Could an individual Texas bail bondsman use a letter of credit as the required cash equivalent for a bail-bond license?

Bail-bond security and qualifying letters of credit

Plain-English summary

Texas Attorney General Jim Mattox concluded in 1990 that both individual and corporate applicants for a bail-bond license could use certain letters of credit as cash equivalents under former article 2372p-3. The statute's definition of person covered individuals and corporations, and the financial-security rules applied to any approved applicant.

"We conclude that an individual as well as corporate applicants may submit certain letters of credit as 'cash equivalents.'"

Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1245.pdf

A qualifying letter of credit had to meet four requirements stated in the opinion's summary:

1. It had to be irrevocable.
2. It had to limit inquiry into the underlying transactions between the county and the bondsman.
3. It had to provide payment on sight or within a reasonably brief period after all required documents were presented.
4. It could not make payment depend on the bondsman's consent or another person's action.

"To qualify as 'cash equivalents,' 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 contingent upon the consent of, or other action by, the bondsman or other party."

Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1245.pdf

The body added that the issuing institution or entity had to be financially responsive for the amount of the credit in the county bail bond board's judgment. The board could also establish a reasonable payment period based on local circumstances.

The opinion distinguished a true letter of credit from a guaranty. A qualifying credit could require a statement or other document, but it could not require proof of the bondsman's default or force the county into litigation over the underlying obligation before payment.

Currency note

This opinion was issued in 1990. 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.

What the opinion said for affected groups in 1990

Individual and corporate bail bondsmen

Both types of applicants could submit qualifying letters of credit. The same basic cash-equivalent standard applied to each.

County bail bond boards

The board assessed whether the issuer was financially responsive for the credit amount and could set reasonable time periods for payment. The credit still had to remain readily convertible into cash without the bondsman's cooperation.

County treasurers and beneficiaries

Payment could depend on presentation of specified documents, but the credit could not require the county to prove default or obtain the bondsman's consent before the issuer paid.

Banks and other issuers

The credit had to create an independent, primary obligation. A revocable instrument or a guaranty tied to performance of the underlying bail-bond obligations did not meet the opinion's standard.

Common questions

Could only corporate bail bondsmen use letters of credit?

No. The opinion read the statute to cover individual and corporate applicants.

Did any irrevocable letter of credit qualify as a cash equivalent?

No. It also had to operate independently from the underlying dispute, pay promptly after proper presentation, avoid conditions requiring outside consent or action, and come from a financially responsive issuer.

Could the county require proof that the bondsman had defaulted?

Not as a condition that forced examination of the underlying transaction. The opinion said that would make the instrument function like a guaranty rather than a true letter of credit.

Did payment have to occur immediately on sight?

Not always. The credit could pay on sight or within a reasonably brief period, and the county bail bond board could set reasonable time periods based on the circumstances.

Could another kind of security still count as a cash equivalent?

Yes. The opinion said its holding did not exclude other instruments that satisfied the conversion-to-cash standards stated in Attorney General Opinion JM-935.

Background and legal framework

Former article 2372p-3 required approved bail-bond license applicants to deposit cash, a cashier's check, a certificate of deposit, or a cash equivalent. Earlier Attorney General opinions treated a cash equivalent as an instrument readily convertible into cash at a fixed price, within a reasonable time and with reasonable effort.

Chapter 5 of the Business and Commerce Code supplied the legal framework for letters of credit. A true letter of credit created an obligation independent of the underlying contract between the customer and beneficiary. The issuer paid when the beneficiary presented the documents required by the credit.

The opinion reviewed commercial, standby, documentary, clean, sight, time, revocable, and irrevocable credits. It used those distinctions to identify which features kept the county's security close enough to cash for licensing purposes.

Key citations

• V.T.C.S. article 2372p-3, sections 2 and 6
• Bus. & Com. Code chapter 5, including §§ 5.102, 5.103, 5.106, and 5.114
• Code Crim. Proc. art. 22.14
• Republic Nat'l Bank of Dallas v. Northwest Nat'l Bank of Fort Worth, 578 S.W.2d 109 (Tex. 1978)
• Westwind Exploration, Inc. v. Homestate Sav. Ass'n, 696 S.W.2d 378 (Tex. 1985)
• New Braunfels Nat'l Bank v. Odiorne, 780 S.W.2d 313 (Tex. App. - Austin 1989, writ denied)
• Apex Oil Co. v. Archem Co., 770 F.2d 1353 (5th Cir. 1985)
• Gunn-Olson-Stordahl Joint Venture v. Early Bank, 748 S.W.2d 316 (Tex. App. - Eastland 1988, writ denied)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1245
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1245.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Obvious character-level OCR errors have been corrected where verified against the scan and reporter citations; minor errors may remain. The linked PDF is authoritative.

Hist MLATTOX November 13, 1990
ATTORNEY GENERAL
Honorable John J. Gavin Opinion No. JM-1245
Chairman
Insurance Committee Re: Whether an individual
Texas House of Representatives surety may file a letter of
P. O. Box 2910 credit for bail bond pur-
Austin, Texas 78769-2910 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)(1) of article 2372p-3
provides in part:

(F) Upon notice from the [county bail
bond) board that the application has been
tentatively approved, the applicant 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 cash equivalent in the
amount indicated by the applicant 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. (Emphasis 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 equiva-
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 2372p-3 does not define the word "applicant."
Section 6(a), however, requires "any person desiring to
act as a bondsman" to file an application for a license.
"Person" is defined by section 2(1) 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)(1) and (2) of article 2372p-3 apply to any
applicant whose application has been tentatively approved,
they apply to both individual and corporate applicants. 2

Article 2372p-3 also does not define "cash equivalent."

The statute as originally enacted in 1973 did not contain
that phrase. Section 6(a)(1) 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 $5,000," or execute in trust a deed
to nonexempt realty worth at least $10,000. Acts 1973, 63rd
(Footnote Continued)
6(f)(1), 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)(1).

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.g., Texas Fire & Casualty Co.
   v. Harris County Bail Bond Bd., 684 S.W.2d 177 (Tex. 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 County Bail Bond Bd. v. Deckard, 604 S.W.2d
   214 (Tex. Civ. App. - San Antonio 1980, no writ) (individual
   surety is not required by section 6(d) of 1973 act to
   deposit more than $5,000). Compare 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, § 6, at 1523.3 The 1973 act was. substan-
tially amended by the legislature in 1981. Acts 1981, 67th
Leg., ch. 312, § 1, at 875-85. The 1981 amendments added
section 6(a) (5), renumbered section 6(d)(1) as 6(f)(1), 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." Id. at 2

(quoting from Kellogg v. Muller, 4 S.W. 361 (Tex. 1887)).
We further described “cash equivalent" in that opinion as an
instrument convertible into cash within a reasonable time
and with reasonable effort. Id. 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)(1) from
   $5,000 to $10,000 or $50,000 depending on the population of
   the county. Acts 1987, 70th Leg., ch. 921, § 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 atrial 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) (1).

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 equiva-
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
“resources in the hands of the County with which to satisfy
a forfeiture without having to resort to court proceedings."
Id. 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 JM-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.

5. Our holding in Attorney General Opinion JM-935
   (1988) is consistent with the cardinal rule of construction
   that effect be given to every part of a statute. See 67
   Tex. Jur. 3d Statutes § 124. We did not therein restrict
   the phrase "cash equivalent" to the security devices listed
   in section 6(a)(5) of the act: cash, cashier’s checks, and
   certificates of deposit. The legislature included the
   phrase "cash equivalent" along with all three of those
   devices in section 6(f)(1), 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)(5) 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 ina manner that
   violates the intent of section 6(f)(1).

p. 6633

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

Section 5.103(a)(1) of the Texas Business and Commerce
Code defines “letter of credit" for purposes of chapter 5 of
the code® 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 in the

credit. A credit may be either revocable 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 demand’ 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 a 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. See Bus. & Com. Code
   § 5.102(c), comment 2 (Tex. UCC) (Vernon 1968); see also BA
   Commercial Corp. v. Hynutek, Inc., 705 S.W.2d 713, 715 (Tex.
   App. - Dallas 1986, no writ) (instrument outside the scope
   of chapter 5 cannot be a letter of credit).

7. A “documentary 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. &
   Com. Code § 5.103(a)(2). A draft refers to a bill of
   exchange. Id. § 3.104(b)(1), (c)+ see Travis Bank & Trust
   v. State, 660 S.W.2d 851, 855 (Tex. App. - Austin 1983, no
   writ) (bill of exchange is any written requirement for
   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. See East Girard Sav.
Ass'n v. Citizens Nat'l Bank & Trust, 593 F.2d 598 (5th Cir.
1979); Annot., 35 A.L.R.3d 1404 (1971). Traditional sales
credits are often referred to as “commercial 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. See Annot., 44 A.L.R.4th 172 (1986); Mueller,
Letters of Credit: A New Tool of Trade for the Real Estate
Attorney, 38 Baylor L. Rev. 109 (1986) (hereinafter
Mueller). These credits are often referred to as "standby
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 be 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, supra, at 110-11. These contracts are independent
of one another in the case of a true letter of credit.
Republic Nat'l Bank of Dallas v. Northwest Nat'l Bank of
Fort Worth, 578 S.W.2d 109, 112-15 (Tex. 1978). The issuer
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." Id, at 114; see also Bus. & Com.
Code § 5.114(a); 49 Tex. Jur. 3d Letters of Credit § 1, at
523.8

Conforming presentation requires that the beneficiary
strictly comply with the conditions for payment described in
the credit. Westwind Exploration, Inc. v. Homestate Sav.
Ass'n, 696 S.W.2d 378 (Tex. 1985). The courts, however,
will not construe mere promises to be conditions and will
resolve ambiguities against the issuer. Furthermore,
absolute perfection of presentation is not a requirement.
See, e.g., New Braunfels Nat'l Bank v. Odiorne, 780 S.W.2d
313, 316-17 (Tex. App. - Austin 1989, writ denied); Willow
Bend Nat'l Bank v. Commonwealth Mortgage Corp., 722 S.W.2da
12, 14 (Tex. App. - Dallas 1986, writ ref’d n.r.e.).

Either a commercial or a standby credit may be a
"documentary" credit, a credit whose terms require that the
draft or demand for payment be accompanied by certain
documents, or a "clean" 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 underly-
   ing obligation. Paris Sav. & Loan Ass'n v. Walden, 730
   S.W.2d 355, 359-64 (Tex. App. - Dallas 1987, writ dism’d)
   (cattle production below the hoped for but not guaranteed
   quality was unintentional and did not constitute fraud for
   section 5.114 purposes); Philipp Bros., Inc. v. Oil Country
   Specialists, Ltd., 709 S.W.2d 262, 264-65 (Tex. App. -
   Houston [1st Dist.] 1986, writ dism’d) (beneficiary’s
   intentional shipment of totally worthless pipe destroyed
   legitimate purposes of the credit and justified an
   injunction); see also Annot., 25 A.L.R.4th 239 (1983) (many
   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 issuer’s customer. Dallas Bank & Trust
   Co. v. Commonwealth Dev. Corp., 686 S.W.2d 226 (Tex. App. -
   Dallas 1984, writ ref’d n.r.e.).

p. 6636

Honorable John J. Gavin - Page 8 (JM-1245)
Annot., 44 A.L.R.4th 172, 176 (1986); see also Apex Oil
Co. v. Archem Co., 770 F.2d 1353, 1355 (5th Cir. 1985) (a
credit may be both "documentary" and "standby"); Gunn-Olson-Stordahl
Joint Venture v. Early Bank, 748 S.W.2d 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 "time" credit that
is not payable until a specified time after presentation of
all required documents. Mueller, supra, at 116; see also
Willow Bend Nat'l Bank, 722 S.W.2d at 12 (draft payable on

sight was payable on demand). Letters of credit, however,
are not negotiable instruments, although the underlying
drafts for payment may be either negotiable or non-
negotiable. Heritage Housing Corp. v. Ferguson, 651 S.W.2d
272 (Tex. App. - Dallas 1983, no writ) (since letters of
credit are not payable to bearer they are not negotiable);
Travis Bank & Trust v. State, 660 S.W.2d 851, 855 (Tex. App.

• Austin 1983, no writ) (unless credit otherwise specifies,
  draft may be either negotiable or nonnegotiable).

Credits may also be either revocable or irrevocable.
Bus. & Com. Code § 5.103(a)(1). 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. Id. § 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. Id. § 5.106(c).9

Given our review of these fundamental concepts of the
law of letters of credit, we conclude that 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. Mueller, supra,
   at 117-18 (citing West Virginia Housing Dev. Fund v. Sroka,
   415 F. Supp. 1107 (W.D. Pa. 1975)).

p. 6637

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

equivalents" 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 equivalent" for purposes of section 6(f)(1) 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 credit that does not require
examination of the performance of the underlying transaction
absent "fraud in the transaction," (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 is
financially responsive in the amount of the credits, in the
opinion of the county bail bond board. However, our
conclusion does not foreclose other “cash equivalents" as
long as the standards of Attorney General Opinion JM-935 are
satisfied.

The credit must be irrevocable to ensure that the
issuer does not unilaterally modify or revoke the credit
prior to a county’s demand for payment under the credit.
The three named security devices in section 6(f)(1) -- 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. Republic Nat'l Bank of Dallas,
578 S.W.2d at 115. If the credit requires as a condition
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 document be submitted prior to

10. As mentioned earlier, a credit may be either a
    "documentary" credit ora "clean" letter of credit. See

(Footnote Continued)
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, e.g., Gunn-Olson-Stordahl Joint Venture, 748
S.W.2d 316 (summary judgment reversed on appeal since credit
subject to performance in compliance with underlying con-
tract and thus was not true letter of credit but guaranty
contract); Summit Ins. Co. of New York v. Central Nat'l Bank
of Houston, 624 S.W.2d 222 (Tex. Civ. App. - Houston [1st
Dist.] 1981, writ ref’d n.r.e.) (true letter of credit may
contain 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)(1) sanctions the use of certificates of
deposit without prohibiting the use of time deposits. See
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 equivalents" pursuant
to section 6(f)(1) of article 2372p-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)
infra, at 11. Although a "clean" 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. See Mueller,
supra, 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.
SUMMARY
Individual as well as corporate applicants
may submit certain letters of credit as "cash
equivalents" for purposes of section 6(f) (1)
of article 2372p-3, V.T.C.S. To qualify as
“cash equivalents," 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.
Very truly yours,
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
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Celeste A. Baker
Assistant Attorney General
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