The opinion
Honorable Mike Atkins Opinion No. H-1033
County Attorney
Ector County Re: Sale at a discount and
Odessa, Texas 79761 "with recourse" by county
hospital of accounts receiv-
able from patients.
Dear Mr. Atkins:
You ask if a proposed financial arrangement between the
Odessa Medical Center Hospital and a state or national bank
would be illegal under Texas law. We have not been furnished
a proposed contract, but you explain:
Under the transaction in question, if a
patient proposed to pay his account at the
hospital in installments over a period of
time in excess of 60 to 90 days, that ac-
count could be sold and assigned to a bank.
The bank would discount the account at a
fixed rate of interest and pay the differ-
ence to the hospital at the time the ac-
count was transferred to the bank. The bank
would then undertake to collect the account.
However, the account would be assigned with
recourse on the hospital so that if reasonable
collection efforts proved unsuccessful the
account would be reassigned to the hospital
and the remaining uncollected balance of
the money previously paid by the bank to
the hospital would be repaid to the bank out
of current revenues of the hospital.
The proposed transaction is a sale of accounts receivable with
recourse to the hospital. See Chester v. Jones, 386 S.W.Zd
544 (Tex. Civ. App. -- Tyler), dism'd as moot, 391 S.W.Zd 722
(Tex. 1965). The word "recourse" in the context of such trans-
actions means to "resort to a person who is secondarily liable
after the default of the person who is primarily liable." In-
dustrial Bank & Trust Co. v. Hesselberg, 195 S.W.2d 470 (MO.
P- 4261
Honorable Mike Atkins - Page 2 (H-1033)
1946); Ballentines Law Dictionary 1070 (3rd ed. 1969); 36A
Words and Phrases 105. For the advantage of receiving its
money at an earlier time and avoiding the collection chore,
the hospital would surrender to the bank the collectable dif-
ference between the face amount of the accounts and their
discounted value.
Odessa Medical Center Hospital is a county hospital operated
and maintained pursuant to articles 4478 through 4493, V.T.C.S.
As such, it is a county facility managed by a Board of Managers
appointed by the Commissioners Court of Ector County. V.T.C.S.
art. 4479. The Board has "general management and control . _ .
of all matters relating to the . fiscal concerns thereof.
. .(1 V.T.C.S. art. 4480. Article 4485, V.T.C.S., specifies that
the superintendant of a county hospital "shall collect and re-
ceive all moneys due the hospital,' but article 4487 makes hos-
pital care and treatment "a charge upon the county+' if the super-
intendent finds that the patient or his responsible relatives
are unable to pay for it. When coupled with the Board's article
4480 power to generally manage and control all matters relating
to fiscal concerns, we believe these provisions furnish ample
statutory authority for transactions of the contemolated sort.
assuming-their constitutionality. 'See Attorney General Opinions
M-912 (1971); M-807 (1971); V-1265 (1951).
The Texas Constitution prevents counties from pledging or
lending public credit, or from releasing indebtednesses due
them. Tex. Const. art. 3, SS 52, 55; art. 11, 5 3. And after
the occurrence of events which give rise to an obligation on
the part of an individual or corporation to the State, the
Legislature has no power to release or diminish that obligation
without consideration. State v. City of Austin, 331 S.W.2d
737 (Tex. 1960). Non-indigent patients at county hospitals be-
come obligated to the county. V.T.C.S. art. 4488. However, we
believe the sale to third parties by a county hospital of
receivables from patients' accounts for less than the face
value thereof would not generally be a "release" prohibited
by the Texas Constitution.
In Lindsey v. State, 74 S.W. 750 (Tex. 1903), the Supreme
Court of Texas considered article 3 , ~section 55 objections to
the sale for only $500 of an uncollectable $6,000 judgment ob-
tained by a county against an insolvent bondsman. A statute
[now V.T.C.S. art. 16211 purported to authorize such disposi-
tions. The Supreme Court upheld the statute, expressly re-
jecting the argument that every sale 'of a judgment for less
than its face value is a "release" of a part of it within the
constitutional intent. The court observed:
P. 4262
Honorable Mike Atkins - Page 3 (H-1033)
[W]e do not think that anything authorized
by the statute comes within the mischiefs
against which the inhibition in question is
directed. It is one thing to release debtors
or extinguish their indebtedness, liabilities,
or obligations without payment or performance,
and quite another to obtain by sale under fair
and prudent management, the value of such
assets.
Id. at 751. Cf. Lindsey v. State, 66 S.W. 332 (Tex. Civ.
App. 1901, nowrit); Attorney General Opinion Y-575 (1970).
See alse
-- City of Houston v. Bullard, 354 S.W.2d 224 (Tex. Civ.
APP. -- Houston 1962, no writ).
Under the proposal as we understand it, the hospital would
receive two types of consideration in exchange for its assign-
ment of claims and its agreement to repurchase those claims
which prove uncollectable.~ It would receive the discounted
value of the claims, and it would avoid the need to make collec-
tion efforts itself -- the bank would perform that service. We
cannot pass upon the adequacy of consideration in a particular
transaction, but such an exchange made for adequate considera-
tion does not constitute a grant or donation violative of ar-
ticle 3, section 52 or of article 11, section 3. Sullivan v.
Andrews County, 517 S.W.2d 410 (Tex. Civ. App. -- El Paso 1974,
writ ref'd n.r.e.).
Nor do we think the agreement to repurchase claims which
prove uncollectable would necessarily be infirm on other grounds.
Such an agreement would apparently create a contingent "debt" of
an uncertain amount but the creation of debts by counties (even
debts uncertain in fact or inexact in amount) is not constitu-
tionally prohibited if it is within the contemplation of the
parties that the debts are to be satisfied out of current reve-
nues for the year or out of some fund immediately controlled
by the county. Tex. Const. art. 11, § 7; Brown v. Jefferson
County, 406 S.W.2d 185 (Tex. 1966); 'County of Ector v. City Of
Odessa, 492 S.W.Zd 360 (Tex. Civ. App. -- El Paso 1973, no
writ); Lew'is v. Nacogdoches County, 461 S.W.2d 514 (Tex. Civ.
APP. -- Tyler 1970, no writ).
We do not pass upon the particulars of any agreement or
arrangement, but it is our opinion that a transaction such as
you describe would generally be valid.
P- 4263
Honorable Mike Atkins - Page 4 (H-1033)
SUMMARY
A transaction in which a county hospital
sells and assigns to a state or federal
bank accounts receivable from hospital
patients at a discounted rate and with
partial recourse on the hospital for un-
collectable accounts would generally be
valid.
Very truly yours,
Attorney General of Texas
APPROVED:
DAVID M. KENDALL, First Assistant
Opinion Committee
klw
P- 4264