The opinion
The Attorney General of Texas
November 24, 1980
MARK WHITE
Attorney General
Honorable Gerald Brown Opinion No. w-277
Executive Director
Texas Industrial Commission Re: Use of floating interest rates
410 East Fifth Street in the issuance’ of industrial revenue
Capitol Station bonds
Austin, Texas 78711
Dear Mr. Brown:
You request cur opinion as to whether the board of directors of an
industrial revenue corporation, when Issuing revenue bonds, may set interest
rates for the bends which vary cr float according to certain economic
indicators such as a percentage of the prime rate charged by a particular
bank. The traditional position of the Attorney General’s Office in its bcmd
approval function has been that such bonds are not negotiable.
The Texas Supreme Court has clearly held that floating rates do
destroy negotiability in bonds. Brazes River Authority v. Cam, 405 S.W. 2d
689. 695 (Tex 1966). The ruling is DmblematiC in that the court based its
holding on article 3 of the U.&Z. (Commercial Paper), which, by its own
terms is inapplicable to investment securities. Bus. & Comm. Code S3.103.
See also S8.102. However, there is authority to the effect that while article
8 provisions govern securities and diect application of article 3 to
investment securities is clearly precluded, recourse to article 3 for guidance
in points not clearly covered under article 8 is appropriate. See E. Fl Hutton
& Co. v. Manufacturers National Bank of Detroit, 259 F. Sqr513, 517 (E.D.
Problems Under the Uniform Commercial Code, Article Eight: A Premise
and Three Problems, 65 Mich. L. Rev. 1379, 1387 (1967). Further, the
common law definition of a term remains in place where the U.C.C. has not
specifically displaced such definition and the common law definition of
negotiability in Texas comports with the article 3 definition. Bus & Comm.
Code S1.103: See also Weisbart & Co. v. First National Bank, 568 F. 2d 391
i;854;ir. 1978mexs.s Banking & his. Co. v. Tumley, 61 Tex. 365, 368
The court in Brazce River Authority based its holding on statutory
interpretation; the issue mvolved 1s not constitutional. Instruments not
qualifying under the common law may, of course, be declared negotiable by
.p. 885
Honorable Gerald Brown - Page Two @g-277)
legislation. The argument has been advanced that article 8 &es in fact define
negotiability for investment securities; that if such securities meet a certain form
they are ipso jure negotiable instruments. The pertinent statutory definition includes a
requirement that the instrument be “of a type commonly dealt in upon securities
exchanges or markets or commonly recognized in any area which it is Issued or dealt in
as a medium for investment.” Bus. & Comm. Code 58.102(a)(l)(B). Due to the Brazes
River Authority case there is no basis for arguing that a bond or note with a fi-
interest rate can fit this part of the definition, thereby qualifying as a negotiable
instrument under article 8. See Folk, s. See also Bsnkhaus Hermsnn, slgra;
Zamore v. Whitten, 395 A. 2d 435 (Me. 1978); Guttmsn, Article 8 - Investment
Securities, 17 Rutgers L. Rev. 136, 138 (1962).
Industrial development corporations are not limited by statute to issuing
negotiable paper. There is no difficulty in such a corporation issuing non-negotiable
paper with.a floating interest rate. However, absent a clear legislative determination
that industrial development corporations may issue negotiable paper tied to floating
rates, we feel that Brazes River Authority controls in its holding that securities with
float@ rates are non-negotiable.
SUMMARY
Under present Texas law an investment security tied to a
flcating interest rate is not a negotiable instrument. Thus an
industrial development corporation may issue its non-negotiable
paper tied to a floating rate, but it must Issue its negotiable
paper with a fixed rate of interest.
MARK WHITE
Attorney General of Texas
JOHN W. FAINTER, JR.
First Assistant Attorney General
RICHARD E. GRAY III
Executive Assistant Attorney General
Prepared by Susan L. Voss
Assistant Attorney General
p. 886
Honorable Gerald Brown - Page Three (W-277)
APPROVED:
OPINION COMMlTTEE
&an L. Garrison, Acting Chairman
Jon Bible
Rick Gilpin
Thomas M. Pollan
Susan L. Vass
p. 887