If Tennessee passed a law letting counties, cities, and towns deposit public funds in a state-chartered credit union, would that violate the Tennessee Constitution's prohibition on local governments becoming stockholders in private corporations?

Plain-English summary

Comptroller Justin Wilson asked whether Tennessee could constitutionally amend its code to let counties, cities, and towns deposit public funds in a state-chartered credit union. The AG concluded no, unless the legislation also provides for the referendum that article II, section 29 of the Tennessee Constitution requires.

Why? Article II, section 29 prohibits "any county, city or town" from "becom[ing] a stockholder with others in any company, association or corporation" without an election. State-chartered credit unions in Tennessee are corporations (organized under Title 45, chapter 4, with a "charter of incorporation," a "board of directors," and "members" who hold "shares"). To deposit funds in a Tennessee-chartered credit union, a depositor must first become a member and purchase at least one share. That makes the depositor a "stockholder with others" in the credit union.

The AG read "stockholder" in article II, section 29 broadly, drawing on Heiskell v. Knox Cnty., 132 Tenn. 180 (1915), which equates the term with "joint owner." The provision sweeps in any joint-ownership arrangement between a local government and a private company, association, or corporation, including those that do not issue formal certificates of stock. Federal tax law treats credit unions as "without capital stock" for tax-exemption purposes (26 U.S.C. § 501(c)(14)(A)), but the AG concluded that the Tennessee constitutional term is broader than that federal usage.

The opinion also points out a practical risk. A state-chartered bank depositor is a creditor whose claim is paid before investor claims in dissolution (Tenn. Code Ann. §§ 45-2-1504(h), (i)). A credit union member who has paid for shares is in a different position: in liquidation, creditors are paid first and the remaining assets go to members "proportionately to the purchase price of shares held" (§ 45-4-902(a)). Public funds in a credit union would receive less protection than the same funds in a bank.

Bottom line, legislation that allows local governments to deposit funds in a state-chartered credit union must also include the article II, section 29 referendum (three-fourths approval). Without it, the legislation would be "fatally incomplete and void." Berry v. Shelby Cnty., 139 Tenn. 532, 545 (1918).

Currency note

This opinion was issued in 2017. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Article II, section 29 of the Tennessee Constitution. The pertinent text: "But the credit of no County, City or Town shall be given or loaned to or in aid of any person, company, association or corporation, except upon an election to be first held by the qualified voters of such county, city or town, and the assent of three-fourths of the votes cast at said election. Nor shall any county, city or town become a stockholder with others in any company, association or corporation except upon a like election, and the assent of a like majority." Adopted in 1870 in response to Reconstruction-era abuses where southern state and local governments incurred large public debt for failed public-private ventures, particularly railroads and canals. Cleveland Surgery Ctr. v. Bradley Cnty. Mem'l Hosp., 30 S.W.3d 278, 282-83 (Tenn. 2000).

Article II, section 31. A parallel prohibition on the State (rather than counties/cities/towns) becoming a stockholder. Has no application to local governments, which is why article II, section 29 exists separately. Eye Clinic, P.C. v. Jackson-Madison Cnty. Gen. Hosp., 986 S.W.2d 565, 575-76 (Tenn. Ct. App. 1998).

The "stockholder" prohibition is broad. Heiskell v. Knox Cnty., 132 Tenn. 180, 190 (1915), equates "stockholder" with "joint owner" and describes the mischief targeted as a "business partnership between a municipality or subdivisions of the state and individuals or private corporations or associations" and the "union of public and private capital in any enterprise whatever."

Tennessee state-chartered credit unions are corporations. Title 45, chapter 4 of the Tennessee Code. Key features for the AG's analysis:

• Organized by "incorporators" who apply for a "charter of incorporation." Tenn. Code Ann. §§ 45-4-101(a), -102, -103.
• Membership requires a "common bond of occupation or association or to groups within a well-defined neighborhood, community, or rural district." § 45-4-301(a).
• To be elected to membership, each member must "have subscribed to one (1) or more shares and have paid for the same in whole or in part." § 45-4-301(a).
• Credit union receives members' savings "through the purchase of various classes of share accounts." § 45-4-501(1).
• Capital consists of payments members have made on shares. § 45-4-701.
• Each member has one vote regardless of shares held. § 45-4-1003(c).
• Member may declare and receive dividends on shares. § 45-4-503. Higher dividend rates may be established for shares above specified minimum amounts. § 45-4-503(2).
• Withdrawal: a member's shares (with credited dividends, less amounts owed to the corporation) are paid out "only after funds become available." § 45-4-302(b).
• Liquidation: assets pay liquidation expenses, creditor claims, and redemption of shares; "[a]ssets then remaining shall be distributed to the members proportionately to the purchase price of shares held by each member as of the date of dissolution was voted." § 45-4-902(a).

Credit union members are joint owners. The AG concluded that a county, city, or town depositing funds in a Tennessee-chartered credit union becomes a "stockholder" in the article II, section 29 sense because the deposit requires the deposit-or to become a member and buy at least one share. The local government's public funds would be joined with the funds of other members in the ownership of a private enterprise.

Practical risk: less protection than a state-chartered bank. In a state-chartered bank, the depositor is a creditor with an absolute right to withdraw and superior claim to any investors in dissolution. American Nat'l Bank v. Miles, 18 Tenn. App. 440, 446-47 (1934); Tenn. Code Ann. §§ 45-2-1504(h), (i). In a state-chartered credit union, the depositor (as a member) can withdraw shares only when funds become available, and on liquidation creditors are paid first and members receive only what remains.

Why federal tax law's "without capital stock" treatment doesn't change the answer. 26 U.S.C. § 501(c)(14)(A) gives tax-exempt status to credit unions "without capital stock organized and operated for mutual purposes and without profit." Federal courts have applied this rule to state-chartered credit unions on the ground that their member-shares cannot appreciate and members get the same buy-back price. La Caisse Populaire Ste. Marie v. United States, 425 F. Supp. 512, 522 (D.N.H. 1976); 31 U.S. Op. Atty. Gen. 176, 179 (1917). But "stockholder" in article II, section 29 of the Tennessee Constitution is used in a broader sense than the federal tax term "capital stock." It reaches any joint ownership in a "company, association or corporation," including organizations that do not issue formal certificates of stock.

The required referendum. Under article II, section 29, a county, city, or town may become a stockholder "except upon a like election, and the assent of a like majority." "Like election" and "like majority" refer to the immediately preceding sentence, which requires "three-fourths of the votes cast at said election." Berry v. Shelby Cnty., 139 Tenn. 532, 545 (1918), held that a statute authorizing extension of county credit was "fatally incomplete and void" because it did not provide for the required election. Applying Berry: any bill that lets local governments deposit in state-chartered credit unions must include the article II, section 29 referendum.

Common questions

Q: Can my Tennessee city or county currently keep its general fund in a credit union?
A: According to this opinion, not without a three-fourths voter referendum approving the arrangement under article II, section 29. The opinion concludes that depositing in a state-chartered credit union makes the local government a "stockholder" in the credit union, which the Constitution prohibits without that referendum.

Q: What's different about a credit union versus a regular bank?
A: A bank depositor is a creditor of the bank, with an absolute right to withdraw and a senior claim if the bank fails. A credit union member is a part-owner who holds shares. The member can withdraw shares only when funds are available, and on liquidation creditors are paid before members get their shares back.

Q: Why does buying one share matter?
A: Tennessee state-chartered credit unions are private corporations. Article II, section 29 of the Tennessee Constitution bars counties, cities, and towns from becoming "stockholder[s] with others" in any private corporation without a three-fourths referendum. The AG reads "stockholder" broadly to mean any joint owner.

Q: Could a city deposit funds in a federal credit union instead?
A: The opinion notes (in footnote 7) that federal law allows federal credit unions to accept "nonmember" deposits from certain local governments under specified conditions (12 U.S.C. § 1757(6)), and Tennessee-chartered credit unions can use federal powers under § 45-4-501(9). But the AG assumed the hypothetical bill would amend the public-deposit provisions of Title 9 in a way that would still require the depositing entity to be a credit union member purchasing at least one share. A different statutory scheme structured around true nonmember deposits would call for a different constitutional analysis.

Q: Does this opinion apply to other kinds of cooperative entities the local government might join?
A: The reasoning sweeps broadly. Any private "company, association or corporation" in which the local government would become a "stockholder" or joint owner falls within article II, section 29. So local governments should be cautious about entering ownership-flavored arrangements with private cooperatives or mutuals without the referendum.

Citations and references

Constitutional provisions:

• Tenn. Const. art. II, § 29
• Tenn. Const. art. II, § 31

Statutes:

• Tenn. Code Ann. §§ 45-4-101 to -1114 (state-chartered credit unions)
• Tenn. Code Ann. §§ 45-2-1504(h), (i) (state bank dissolution)
• 26 U.S.C. § 501(c)(14)(A); 12 U.S.C. §§ 1757(6), 1768

Cases (key authorities):

• Heiskell v. Knox Cnty., 132 Tenn. 180, 177 S.W. 483 (1915)
• Ransom v. Rutherford Cnty., 123 Tenn. 1, 130 S.W. 1057 (1910)
• Berry v. Shelby Cnty., 139 Tenn. 532, 201 S.W. 748 (1918)
• Cleveland Surgery Ctr. v. Bradley Cnty. Mem'l Hosp., 30 S.W.3d 278 (Tenn. 2000)
• Eye Clinic, P.C. v. Jackson-Madison Cnty. Gen. Hosp., 986 S.W.2d 565 (Tenn. Ct. App. 1998)
• Hooker v. Haslam, 437 S.W.3d 409 (Tenn. 2014)
• La Caisse Populaire Ste. Marie v. United States, 425 F. Supp. 512 (D.N.H. 1976), aff'd 563 F.2d 505 (1st Cir. 1977)
• American Nat'l Bank v. Miles, 18 Tenn. App. 440, 79 S.W.2d 47 (1934)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2017/op17-051.pdf

Original opinion text

Best-effort transcription preserving the AG's structure. The linked PDF is authoritative.

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
November 27, 2017
Opinion No. 17-51

Constitutionality of Legislation Allowing Local Governments to Deposit Funds in State-Chartered Credit Unions

Question

If the Tennessee Code were amended to allow a county, city, or town to deposit its funds in a state-chartered credit union, would the amendment violate that portion of article II, section 29 of the Tennessee Constitution that forbids a county, city, or town from becoming a "stockholder with others in any company, association or corporation"?

Opinion

Yes. Therefore, legislation allowing a county, city, or town to make such a deposit would not be constitutionally permissible unless the legislation provided for the requisite referendum under article II, section 29 of the Tennessee Constitution.

ANALYSIS

Credit unions are cooperative associations that offer low-interest loans and other consumer banking services to persons sharing a "common bond." See Black's Law Dictionary p. 426 (9th ed. 2009). Typically, the common bond links persons by occupation, organization, or geographic location. See id.; 12 C.J.S. Building & Loan Assoc. §§ 1, 5 (2017).

Credit unions are organized under special statutory provisions. They are not ordinary private corporations for profit. See 10 Am.Jur.2d Banks and Financial Institutions § 15 (2017). Rather, credit unions are organized as mutuals; that is, they are owned by their depositors. Account holders in a credit union are referred to as "members," and they receive "shares" when they make deposits. See National Credit Union Admin. Bd. v. Jurcevic, 867 F.3d 616, 620 (6th Cir. 2017); LaManna v. Electrical Workers' Local Union No. 474, 518 S.W.2d 348, 351 (Tenn. 1974). A member's shares evidence that member's ownership of the credit union, and any profit of the credit union inures to its members, generally in the form of dividends or lower interest rates.

State-chartered Credit Unions in Tennessee

State-chartered credit unions in Tennessee are established in accordance with Chapter 4 of Title 45 of the Tennessee Code. Initially, incorporators come together for the purpose of forming a corporation to "carry[] on a credit union," see Tenn. Code Ann. § 45-4-101(a), and they submit an application for a charter of incorporation as a credit union to the Commissioner of Financial Institutions for approval. See Tenn. Code Ann. §§ 45-4-102, -103.

Assuming the Commissioner approves the application, the membership of the credit union consists of the "incorporators and persons, societies, associations, copartnerships and corporations that have been duly elected to membership" – all of whom must have a "common bond of occupation or association or to groups within a well-defined neighborhood, community, or rural district." Tenn. Code Ann. § 45-4-301(a). To be duly elected to membership, each member must "have subscribed to one (1) or more shares and have paid for the same in whole or in part, with the entrance fee as required by the by-laws, and have complied with other requirements that the certificate of organization may contain." Id.

Once formed, the credit union receives the savings of its members "through the purchase of various classes of share accounts, including general or regular shares, share certificates, special accounts, share draft accounts or members' special accounts, savings accounts, certificates and notes." Tenn. Code Ann. § 45-4-501(1). The credit union must obtain and maintain "insurance of its share and deposit balances by membership in either the state credit union share insurance corporation or the National Credit Union Association." Tenn. Code Ann. § 45-4-505(a).

The capital of the credit union consists of the payments that have been made by its members on shares. Tenn. Code Ann. § 45-4-701. The credit union uses its capital primarily to make loans to its members. See Tenn. Code Ann. § 45-4-501(2). Capital, undivided profits, reserve funds, and other assets not required for loans to members may be invested. Tenn. Code Ann. § 45-4-501(3).

The credit union may also declare dividends for its members. Tenn. Code Ann. § 45-4-503. A member's number of shares can affect the amount of dividends that member receives. See Tenn. Code Ann. § 45-4-503(2) (higher dividend rates may be established for shares held in excess of specified minimum amounts).

A member's right to vote at meetings, however, is not affected by the number of shares held. Each member of the credit union has one vote. See Tenn. Code Ann. § 45-4-1003(c). At an annual meeting, the members of a credit union elect a board of directors. Tenn. Code Ann. § 45-4-201(a). All of the directors must be members of the credit union. Id. The board of directors has the "duty of general management of the affairs, funds and records of the corporation." Tenn. Code Ann. § 45-4-202.

In addition to voting rights, a member is authorized to transfer or withdraw shares under certain conditions. A member may transfer "fully paid-up shares" to any person upon election to membership in accordance with the terms that the by-laws may provide. Tenn. Code Ann. § 45-4-403. When a member withdraws or is expelled, "[a]ll amounts paid in on shares of an expelled or withdrawing member with any dividends credited to the member's shares to the date of expulsion or withdrawal shall be paid to the member, but only after funds become available and after deducting any amounts due to the corporation by the member." Tenn. Code Ann. § 45-4-302(b).

Finally, in the event of liquidation or dissolution, the assets of the credit union must be used to pay expenses incidental to the liquidation, any liability due nonmembers, and redemption of shares, share accounts, and members' special accounts. Tenn. Code Ann. § 45-4-902(a). "Assets then remaining shall be distributed to the members proportionately to the purchase price of shares held by each member as of the date of dissolution was voted, or the date of order of liquidation or suspension by the commissioner." Id.

Article II, Section 29 of the Tennessee Constitution

Article II, section 29 of the Tennessee Constitution provides in pertinent part:

The General Assembly shall have power to authorize the several counties and incorporated towns in this State, to impose taxes for County and Corporation purposes respectively, in such manner as shall be prescribed by law; and all property shall be taxed according to its value, upon the principles established in regard to State taxation. But the credit of no County, City or Town shall be given or loaned to or in aid of any person, company, association or corporation, except upon an election to be first held by the qualified voters of such county, city or town, and the assent of three-fourths of the votes cast at said election. Nor shall any county, city or town become a stockholder with others in any company, association or corporation except upon a like election, and the assent of a like majority. . . .

The italicized language quoted above was adopted as part of the Constitution of 1870 at the end of the Reconstruction government in Tennessee. Cleveland Surgery Ctr. v. Bradley Cnty. Mem'l Hosp., 30 S.W.3d 278, 283 (Tenn. 2000). As explained by the Tennessee Supreme Court, these provisions were aimed at ending the abuses that occurred during Reconstruction.

In short, article II, section 29 was amended in 1870 to shield local governments from the pecuniary expense or liability that could arise from participating in projects originated by private parties. Ransom v. Rutherford Cnty., 123 Tenn. 1, 32-36, 130 S.W. 1057, 1065 (1910).

[T]he letter and spirit of this provision is that [a county, city or town] shall not be a stockholder or joint owner with any company, association, or corporation in any enterprise or improvement; that the mischief it seeks to prevent is a business partnership between a municipality or subdivisions of the state and individuals or private corporations or associations; that it forbids the union of public and private capital in any enterprise whatever.

Heiskell v. Knox Cnty., 132 Tenn. 180, 190, 177 S.W. 483, 486 (1915) (citing Ransom v. Rutherford Cnty., 123 Tenn. 1, 130 S.W. 1057 (1910)).

Application of Article II, Section 29 to State-Chartered Credit Unions

The provisions in Chapter 4 of Title 45 clearly indicate state-chartered credit unions in Tennessee are corporate beings. Moreover, these corporations are organized, managed, and operated by private entities and individuals. See Tenn. Code Ann. § 45-4-301(a). Thus, a county, city or town cannot become a "stockholder" in this type of corporation. See Heiskell, 132 Tenn. at 190, 177 S.W. at 486; Ransom, 123 Tenn. at 34-36, 130 S.W. at 1065.

A member of a Tennessee-chartered credit union has some characteristics of a stockholder in an ordinary for-profit corporation, but not all. Like a stockholder, a member has an ownership stake. A deposit into a credit union account equates to "shares" evidencing a member's ownership of the credit union. Upon making the initial deposit, the member is granted voting rights, along with surplus income that can be returned to the member in the form of dividends. A credit union member also has the right to share in the remaining assets of the credit union upon liquidation.

But there are some differences between a member of a credit union and a stockholder in an ordinary for-profit corporation. While a credit union member is granted the right to vote, the right is of less importance than that of a stockholder in an ordinary for-profit corporation because a credit union member has only one vote to cast regardless of the number of shares held. Additionally, a credit union member does not make a permanent contribution of capital as does a purchaser of stock upon formation of an ordinary for-profit corporation. A credit union member has the ability to withdraw his or her shares, subject to some restrictions.

These differences, in large part, are the reason that state-chartered credit unions are generally exempt from federal taxation under 26 U.S.C. 501(c)(14)(A), which gives tax-exempt status to "[c]redit unions without capital stock organized and operated for mutual purposes and without profit." As one New Hampshire court explained, credit unions may avail themselves of this exemption because "[t]here is no 'capital stock.' The shares owned by the members cannot appreciate in value." La Caisse Populaire Ste. Marie v. United States, 425 F.Supp. 512, 522 (D. N.H. 1976).

The term "stockholder" in article II, section 29 of Tennessee's Constitution, however, is used in a broader sense and a different context than "stock" in the federal statute that provides tax-exempt status to "credit unions without capital stock . . . ." The prohibition of private investments in article II, section 29 is not limited to corporations. Article II, section 29 also prohibits a county, city or town from becoming a stockholder with others in companies and associations. Often, companies and associations do not issue certificates of stock.

To construe article II, section 29 as applying only to companies and associations that issue certificates of stock would impermissibly limit the prohibition's force. The Tennessee Supreme Court in 1915 equated the term "stockholder" to a "joint owner" when it stated that "the letter and spirit of this provision is that [a county, city or town] shall not be a stockholder or joint owner with any company, association, or corporation . . . ." Heiskell, 132 Tenn. at 190, 177 S.W. at 486.

Accordingly, we conclude that a county, city or town that deposits funds in a Tennessee-chartered credit union would become a "stockholder" as that term is used in article II, section 29 of the Tennessee Constitution because one cannot deposit funds in a Tennessee-chartered credit union without becoming a member and purchasing at least one share. See Tenn. Code Ann. § 45-4-301(a). In short, the county, city or town would impermissibly join public funds with the funds of others in the ownership of a private enterprise.

Moreover, those public funds would receive less protection in a state-chartered credit union than a state-chartered bank. The relationship between a bank and a general depositor is that of debtor and creditor – the debt being due on demand. American Nat'l Bank v. Miles, 18 Tenn. App. 440, 446, 79 S.W.2d 47, 51 (1934). A depositor's right to withdraw his or her deposit is absolute. While a member of a credit union has the right to withdraw his or her shares, a member's shares will be paid "only after funds become available and after deducting any amounts due to the corporation by the member." Tenn. Code Ann. § 45-4-302(b). Moreover, in the case of a state-chartered bank's dissolution, all claims of creditors are paid before those of the bank's investors. See Tenn. Code Ann. §§ 45-2-1504(h), (i). That would not be the case in the dissolution of a credit union.

Consequently, legislation that permits a county, city or town to deposit funds in a state-chartered credit union would have to provide for the election required by article II, section 29 because "an election cannot be held unless its holding be directed by law." Berry v. Shelby Cnty., 139 Tenn. 532, 545, 201 S.W. 748, 751 (1918). In Berry, the Court found a statute authorizing the lending of the county's credit to be fatally incomplete and void because it did not also provide for the election required by the provision of article II, section 29. Accordingly, in the absence of the requisite referendum provision set forth in article II, section 29, legislation authorizing a county, city or town to deposit funds in a state-chartered credit union would be "fatally incomplete and void."

In sum, legislation that allows a county, city, or town to deposit its funds in a state-chartered credit union would violate that portion of article II, section 29 of the Tennessee Constitution that forbids a county, city, or town from becoming a "stockholder with others in any company, association or corporation." Therefore, legislation allowing a county, city, or town to make such a deposit would not be constitutionally permissible unless the legislation provided for the requisite referendum under article II, section 29 of the Tennessee Constitution.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

LAURA T. KIDWELL
Senior Counsel

Requested by:
The Honorable Justin P. Wilson
Comptroller of the Treasury
State Capitol
Nashville, Tennessee 37243-9034