    by any person,     subsequent     reports    by such person
                may he made on an annual basis on or before May 1st of
                each year.

                                           p. 868
The Honorable      Jesse,James,       page    5 (H-lE6)

                       “(a) The term ‘person’ as used in this Article
               menas any individual,          corporption,     business associa-
               tion, partnership,       governmental       or political     subdivision
               or offxe~r,    public authority,      estate,    trust,   trustee,
               officer   of a. court,   liquidator,    two (2) or more persons
               having a joint or common interest,             or any other legal,
               commercial,       governmental       or political    entity,   except
               banks, savings and loan associations,               banking organi-
               zations    or institutions.

                      “(b) The term ‘personal          property’     includes,    but is
               not limited  to, . : . dividends.         . . . ”
                                                            ,
     Article     3272b provides       in part:

                       “Section   1. Every depository      holding dormant
               deposits    or inactive,accounts    of depositors   or owners
               whose existence       and whereabouts    ar.e unknown to the
               depository,     shall preserve   intact the deposits   and
               accounts    so long as they remain in a dormant        or inac-
               tive status.

                         "a. The term ‘depository’    as-used in this Article
                means’any    bank, savings and loan association,        banking
                institution  or organization  which receives     and holds for
                others deposits    of money or its equivalent     in banking
                practice .or other personal   property    in this State,   or in
                other States ~for residen,ts last known to have resided        in
               .this State.

                      “b.   Th.e terms ‘dormant     deposits’ and ‘inactive
               accounts’ mean those demand,         savings,  or other deposits
               of money or its equivalent     in banking practice,    including
               but not limited    to sums due on certified    checks,   dividends,
               notes, accrued     interest,  or other evidences    of indebted-
               ness, held by a depository      for repayment    to the depositor
               or creditor,    or his order,   which on or after the effective

                                             p> 869
The Honorable     Jesse   James,     page   6 (H-186)

              date of this Article   have continuously     remained
              inactive   for a period of more than one (1) year with-
              out credit or debit whatsoever       through the act of the
              depositor,    either in person or through an authorized
              agent other than the depository      itself.  ‘Dormant
              deposits’ and ‘inactive     accounts’ lose their status
              as such when a deposit is made by the depositor,          or
              a check is drawn or withdrawal         is made therefrom
              by such depositor,     either in person or through an
              authorized    agent other than the depository     itself.

                       “Sec.    2: it shall be unlawful for any depository
              to transfer;.,    convert    or reduce any dormant       deposit or
              inactive     account to the profits      or assets   of the deposi-
              tory,    either through book transfer,         assessments,
              service     charges     or any other procedure       so long as the
              deposit or account remains           in a dormant     or inactive
              status..     This-shall    not apply to the charges      hereinafter
              specifically     authorized     for efforts  to locate the deposi-
              tors. ”

         Assuming    the absence    of a. penal offense,   we believe    Article   3272a
would apply when the dividends         are distributed    to the trusts   or to the bene-
ficiaries.    Attorney    General Opinion M-563 does not require           a different
result.     Unlike .the situation .you describe     for us here,    that opinion assumed
the maintenance:of      the. dividc~nds by the bank in a separate       fund since it was
una.ble to distribute   them among the trusts.   Here,  the dividends    are held
by-either,the    trusts or .the beneficiaries. We do not believe   that the fact that
a nominee     of a bank acts as trustee would cause these dividends     to fall under
the~bank,exc,lusion    ~8 Article  3272a.

       Accordingly,      in the context of the narrow fact situation you present,
we answer your      first question   in the negative and your second question in
the affirmative.

       Your   third   and fourth   questions   are:

                                            p. 870
                   .
.   . .   a

              The Honorable    Jesse   James,    page    7   (H-186)

                           “3.   If the answer to number 1 above should be in the
                           negative,   under the facts here presented    wi’ll the cause
                           of action for recovery     of the dividends on behalf of the
                           purchaser    of the stock accrue on the giving of notice to
                           the broker    to or through whom the sale is made, as
                           stated in the letter set out in the preceding    paragraph?

                           “4.   Under the facts here presented,           do the provisions
                           of Attorney    General’s   Opinion No. M-563 (1970) with
                           respect   to the bar of limitations       in an escheat action
                           apply to a bank trust department’s           trust accounts whose
                           records    specifically  identify    the owner of the dividends,
                           shares of other securities        credited    to a particular   trust
                           account? ”

                      You have advised    us that the bank proposes      to give notice to brokers
              in an attempt to begin the running of the statute of limitation         under Vernon’s
               Texas Civil Statutes,    Article   342-701, on any action to recover      the dividends.     :
              Article   342-70.1 provides    in part that, “[t]he cause of action on any such depos-
              itory contract,   ~&her than a time deposit,       shall not accrue  until the bank has
              denied liability   and given the depositor     notice thereof.   ”

                     The notice the bank proposes     to give is contained in a letter which will
              be sent periodically   to each broker with whom the trust department      nominee
              has done business    during the period.    It will read:
                                                                                          ;   -.          : .,
                           “(Na.me of Nominee)    has carefully      reviewed     its records
                           respecting   stock, bonds and other securities           sold to~or
                           through your firm during                      month    period   ending
                           on the last day of                             , 197-*     As shown
                           by our records,    all meritorious     claims    that   have  been
                           filed with us on account of dividends,         whether in cash,
                           shares or other securities      received    by us after the making
                           of the sale, have been paid and discharged.             Accordingly,
                           this company hereby denies liability         for any claim that
                           you may now or hereafter       have on behalf of yourself         or on
                           behalf of any other person,      for dividends,     whether     in cash,

                                                        p. 871
,The Honorable      Jesse   James,   page   8 (H-186)

                  shares or other securities,  received by us after the
                  making of any sale to or through you during the period
                  above specified. ”

         We do not believe     this letter constitutes     notice under Article    342-701.
It is not directed     to the equitable    owner of the dividends,     who in the context
of Attorney     General    Opinion M-563 (1970) is the depositor,         and~it does not
identify   the property     on which liability    is being denied.    However,     we do not
believe   Article    342-701 is applicable      to the situation you describe.      T~he divi-
dends have been allocated         to the trusts and beneficiaries      and, unlike the
situation    considered    in Attorney    General    Opinion M-563,     are not held by the
bank for possible       repayment    to the equitable    owner.    Therefore,    your third
and fourth questions       are answered      in the negative.

                                         SUMMARY

                Dividends    on stock sold before the ex-dividend        date
       which a bank trust department       distributes    to the~trust which
       sold the stock may be subject to escheat under Vernon’s               Texas
       Civil Statutes,    Article  3272a.  Also,    a distribution    of dividends
       to someone     other than their rightful    owner,    dep,ending on all the
       relevant  facts and circumstances,        could be in violation     of the
       Penal     Code.

DAVID M. KENDALL,             Chairman
Opinion Committee

                                            p.   872