Can a Texas school board borrow from its depository bank when a board member works for that bank?

Texas AG Opinion JM-1082: Can a School Board Borrow From Its Own Depository Bank?

Plain-English summary

State Senator Carl Parker, then chair of the Senate Education Committee, asked the Attorney General to take a second look at an earlier opinion. The question was practical: can a school district's board of trustees take out a loan from the same bank that holds the district's deposits, when one of the trustees works for that bank? The board also wanted to know whether it could act on the loan later (renewals, payments) under those conditions.

The earlier opinion, JM-583 (1986), had implied the answer was no. It leaned on the common-law conflict-of-interest doctrine, which voids any contract between a governmental body and an outside entity when a member of that body has a direct or indirect financial stake in the deal. On that reading, a trustee who was a bank employee would poison the loan contract entirely.

This opinion reconsidered that reasoning and found it incomplete. When JM-583 was written, the office had looked at section 23.75 of the Education Code (a special statute that lets a district keep its money in a bank a trustee is tied to) but had not considered chapter 171 of the Local Government Code, a general conflict-of-interest statute covering all local officials and all kinds of transactions. Chapter 171 does not flatly forbid these deals. Instead, it replaces the common-law "void the contract" rule with a disclosure-and-abstention rule. School board members are "local public officials" under chapter 171, and banks are "business entities" under it, so loan transactions between a board and its depository bank fall inside chapter 171. A board member with a "substantial interest" in the bank has to file an affidavit stating that interest and then step out of any vote where the action would have a special economic effect on the bank that is different from its effect on the public. The board as a whole is not barred from making the loan.

The opinion reaffirmed the separate holding about depository contracts (section 23.75 still governs those, and a financially interested trustee need not recuse on a straight deposit contract), and it modified JM-583 to line up with this narrower conflict-of-interest analysis for loans.

Currency note

This opinion was issued in 1989. 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.

Chapter 171 of the Local Government Code and section 23.75 of the Education Code have both been amended and recodified since 1989. The specific section numbers, the affidavit procedure, and the "substantial interest" thresholds described here are as they stood in 1989. Anyone facing a present-day question about a school board borrowing from a bank tied to a trustee should check the current text of chapter 171 and the current Education Code, along with any later Attorney General opinions.

Who this opinion affected (as of 1989)

School districts and their boards of trustees: The opinion told boards that a loan from the district's depository bank was not automatically off-limits just because a trustee had a financial connection to the bank. The loan was permissible if the interested trustee followed chapter 171's disclosure and abstention steps.

Trustees who worked for or held a stake in a depository bank: A trustee with a "substantial interest" in the bank had to file an affidavit stating the interest and abstain from votes where the action would have a special economic effect on the bank distinguishable from its effect on the public. On a plain depository (deposit) contract, by contrast, section 23.75 still let the interested trustee participate without recusing.

Local government lawyers and bank counsel: The opinion clarified that chapter 171, not the harsher common-law rule from JM-583, governed these loans, changing the compliance path from "the contract is void" to "disclose and abstain."

Common questions

Can a Texas school board take a loan from the bank where it keeps its deposits?
Under this opinion, yes. The board is not barred from entering a loan contract with its depository bank even when a trustee is financially interested in the bank, as long as the interested trustee complies with chapter 171 of the Local Government Code.

What does an interested trustee have to do?
A trustee with a "substantial interest" in the depository bank had to file an affidavit disclosing that interest and abstain from participating in decisions on the loan when the action would have a special economic effect on the bank that is distinguishable from its effect on the public.

Is a loan treated the same as keeping the district's money at the bank?
No. The opinion kept those two situations separate. A depository (deposit) contract is governed by section 23.75 of the Education Code, and a financially interested trustee may participate in decisions about that contract without recusing. A loan is governed by chapter 171, which requires disclosure and abstention.

Did this opinion overturn the earlier one, JM-583?
It modified it. The opinion reaffirmed JM-583's holding on depository contracts but corrected its analysis of loans, replacing the implied common-law bar with chapter 171's disclosure-and-abstention framework.

Background and statutory framework

The request came from Senator Carl Parker and asked the office to reconsider Attorney General Opinion JM-583 (1986). JM-583 had implied that the common-law conflict-of-interest doctrine barred a loan contract between a school district and its depository bank when a trustee was financially interested in the bank. That doctrine invalidates any contract between a governmental body and another entity in which a member of the body holds a direct or indirect pecuniary interest. See Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App. - Eastland 1925, no writ); Attorney General Opinions JM-424 (1986); H-916 (1976).

JM-583 had analyzed section 23.75 of the Education Code, which modifies the common law by letting a school district enter a depository contract with a bank in which a trustee is financially interested as a stockholder, officer, director, or employee. The office had treated section 23.75 as a special statute for depository contracts that excepted them from chapter 171 of the Local Government Code, the general conflict-of-interest statute for local public officials. This opinion reaffirmed that a trustee interested in the depository bank may take part in decisions about the depository contract without filing an affidavit or recusing.

Where JM-583 fell short was on loans. It had correctly held that section 23.75 did not exempt loan transactions from common-law restrictions, but it had not asked whether chapter 171 changed the rule for those loans. Chapter 171 modifies the common-law conflict-of-interest doctrine for all local officials and all transactions, while section 23.75 modifies the common law only for school depository contracts. See Acts 1987, 70th Leg., ch. 362, § 6, at 1800 (amending V.T.C.S. art. 988b, § 6, now codified as Local Gov't Code § 171.007). When a general statute and a more detailed statute address the same subject, they are to be harmonized if possible. Culver v. Miears, 220 S.W.2d 200 (Tex. Civ. App. - Eastland 1949, writ ref'd).

Applying chapter 171, the opinion found that school board members are "local public officials" under it, Local Gov't Code § 171.001(1); Attorney General Opinion JM-379 (1985), and that banks and other lending institutions are "business entities" under it, Attorney General Opinions JM-379 (1985); JM-178 (1984). Chapter 171 therefore applies to loan transactions between a school board and its depository bank. A board is not barred by common-law conflict-of-interest rules from entering such a loan; a member with a "substantial interest" in the bank, Local Gov't Code § 171.002, must file an affidavit stating the interest and abstain from decisions where "action on the matter will have a special economic effect on the [bank] . . . that is distinguishable from the effect on the public." Acts 1987, 70th Leg., ch. 362, § 4, at 1799 (amending V.T.C.S. art. 988b, § 4, now codified as Local Gov't Code § 171.004). On that basis, JM-583 was modified.

The opinion also traced the earlier back-and-forth on the borrowing question: JM-583 had overruled Attorney General Opinion M-331 (1969), which had not distinguished borrowing public funds from depositing them, and Attorney General Opinion H-649 (1975) had earlier questioned M-331.

Citations

Constitutional and statutory authorities:

• Local Gov't Code ch. 171 (conflicts of interest of local public officials); § 171.001(1) ("local public official"); § 171.002 ("substantial interest"); § 171.004 (affidavit and abstention); § 171.007 (relation to other conflict-of-interest law)
• Education Code § 23.75 (school district depository contract with a bank a trustee is interested in)
• V.T.C.S. art. 988b (former conflict-of-interest statute, recodified into Local Gov't Code ch. 171)
• Acts 1987, 70th Leg., ch. 362, §§ 4, 6 (amending V.T.C.S. art. 988b)

Cases:

• Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App. - Eastland 1925, no writ) (common-law rule voiding contracts in which a governmental body's member is interested)
• Culver v. Miears, 220 S.W.2d 200 (Tex. Civ. App. - Eastland 1949, writ ref'd) (general and detailed statutes on the same subject are harmonized)

Attorney General materials referenced:

• Reconsidered/modified: JM-583 (1986)
• Referenced: JM-424 (1986); H-916 (1976); M-331 (1969); H-649 (1975); JM-379 (1985); JM-178 (1984)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1082
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1082.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative. The two case names were confirmed by citation lookup.

August 7, 1989

Honorable Carl Parker
Chairman
Education Committee
Texas State Senate
P. O. Box 12069
Austin, Texas 78711

Opinion No. JM-1082

Re: Whether the board of trustees of a school district may enter into a loan contract with its depository bank if a trustee is a bank employee (reconsideration of Attorney General Opinion JM-583 (1986)) (RQ-1658)

Dear Senator Parker:

You ask whether the board of trustees of a school district may enter into a loan contract with its depository bank, and take subsequent action concerning the loan, if a board member is employed by the bank. Attorney General Opinion JM-583 (1986), in addressing a similar question, implied that such loan contracts were barred by the common law conflict of interest doctrine, which invalidates any contract between a governmental body and another entity if a member of the governmental body has a direct or indirect pecuniary interest in it. Attorney General Opinion JM-583 at 4, 7 (1986); see Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App. - Eastland 1925, no writ); Attorney General Opinions JM-424 (1986); H-916 (1976). However, Attorney General Opinion JM-583 did not consider whether chapter 171 of the Local Government Code applied to such loan transactions. Your question requires us to reconsider the implication in Attorney General Opinion JM-583 that common law conflict of interest rules govern a school district's loan contract with its depository bank.

Our prior opinion dealt with section 23.75 of the Education Code, which modifies the common law by allowing a school district to enter into a depository contract with a bank in which a trustee is financially interested as a stockholder, officer, director, or employee. We concluded that section 23.75 was a special statute applicable to school district depository contracts and that it excepted such contracts from chapter 171 of the Local Government Code, a general provision regulating conflicts of interest of local public officials as a class. Thus, a school trustee who has an interest in a depository bank as defined by section 23.75 may participate in decisions about the depository contract, without filing an affidavit stating his interest or recusing himself from participation in decisions about the depository contract in accordance with chapter 171 of the Local Government Code. We reaffirm this holding, which is limited to matters affecting the depository contract.

Attorney General Opinion JM-583 also discussed a second issue concerning section 23.75 of the Education Code. We concluded that section 23.75 did not permit a school district to borrow money from its depository bank if a trustee was a stockholder, officer, director, or employee of that bank, because there was a substantial difference between borrowing public funds from a depository bank and depositing funds in it. A prior opinion that did not make this distinction was overruled. See Attorney General Opinion M-331 (1969) (overruled by Attorney General Opinion JM-583); see also Attorney General Opinion H-649 (1975) (questioning Attorney General Opinion M-331).

Attorney General Opinion JM-583 ended with the conclusion that section 23.75 of the Education Code did not remove common-law prohibitions against loan transactions between a school district and its depository if a school trustee was also a stockholder, officer, director, or employee of the depository bank. The opinion does not expressly state that the common law barred such loan transactions, but it certainly implies this result.

On reexamining Attorney General Opinion JM-583, we realize that our discussion of the second issue was incomplete. We correctly determined that section 23.75 of the Education Code did not exempt loan transactions between a school district and its depository from common-law restrictions, but we also should have considered whether chapter 171 of the Local Government Code changed the law applicable to such loans. Chapter 171 modifies the common law conflict of interest doctrines applicable to all local officials and all kinds of transactions, while section 23.75 modifies the common law for school depository contracts only. See Acts 1987, 70th Leg., ch. 362, § 6, at 1800 (amending V.T.C.S. art. 988b, § 6, now codified as Local Gov't Code § 171.007). When two statutes deal with the same subject, one in general terms and the other in a more detailed way, they should be harmonized if possible. Culver v. Miears, 220 S.W.2d 200 (Tex. Civ. App. - Eastland 1949, writ ref'd).

School board members are "local public officials" subject to chapter 171 of the Local Government Code. Local Gov't Code § 171.001(1); Attorney General Opinion JM-379 (1985). Banks and other lending institutions are "business entities" within chapter 171. Attorney General Opinions JM-379 (1985); JM-178 (1984). In our opinion, chapter 171 of the Local Government Code applies to loan transactions between a school board and its depository bank. Thus, a school board is not barred by common law conflict of interest rules from entering into a loan contract with its depository bank when a board member is pecuniarily interested in the contract. A school board member with a "substantial interest" in the depository bank, Local Gov't Code § 171.002, must file an affidavit stating his interest and must abstain from participating in decisions on loan contracts with the depository if "action on the matter will have a special economic effect on the [bank] . . . that is distinguishable from the effect on the public." Acts 1987, 70th Leg., ch. 362, § 4, at 1799 (amending V.T.C.S. art. 988b, § 4, now codified as Local Gov't Code § 171.004). Attorney General Opinion JM-583 (1986) is modified in accordance with this opinion.

SUMMARY

Chapter 171 of the Local Government Code applies to loan contracts between a school board and its depository bank if a school board member has a substantial interest in the bank. Section 23.75 of the Education Code applies to a depository contract between a school board and its depository bank in cases where a school board member is a stockholder, officer, director, or employee of the bank. Attorney General Opinion JM-583 (1986) is modified in accordance with this opinion.

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Susan L. Garrison
Assistant Attorney General