Can a community college board member who works at the district's bank vote on money decisions affecting that bank?

Texas AG Opinion JM-583: College Trustee Conflict

Plain-English summary

A community college asked whether one of its trustees had to sit out votes that affected the bank he worked for. The trustee was a trust officer at the bank that served as the college's depository, and his salary from the bank was more than ten percent of his income, which made his interest "substantial" under the state conflict-of-interest law for local officials, article 988b, V.T.C.S. The worry was that any vote to spend money, which would lower the balance the bank held on deposit, would trigger a duty to abstain. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

The AG concluded he did not have to abstain from those routine spending votes. The School Depository Act, and specifically section 23.75 of the Education Code, spoke directly to bank-affiliated trustees. It barred such a trustee only from voting on the award of the depository contract itself, and it modified the older common-law rule that would have disqualified him entirely. Because that specific statute controlled over the general conflict law, article 988b did not force him to abstain from ordinary expenditure decisions. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Along the way, the AG overruled an earlier opinion, M-331 (1969), that had read the same kind of statute to let a school district borrow from a bank connected to one of its board members. The AG agreed with a later opinion, H-649 (1975), that the depository exception is narrow and does not reach loan transactions. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

The official JM-583 landing page identifies the opinion's subsequent treatment as "Modified by JM-1082." JM-1082 reaffirmed JM-583's holding for matters affecting the depository contract, but changed its implication that common-law conflict rules barred a school district loan from the same bank. For loans, JM-1082 concluded that chapter 171 of the Local Government Code controlled: the board was not automatically barred from the loan, while a trustee with a substantial interest in the bank had to file an affidavit and abstain when the statutory economic-effect test was met. Sources: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0583 and https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1082

Currency note

This opinion was issued in 1986. 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.

Subsequent treatment

JM-1082 stated, "We reaffirm this holding, which is limited to matters affecting the depository contract." It modified only JM-583's treatment of loans, explaining that chapter 171 displaced the common-law bar for those transactions and instead required an interested trustee to disclose and abstain when the statute applied. JM-1082's summary says: "Attorney General Opinion JM-583 (1986) is modified in accordance with this opinion." Source: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1082

Common questions

Did the trustee have a conflict of interest under the general law?

Yes, in the sense that his bank salary gave him a "substantial interest" in the depository bank under article 988b, V.T.C.S. The question was whether that general conflict law required him to abstain, or whether a more specific statute governed. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Which votes could he still take part in?

Routine expenditure decisions, including votes that would reduce the amount of college funds on deposit at the bank. The AG read section 23.75 to bar him only from the vote to award the depository contract, not from the ordinary business of the board. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Why did the specific statute win over the general one?

Under settled rules of construction, a specific statute is treated as an exception to a more general one, even a more recently enacted general one. The School Depository Act dealt precisely with bank-affiliated trustees, so it more clearly showed the legislature's intent for that situation than the catch-all conflict statute did. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

What about borrowing money from the same bank?

JM-583 treated borrowing differently from depositing public money. It overruled Opinion M-331 and said section 23.75 did not remove the common-law restrictions on a district borrowing from a bank tied to one of its trustees. JM-1082 later modified that part of the analysis. It concluded that chapter 171 governed the loan, so the board was not automatically barred, but a trustee with a substantial interest had to file an affidavit and abstain when the statutory economic-effect test was met. Sources: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf and https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1082

Background and statutory framework

Article 988b, V.T.C.S., set the conflict-of-interest rules for local public officials, including community college trustees, who the AG confirmed are officers exercising more than advisory responsibilities. It made it an offense for such an official to knowingly vote on a matter involving a business entity in which the official has a substantial interest when an economic benefit to that entity is reasonably foreseeable, and it required an abstention-and-affidavit procedure in certain cases. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Section 23.75 of the Education Code, part of the School Depository Act (sections 23.71 through 23.80), addressed the narrower situation. It provided that a bank is not disqualified from becoming the district's depository just because a board member is a stockholder, officer, director, or employee of the bank, so long as the bank is chosen by the required majority and the interested member does not vote on awarding the depository contract. The AG reasoned that reading section 23.75 to bar the trustee from every deposit-affecting vote would make him a near non-voting member, which the legislature did not intend. It cited the rule that a specific statute controls over a general one, quoting Townsend v. Terrell, American Canal Co. v. Dow Chemical Co., and Hallum v. Texas Liquor Control Board, and pointed to Delta Electric Construction Co. v. City of San Antonio on the workability of board action under an existing contract. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Citations and references

The opinion cited the following authorities. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf

Statutes:

• V.T.C.S. art. 988b, §§ 1(1), 2(a)(2), 3, 4, 5
• Educ. Code § 23.75 (School Depository Act)
• Educ. Code §§ 23.71-23.80, including §§ 23.77 and 23.79
• Educ. Code § 130.084
• V.T.C.S. art. 2832c
• V.T.C.S. art. 2529c

Cases:

• Delta Electric Construction Co. v. City of San Antonio, 437 S.W.2d 602 (Tex. Civ. App. - San Antonio 1969, writ ref'd n.r.e.)
• Townsend v. Terrell, 16 S.W.2d 1063 (Tex. 1929)
• American Canal Co. v. Dow Chemical Co., 380 S.W.2d 662 (Tex. Civ. App. - Houston 1964, writ dism'd)
• Hallum v. Texas Liquor Control Board, 166 S.W.2d 175 (Tex. Civ. App. - Dallas 1942, writ ref'd)

Prior opinions:

• Attorney General Opinion M-331 (1969) (overruled)
• Attorney General Opinion H-649 (1975)
• Attorney General Opinions JM-13 (1983), JM-178 (1984), JM-424 (1986)
• Attorney General Opinions WW-161 (1957), V-640 (1948), O-7514 (1946), O-5158 (1943), O-2656 (1940)
• Letter Advisory No. 149 (1977)
• Subsequent treatment: Attorney General Opinion JM-1082 reaffirmed the depository-contract holding and modified the loan analysis.

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0583
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0583.pdf
• Modifying opinion: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1082

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

Mr. Kenneth B. Ashworth
Commissioner
Coordinating Board
Texas College and University System
P. O. Box 12788
Austin, Texas 78711

Opinion No. JM-583

Re: Whether a member of the board of trustees of a community college district must abstain from voting on particular matters under article 988b, V.T.C.S., where he is an officer in a bank affected by the vote and holds a substantial interest therein

Dear Mr. Ashworth:

On behalf of a community college, you request an opinion on the following question:

Must a member of the board of trustees of a community college district abstain from voting on financial matters affecting fund balances in the district depository bank if the member is an officer in the bank, and holds a substantial interest in the bank as defined by article 988b?

A brief submitted on behalf of the trustee in question states that he is a trust officer of the bank which serves as the depository bank for the community college. A letter from the community college states that the bank was chosen as its depository before the trustee in question was elected to the board.

Article 988b, V.T.C.S., applies to conflicts of interest involving local public officials. It applies to a member of the governing body of "any district (including a school district) . . . who exercises responsibilities beyond those that are advisory in nature" and who has a substantial interest in a business entity that would be affected by an action of the governing body. V.T.C.S. art. 988b, § 1(1). The trustees of a community college exercise responsibilities that are not merely advisory in nature. See, e.g., Educ. Code § 130.084; Letter Advisory No. 149 (1977) (trustees of community college district are officers).

The trustee's salary from the bank exceeds ten percent of his gross income. Therefore, he has a substantial interest in the bank for purposes of article 988b. V.T.C.S. art. 988b, § 2(a)(2). Article 988b, V.T.C.S., provides in part:

Sec. 3. (a) Except as provided by section 5 of this Act, a local public official commits an offense if he knowingly:

(1) participates in a vote or decision on a matter involving a business entity in which the local public official has a substantial interest if it is reasonably foreseeable that an action on the matter would confer an economic benefit to the business entity involved;

. . . .

(b) An offense under this section is a Class A misdemeanor.

Sec. 4. If a local public official or a person related to that official in the first or second degree by either affinity or consanguinity has a substantial interest in a business entity that would be peculiarly affected by any official action taken by the governing body, the local public official, before a vote or decision on the matter, shall file an affidavit stating the nature and extent of the interest and shall abstain from further participation in the matter. The affidavit must be filed with the official recordkeeper of the governmental entity.

Sec. 5. [Exemption for business that is only business within the jurisdiction which supplies the product or service and that is sole bidder.] (Emphasis added).

V.T.C.S. art. 988b.

The community college district board of trustees is concerned that the trustee in question may be required by article 988b, V.T.C.S., to abstain from participation in any vote which would result in an expenditure and thereby decrease the funds on deposit in the depository bank. The bank would be affected by such action, since a reduction of the amount on deposit could decrease the interest income earned by the bank on the deposit. See Attorney General Opinion JM-178 (1984). However, the letter from the community college board of trustees points out that section 23.75 of the Education Code, and not article 988b, V.T.C.S., may control the trustee's powers and duties toward the depository bank.

Section 23.75 of the Education Code is a provision of the School Depository Act. Educ. Code §§ 23.71-23.80. This office has determined that the School Depository Act applies to community colleges as well as to independent school districts. Attorney General Opinions JM-13 (1983); MW-272 (1980). Section 23.75 of the Education Code states as follows:

In the event a member of the board of trustees of a school district is a stockholder, officer, director, or employee of a bank, said bank shall not be disqualified from bidding and becoming the school depository of said school district provided said bank is selected by a majority vote of the board of trustees of said school district or a majority vote of a quorum when only a quorum eligible to vote is present. Common law rules in conflict with the terms and provisions of this Act are hereby modified as herein provided. If a member of the board of trustees of a school district is a stockholder, officer, director, or employee of a bank that has bid to become a depository for said school district, said member of said board of trustees shall not vote on the awarding of a depository contract to said bank and said school depository contract shall be awarded by a majority vote of said trustees as above provided who are not either a stockholder, officer, director, or employee of a bank receiving a school district depository contract. (Emphasis added).

Educ. Code § 23.75. This provision was enacted as part of the School Depository Act of 1967. Acts 1967, 60th Leg., ch. 456, § 4, at 1040.

Prior to 1967 this office on several occasions construed the predecessor to the School Depository Act. Acts 1905, 29th Leg., ch. 124, § 165, at 263; repealed by Acts 1979, 66th Leg., ch. 829, at 2167. The opinions of this office determined that a stockholder, officer, director, or managing employee of a corporation serving as a school district depository could not serve as trustee of that school district. See, e.g., Attorney General Opinions WW-161 (1957); O-7514 (1946); O-5158 (1943); O-2656 (1940); Attorney General Opinion (To Hon. S.M.N. Marrs, September 16, 1929), 1928-30 Texas Attorney General Biennial Report 126. Most of these opinions quoted the reasoning of an opinion of September 16, 1929 which concluded that a stockholder or director of the depository corporation would not be eligible to serve as trustee of the school district contracting with the depository. The opinion stated as follows:

[T]he two positions present such a conflict of interests as to prevent the holding of the two relationships at one and the same time. The trustees of an independent school district have as part of their duty the task of seeing that the treasurer or depository properly manages the fund and moneys of the school district. It is also incumbent upon the trustees to see that the school funds are properly protected by bonds and that the solvency of the bonds and also the solvency of the institution should be watched after to the end that the moneys may always be properly protected. Innumerable instances could be recounted where the pecuniary interests of a stockholder in a corporation would sway the trustee to an act of favoritism, at least that an unbiased and non-interested trustee would resolve against such depository or treasurer; without attempting to enumerate these various objections we conclude that upon the grounds of public policy the two positions are incompatible. . . . (Emphasis added).

Attorney General Opinion (To Hon. S.M.N. Marrs, September 16, 1929), 1928-30 Texas Attorney General Biennial Report 126.

The enactment of section 23.75 of the Education Code modified the common law rule expressed in the September 16, 1929 opinion. The common law prohibition against such a contract applied not only to contract formation but to actions taken by the trustees that had a bearing on the contract. See Attorney General Opinions O-7514 (1946); O-2656 (1940); Attorney General Opinion (To Hon. S.M.N. Marrs, September 16, 1929), supra. In our opinion, section 23.75 must be read to permit actions which the trustees must necessarily perform under an existing depository contract. Otherwise, the common law rule would prohibit the entire board from acting in any matter involving the depository contract if one board member were pecuniarily interested in it. See Delta Electric Construction Co. v. City of San Antonio, 437 S.W.2d 602 (Tex. Civ. App. - San Antonio 1969, writ ref'd n.r.e.); Attorney General Opinion JM-424 (1986).

The detailed provisions of the School Depository Act limit, moreover, the board's discretion, thereby providing some protection from the favoritism against which the common law rule was directed. Section 23.77 of the Education Code sets out the depository's duties in detail and expressly reserves the district's right to invest funds as permitted by sections 20.42 and 23.80 of the Education Code. Section 23.79 of the Education Code provides that

[t]he bank or banks selected as school depository or depositories in accordance with the terms and provisions of this Act, and the school district shall make and enter into a depository contract or contracts, bond or bonds, or such other necessary instruments setting forth the duties, responsibilities, and agreements pertaining to said depository, in a form and with the content prescribed by the State Board of Education, attaching to the contract and incorporating in the contract by reference the bid of the depository. . . . (Emphasis added).

Educ. Code § 23.79(a).

Section 23.75 of the Education Code in effect allows an individual to be a school trustee despite his role as stockholder, officer, director, or employee of the school's depository bank. We do not believe the legislature intended to restrict that board member's participation in the business of the board to the extent that he would virtually be a non-voting trustee. In our opinion, since section 23.75 requires the trustee to recuse himself only from the decision to enter into the contract, it impliedly authorizes a board member with an interest in the depository to vote on expenditures that would decrease the amount of funds on deposit.

The depository bank is required by law to pay the checks and drafts written by the school board on its funds. Educ. Code §§ 23.77, 23.79. Such a provision is central to the depository contract, and is set out in some detail in the contract and statute. A prospective bidder should be fully aware of the school board's right to withdraw funds. We believe that the interested trustee may participate in the routine exercise of the board's right to withdraw funds as established by the contract and the statute.

The School Depository Act is a special statute which governs a particular kind of contract entered into by independent school districts and community college districts. Section 23.75 modifies the common law rule applicable to a specific conflict of interest that might arise in the context of school depository contracts. As a specific statute, it was not repealed by article 988b, V.T.C.S. The latter statute is a general provision, which applies to conflict of interest situations involving local officers as a class. The specific statute more clearly evidences the legislative intent, and is considered to be an exception to the more recently enacted general statute. Townsend v. Terrell, 16 S.W.2d 1063 (Tex. 1929); American Canal Co. v. Dow Chemical Co., 380 S.W.2d 662 (Tex. Civ. App. - Houston 1964, writ dism'd); Hallum v. Texas Liquor Control Board, 166 S.W.2d 175 (Tex. Civ. App. - Dallas 1942, writ ref'd). Therefore, article 988b, V.T.C.S., does not govern the trustee's conduct in the present case.

Briefs submitted in connection with your request refer to Attorney General Opinion M-331 (1969). This opinion construed the predecessor statute to section 23.75 of the Education Code, which was essentially the same as the present provision. See Acts 1967, 60th Leg., ch. 456, § 4, at 1040, 1041 (formerly codified as V.T.C.S. art. 2832c, § 4(b) (1925)) (recodified 1969). Attorney General Opinion M-331 concluded that the predecessor to section 23.75 of the Education Code allowed a school district to borrow money from the depository bank even though a school board member was also an officer or stockholder in that bank. Relying on analogies between a contract of deposit and a contract of loan expressed in an attorney general opinion and judicial authorities, Attorney General Opinion M-331 concluded that

the legislature intended to remove the common law prohibitions which, in the past, had prevented a school board from borrowing from and/or choosing as a depository, a bank in which one of its members also serves as a director or stockholder provided that the school district had adopted article 2832c and had complied with section 4 thereof.

Attorney General Opinion M-331 (1969) at 4.

The reasoning and conclusion of Attorney General Opinion M-331 was criticized in Attorney General Opinion H-649 (1975), which determined that a city was prohibited from borrowing money from a bank of which the mayor was director. Article 2529c, V.T.C.S., allowed state agencies and political subdivisions to choose a depository even though a member of its governing body was an officer, director, or stockholder of the depository corporation. Despite the similarity between article 2529c, V.T.C.S., and section 23.75 of the Education Code, Attorney General Opinion H-649 declined to follow Attorney General Opinion M-331, stating as follows:

Although Attorney General Opinion M-331 found little difference between depositing public funds in a depository bank and borrowing funds from that depository, there are numerous statutory requirements regarding the qualifications and selection of a depository and the security which must be provided to protect the governmental body's deposits. See Education Code, § 23.71 et seq. These restrictions and requirements do not apply to other transactions such as the two you describe. Compare Attorney General Opinion V-640 (1948).

[W]e do not believe the Legislature intended that article 2529c should have a wider application than its language plainly indicates. We think a narrow exception to the old and well established common-law rule against self-dealing was intended and that intent is reflected in the language of the statute where it provides that 'common-law rules in conflict are hereby modified as herein provided.'

Attorney General Opinion H-649 (1975) at 3-4.

We agree with the criticisms of Attorney General Opinion M-331 which are expressed in Attorney General Opinion H-649. We do not believe section 23.75 of the Education Code removes common law prohibitions against loan transactions between the school district and its depository where the same individual is a trustee of the school district that borrows the money and a stockholder, officer, director, or employee of the depository bank which lends the money. Attorney General Opinion M-331 incorrectly construes section 23.75 of the Education Code and we hereby overrule it.

In view of our answer to your first question, we need not answer your second question.

SUMMARY

Section 23.75 of the Education Code constitutes an implied exception to the provisions of article 988b, V.T.C.S. Under section 23.75 of the Education Code, a trustee of a community college district who is also a stockholder, officer, director, or employee of the district's depository bank may vote on matters which would result in an expenditure and thereby decrease the funds on deposit in the depository bank. Attorney General Opinion M-331 (1969) is overruled.

Very truly yours,

JIM MATTOX
Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Susan L. Garrison
Assistant Attorney General