Case Information
*1 OFFICE OF THE ATTORNEY GENERAL OF TEXAS
AUSTIN
GENALS C. MANN ATTORNEY GENERAL
Honorable John C. Hoddams, Commissioner Department of Banking Austin, Texas
Attention: H. A. Jamison
Dear Sir:
Opinion No. 0-4956
Re: Leon limit of a Rural Credit Union organized and operating under Articles 2461-2484a, v. 0. 8.
Your request for opinion dated November 19, 1942, has been received and considered by this department. We quote from your letter of request as follows:
"The direct your attention to the whole of Articles 2461 to 2484a, being that section of the law which has to do with the organization, supervision and liquidation of credit unions. Your particular attention is directed to the following quoted passages of excerpts from various articles:
"Article 2461: "The words "credit union" shall form a cooperative association formed for the purpose of promoting a shift among its members, and to enable them, when in need, to obtain for productive and prayident purposes moderate (emphasis our) loans of money for short periods and at reasonable rates of interest." (As amended Acts 1939, with 1954, §. 221, Sec. 3)
"Article 2477: "——— Loans to any one member shall not exceed Two Hundred Dollars ($200), or ten (10) per cent of the capital and surplus, whichever shall be the larger."
"Article 2484a: "The term "capital and surplus" as used in this act shall mean the aggregate of the
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Honorable John 2. 20Adama, Co:clusioner, Page 2
pald-up ohoves of the menbere plus the total oneh deposits of the ne:bere with tho oredit union lesa any and all outatanding obligations and liabilities of the oredit union. [9] (Acts 1939, 46th Leg., p. 221, 200. 5) "The nueation has arisen remarding the loe:inlative latent incident to the loan limit of oredit uilons, as the language used in irticle 2484 a when conaldered in the light of the loan limit refer. ense under irticle 2477 appears to be such as oopable of two or three constructions. To are nottiog out below the condensed balance aheat of one of the state ohartered oredit unions, and will ap. proolate apocifio sevico from you as to the loan limit of a union whoan bulaneo ahoot is as ahown.
| "Louns to Members | $174,679.68 | | :--: | :--: | | Cash on hand and | 20,854.96 | | in banks | | | Furniture and Fixtures | 404.50 | | Total Assets | $195,939.14 | | Share Acoums | $114,671.66 | | Deposit by Members | 57,643.83 | | Individual Ledger | | | Balances | 685.49 173,000.98 | | Accounts Payable | 1.637 .06 | | Total Lieblitiy ovaluatve of net | | | capital a/o | 174,638.04 | | Not Undivided Profits | 21,897.60 | | Guaranty and/or Reserve | | | Fund | 21,301.10 | | Total Liabilities | $195,939.14 |
"Technically apanking, it would seem that Art. 10lo 2484a will the applicable portion of Article 2477 when projooted into the above balance aheat would augnost a maximum loan limit of leas than
*3 Hesorable John - Hcshues, Gecmizationir, Pane 3 notilins which, of course, in an inpossible ritun tion, for the e:rerate of the peld-up sheren of the menbers, plus the total e:sh deposits of the menbers with the erodit union, is shean to be 2173,000.98, and eftor seduating all outstandine oblirations and liabilities, including the liability to menbern as such, plus the aceounts payable itom, the resulting figure would be 11,637.06and obviously of the minus figure would etill leave a sinus. If it wan the letalative intent to say that the torm 'ospital and surplus' as used in this set shall mean the as;rerate of the peldun shares of the menbers, plus the total e:sh deposits of the menbers with the eredit union less any and all outstanding oblirations of the eredit union, erclusive of its liabilities to menbers and sherebolions an such, then the loall 11cit in the inetant eane would appear to be 10. of 2171,363.92, being the net amount of paid-up sheres of the menbers plus the total eash deposits of the menbers less outstanding oblirations erclusive of liability to menbers, or 217,136.39, which would seem to be an unreasonable lean limit for any eredit union "If, on the other hand, it was the letalative intent to define capital and surplus insofar as the use of that term is concerned in determining the loan limit to a nereontage of the differance between total assets less outstanding liabilities, including liability to shereboloers and menbers as such, the resulting figure in the instant eane would be , or a loan limit of , which would he in line with the conservative atmosphere that seems to surround the operation of eredit unions by which we mean that it seems obvious to us that sinee the letalature did not ace fit to require a a1mable paid in capital cleanifiable as free capital or reserves ineldent to the organization of a eredit union, and sinee further the letelature has seen fit to set out in detail conservative practices ineldent to the operation of a erodit union, perhaps, in recopti tion of the fnot that free capital or reserves are not required, it seems to us that there must have been a letelative intent to project the same conservative treatment into the ratter of a eredit
*4 Hororatie Johs i. Holans, Comissioner, Page 4 union's loan limit. Particularly, to wo bolievo this to be true in that the language inoldent to the loan limit of a oredit unita usea a consorvative jollar figure by providing that 'loons to any one nuster shall not oxoed fivo Hundred 'ol. lara (1000), (orphasis ours) or ten (10) per cant of the cupitul and surplus, whiohovor ahull be the larger." "Referring further to the balance shoot not out above, from one point of analyais the loan 11:1t weuln be , from atill another it would be and iren atill another it would be , being the aggregate of the assets of the union loen its accounts payable and the projection of into each amoint. "................" The four solutions which you augeot may be sumarized as follows: (a) "Capital and surplus" is the difiereroe obtained by deduoting a subtrahend compoed of all outatanding liabilities, including therein each doposits and the amont of the paid-up shares, from a minand compond of the amont of the paid-up shares plus the each deposite. (b) "Capital and surplus" is based on the same formula as in (a) but the eash doposits and the amont of the paid-up shares are not included among the liabilities in the subtrahend.
As you well demonstrate in your lotter of request, the application of the foroula get forth in (a) lauds to
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Honorable John i. Hoddens, Comisiacioner, Page 5
ridiculous results since it is nathoraticnly imporaible for the difference tharaby obtained to be more than zero, and, in the great najority of cases, such difforonce will be loae than zoro. The absurdity of such a formula is further revealed when we consider that Article 2464, V. A. C. S., as anended, linits borrowing by a credit Union to 15.0 of "ospital and surplus", total inyosttents to 25.0 of this amount, and individual investionts to 5.0 of this figuro. If this formula were to be adopted, we would be forced to say that a Credit Union"e power to lend, to borrow, and to invest are all neaoured either by a fractional part of zero or by a fractional part of a negative amount.
Enployment of either formula (e) or (d) would anom to be precluded by the fact that each of these formulae en- ploys "total "essots" as a minuend whereas Article 2482a, V. A. C. S., as anended, specifically requires that the ninuend be "the aggregate of the paid-up shares of the menbers plus the total eash deposits". Although the term "ospital and surplus" is sometimes used as synonymous with "total assets" such usage is precluded in this problem by the apeolfic language of the above-cited statute.
Formula (b) employs a minuend which conforms to the statutory requirement but uses a subtrahend which ex- cludes the amount of the paid-up shares and the eash deposits from tho "outstanding obligations and liabilities". In the balaneo sheet which you have submitted, the effect of this exalusion is to make "accounts payable" the only iten in the subtrahend. As will be shown below, we feel that "accounts payable" does not constitute the sole outstanding liability of this Union; consequently, we are likewise forced to reject this formula.
As can be seen from the above, the difficulty in this problen oentero around the determination of those items which may be classed as "outstanding obligations and liabil-1 ities" of the Union. We shall consider the various possible itens in this belaneo sheet separately:
Chara Account (Paid-Up Shares): Since Credit Unions of the kind under consideration are corporations (Articles 2463 and 2464 V. A. C. S., as anended), their shares are governed by the principles generally applicable to ahores of corporate atook. It is well recognized that the holder of such a ohare is not in the same position as the holder of an obligation or liability of a corporation. The shareholder has no
*6 Honorable John Q. McAdams, Commissioner, Page 6 direct interest in or claim to the assets of the corporation. Although the officers of the corporation are certain duties of loyalty and care to the shareholder, the corporation per se once him nothing. Despite the fact that a shareholder does possess substantial rights to the surplus of a corporation, once dividends are properly declared, and despite the fact that he is entitled to a pro rata share of the corporate assets upon dissolution (see Article 2483, V. A. C. S., as amended), these rights are of an inchoate nature so long as the organization is a going concern and so long as no specific property has been allocated for the payment of dividends. Fadulator v. Eclipse 011 Company, 98 S.W. (2d) 171, 176 (Sup. Ct.); 10 Tex. Jur. 780-781, Sec. 152-153. Consequently the shares of Credit Unions do not constitute "obligations or liabilities" and the amount of such shares is properly excluded from the subtrahend in the resolution of this problem.
Deposits by Nombara and Individual Ledger Balances: Credit Unions are authorized to receive the cash deposits of their members (Articles 2462 and 2466, V. A. C. S., as amended), and such deposits apparently are received not as capital investments by the members but as mere deposits comparable to those received by ordinary savings and commercial banks. Such deposits are plainly direct obligations and liabilities of the receiving organization. As such they should be included in the subtrahend under Article 2484a. We have been informed by a representative of your Department that the "Individual Ledger Balances" account of this company represents each deposits by members which have been segregated from the general deposit account. Consequently this account and the cash deposit account will be treated the same for purposes of this opinion. We wish to note, however, that we are not here passing on the status of the Individual Ledger Balances account when such account contains items other than segregated cash deposits.
Accounts Payable: The status of such accounts as obligations and liabilities and the necessity for their inclusion in the subtrahend is too patent to require discussion.
Hot Undivided Profits: Until dividends are lawfully declared and a portion of the net profits is allocated for the satisfaction of such declaration, net profits constitute merely an accretion to the capital investment of the shareholders and are to be treated accordingly. See 10 Tex. Jur. 686, Sec. 73. Consequently such profits do not represent obligations or liabilities of the Union. Notice, however, that
*7 Honorable John Q. McAdams, Commissioner, Page 7 dividends declared but unpaid are direct obligations of the declaring organization and should be included in the subtrahend.
Cunranty and/or Reserve Fund: The guaranty fund of a Credit Union is established and maintained under Article 2482 "to meet contingencies or losses in its business". Al- though such funds are reserves for possible liabilities, ob- ligations or losses, they in no sense represent "outstanding" obligations or liabilities; rather they constitute a segre- gated portion of surplus kept inviolate from dividend declar- tions.
Thus, following the definition contained in Article 2484a, the "capital and surplus" of the instant credit Union is obtained by adding the cash deposits (includine ledger balances) to the amount of the paid-up shares and deducting therefrom the sum of the cash deposits (including ledger bal- ances) and the accounts payable. Ten account of the figure thus obtained (10% of or ) represents the loan limit of the Credit Union under consideration.
The loan limit thus obtained may seem unduly high in view of the fact that such unions avowedly were created to provide "moderate loans" (Article 2451) and in view of the general conservatism of the Articles governing the creation and operation of such Unions. Moreover, the fact that the old loan limit of 31,000 was changed in 1939 (see Article 2477, supra) to the present "Two Hundred Dollars or ten per cent of the capital and surplus, whichever shall be the large- er" may well indicate an intention that the new limit be even striater than that formerly prevailing. However, if such an intention were present at the time that the present loan limit was established, the language used to express it was singular- ly inapt for that purpose.
Trusting that this fully answers your inquiry, we are
Yours very truly
AUTORINE CERIPAL OF TEXAS
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