Can a Texas state university bank with a bank where one of its regents is an officer?

Plain-English summary

The chancellor of Texas Woman's University asked whether the university could keep banking with a bank that had just hired a new regent as an officer and employee. The regent owned no stock, had no ownership interest in the bank, and did not manage the university's account. The chancellor wanted to know whether the regent had a pecuniary interest and whether the university could continue contracting with the bank if contracts were awarded by sealed bids and the regent disclosed the interest and abstained. The Attorney General concluded the board could not contract with the bank.

The board of regents of Texas Woman's University holds the same contracting powers as the board of regents of the University of Texas System, which has broad authority to govern and contract for its institutions. A strict common-law conflict of interest rule applies to contracts entered into by the governing bodies of state agencies, including state university boards. As an old Texas appellate case put it, if a public official directly or indirectly has a pecuniary interest in a contract, the contract violates the spirit and letter of the law and is against public policy, no matter how honest the official is. The opinion explained that the conflicts statute in Government Code section 572.058, which requires disclosure and recusal on "measures, proposals, or decisions," did not repeal the common-law rule and was not intended to apply to contracts. So an officer and employee of a bank has a pecuniary interest in it, and the common-law rule barred the board from contracting with that bank.

The opinion then addressed Education Code section 51.923, which softens the common-law rule for certain university contracts with a corporation in which a regent is economically interested. A university may contract with a corporation even though a board member holds stock or serves as a director, provided no member has a beneficial interest in more than five percent of the outstanding stock, the contract is an affiliation, licensing, or sponsored-research agreement or is competitively bid, the interested member discloses and abstains, and a majority approves. But section 51.923 does not mention officers or employees. Tracing the bill's history, the opinion found that the original version of the bill listed "stockholder, officer, director, or employee," and the Senate committee deleted "officer" and "employee" before passage. Reading the statute by its plain terms, the opinion would not assume the exception silently covers an officer or employee. So when a regent is an officer and employee of a bank, the board may not contract with it.

Currency note

This opinion was issued in 2001. Subsequent statutory amendments, court decisions, or later Attorney General 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 meant for those who asked

University boards of regents (what the opinion held): The opinion concluded the board could not contract with a bank where a regent serves as an officer and employee, even with sealed bidding and the regent's disclosure and abstention, because the common-law conflict rule applied and section 51.923 did not lift it for officer-employee interests.

Regents and their outside employers (what the opinion held for them): The opinion drew a sharp line: a regent who is only a stockholder or director (with no more than a five percent beneficial interest) can fall within the section 51.923 exception, but a regent who is an officer or employee of the contracting entity does not.

Common questions

Does a regent who works for a bank have a conflict if the university banks there?
The opinion concluded yes. Under the common-law rule, an officer or employee of a bank has a pecuniary interest in the bank.

Can sealed bidding and abstention cure the conflict?
Not for an officer or employee. The opinion held the common-law rule barred the contract regardless, and the statutory exception in section 51.923 did not reach officer or employee interests.

What does Education Code section 51.923 allow?
The opinion explained it lets a university contract with a corporation in which a regent is a stockholder or director, if no member's beneficial interest exceeds five percent, the contract is an affiliation, licensing, or sponsored-research agreement or is competitively bid, and the interested member discloses and abstains while a majority approves.

Why doesn't section 51.923 cover an officer or employee?
The opinion traced the bill's history: the words "officer" and "employee" were in the original bill but were deleted in committee, so the AG would not read them back into the statute.

Background and statutory framework

The board of regents of Texas Woman's University has the contracting power conferred on the board of regents of the University of Texas System. Tex. Educ. Code Ann. § 107.41 (Vernon 1991); see id. § 65.31(a); id. § 65.34 (Vernon 1991 & Supp. 2001). A strict common-law conflict of interest rule applies to contracts entered into by the governing bodies of state agencies, including state university boards. As stated in Meyers v. Walker, if a public official directly or indirectly has a pecuniary interest in a contract, the contract is violative of the spirit and letter of the law and against public policy. Meyers v. Walker, 276 S.W. 305, 307 (Tex. Civ. App.-Eastland 1925, no writ). Government Code section 572.058 requires a state agency board member with a personal or private interest in a measure, proposal, or decision to disclose it and refrain from voting, but it did not repeal the common-law rule and was not intended to apply to contracts. Tex. Gov't Code Ann. § 572.058(a) (Vernon 1994). Education Code section 51.923 permits a university to contract with a corporation in which a regent is a stockholder or director, subject to a five percent beneficial-interest cap, a competitive-bidding or affiliation/licensing/sponsored-research requirement, disclosure, abstention, and majority approval. Tex. Educ. Code Ann. § 51.923(c), (d) (Vernon 1996). The bill that became section 51.923 originally listed "stockholder, officer, director, or employee," but "officer" and "employee" were deleted before passage. Tex. S.B. 1569, 71st Leg., R.S. (1989). Statutes are read by their plain terms; words are not inserted unless necessary to effect a clear legislative intent. RepublicBank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605, 607 (Tex. 1985); Bouldin v. Bexar County Sheriff's Civil Serv. Comm'n, 12 S.W.3d 527, 529 (Tex. App.-San Antonio 1999, no pet.).

Citations

Statutory provisions:

• Tex. Educ. Code Ann. § 107.41 (Vernon 1991)
• Tex. Educ. Code Ann. § 65.31(a)
• Tex. Educ. Code Ann. § 65.34 (Vernon 1991 & Supp. 2001)
• Tex. Gov't Code Ann. § 572.058(a) (Vernon 1994)
• Tex. Educ. Code Ann. § 51.923(c) (Vernon 1996)
• Tex. Educ. Code Ann. § 51.923(d)
• Tex. S.B. 1569, 71st Leg., R.S. (1989)

Cases:

• Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App.-Eastland 1925, no writ)
• RepublicBank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605 (Tex. 1985)
• Bouldin v. Bexar County Sheriff's Civil Serv. Comm'n, 12 S.W.3d 527 (Tex. App.-San Antonio 1999, no pet.)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/john-cornyn/jc-0426
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2001/jc0426.pdf

Original opinion text

Best-effort transcription from the official scanned PDF. Minor character-level errors from the source OCR have been corrected; the linked PDF is authoritative.

OFFICE OF THE ATTORNEY GENERAL - STATE OF TEXAS

JOHN CORNYN

October 22, 2001

Dr. Ann Stuart, Chancellor
Texas Woman's University
P.O. Box 425497
Denton, Texas 76204-5497

Opinion No. JC-0426

Re: Whether a state university may contract with a bank that employs a member of the board of regents as an officer (RQ-0387-JC)

Dear Dr. Stuart:

A new regent at Texas Woman's University is an employee and officer of a bank with which the university has a continuing banking relationship.[1] The regent is not a stockholder, has no ownership interest in the bank, and does not participate in managing the university account with the bank.[1] You ask whether the regent has a pecuniary interest in that bank and whether the university may continue to contract with the bank if contracts are awarded upon the basis of sealed bids and the regent refrains from voting on matters relating to such contract after fully disclosing his interest. Under the common-law conflict of interest rule, an employee or officer of a bank has a pecuniary interest in the bank. When a regent of Texas Woman's University has such interest in a bank, the university board of regents may not enter into a contract with the bank.

The board of regents of Texas Woman's University "has the power incident to its position and to the same extent, as far as applicable, as is conferred on the board of regents of The University of Texas System." TEX. EDUC. CODE ANN. § 107.41 (Vernon 1991); see id. § 107.44 (authority of board to adopt rules). Accordingly, the board of Texas Woman's University may exercise, with respect to that institution, the contracting powers conferred upon the board of regents of the University of Texas System. The board of the University of Texas System has broad power to govern, operate, support, and maintain each of the institutions included in the system. See id. § 65.31(a); see also id. § 65.34 (Vernon 1991 & Supp. 2001) (contracts must be approved by the board of the University of Texas or otherwise entered into in accordance with rules of the board). Thus, the board of regents of Texas Woman's University exercises the university's authority to contract with banks.

A strict common-law conflict of interest rule applies to contracts entered into by the governing bodies of state agencies, including the governing boards of state universities. See Tex. Att'y Gen. Op. Nos. DM-18 (1991) (member of Board of Examiners in the Fitting and Dispensing of Hearing Aids); JM-671 (1987) (regent of Texas A & M University); MW-179 (1980) (member of Board of Health); Tex. Att'y Gen. LO-97-052 (board member of Texas Agricultural Finance Authority). The court in Meyers v. Walker, 276 S.W. 305 (Tex. Civ. App.-Eastland 1925, no writ) stated this rule as follows:

           If a public official directly or indirectly has a pecuniary interest in a contract, no matter how honest he may be, and although he may not be influenced by the interest, such a contract so made is violative of the spirit and letter of our law, and is against public policy.

Id. at 307.

The enactment of section 572.058 of the Government Code did not repeal the common-law rule. See Tex. Att'y Gen. Op. No. JM-671 (1987) at 6 (discussing predecessor of section 572.058, Government Code). This statute provides that a member of a state agency board "who has a personal or private interest in a measure, proposal, or decision pending before the board" shall disclose that interest and refrain from voting on the matter. TEX. GOV'T CODE ANN. § 572.058(a) (Vernon 1994). Neither the language nor the legislative history of this provision indicates that it was intended to apply to contracts. Id. If the new regent has a pecuniary interest in the bank, the common-law conflict of interest rule would bar the board of regents of Texas Woman's University from contracting with it.

In Attorney General Opinion H-916, this office determined that a school trustee who was employed by a paper company in a managerial capacity had a pecuniary interest in the company's contracts, because of his interest in the financial success of the company. Tex. Att'y Gen. Op. No. H-916 (1976) at 2; see also Tex. Att'y Gen. LO-93-012 (state university may not contract with a law firm in which a regent is a partner); Tex. Att'y Gen. Op. No. DM-18 (1991) (employee of a hearing aid company has a financial interest in company for purposes of statute regulating the fitting and dispensing of hearing aids). As an officer and employee of the bank, the new regent of Texas Woman's University would have a pecuniary interest in the bank, and the common-law conflict of interest rule would prevent the board of regents from entering into a contract with it.

We note that section 51.923 of the Education Code modifies the common-law conflict of interest rule for certain contracts between a university and a corporation in which a regent is economically interested. An institution of higher education may contract with a corporation even though one or more members of the governing board holds stock in it or serves as a director, as long as no board member has a beneficial interest in more than five percent of the corporation's outstanding capital stock. TEX. EDUC. CODE ANN. § 51.923(c) (Vernon 1996). In addition, the contract must be "an affiliation, licensing, or sponsored research agreement" or must be awarded by competitive bidding or competitive sealed proposals, and the board member having an interest in the contract or transaction must disclose that interest in a public meeting and refrain from voting on the contract or transaction. Id. § 51.923(c), (d). An affirmative majority of the board members voting on the contract or transaction must approve it. Id. § 51.923(d).

Section 51.923, however, does not expressly change the common-law rule when a regent is an officer or employee of the corporation. It might be argued that section 51.923 impliedly authorizes contracts in which the regent is interested as an officer or employee, on the ground that these positions involve lesser pecuniary interests in the bank than the positions of director or shareholder. However, we must read this statute according to its clear terms and may not read language into it, unless this is necessary to effect a clear legislative intent. See RepublicBank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605, 607 (Tex. 1985) (statute must be construed according to its plain language); Bouldin v. Bexar County Sheriff's Civil Serv. Comm'n, 12 S.W.3d 527, 529 (Tex. App.-San Antonio 1999, no pet.) (additional words may not be inserted into a statute unless it is necessary to effect a clear legislative intent).

As introduced, the bill that became section 51.923 of the Education Code provided that an institution of higher education or a university system was not prohibited from contracting with a business entity because a member of the governing board was "a stockholder, officer, director, or employee" of the business entity. Tex. S.B. 1569, 71st Leg., R.S. (1989). The bill included this language at its first public hearing before the Senate Committee on Education, at which it was referred to a subcommittee. Hearings on Tex. S.B. 1569 Before the Senate Committee on Education, 71st Leg., R.S. (Apr. 19, 1989) (audio tape available from Senate Staff Services Office). The Senate Committee on Education ultimately approved a committee substitute from which the terms "officer" and "employee" were deleted. Hearings on Tex. S.B. 1569 Before the Senate Committee on Education, 71st. Leg., R.S. (Apr. 19 & May 3, 1989) (audio tapes available from Senate Staff Services Office). Given the deletion of these terms, we will not assume that section 51.923 of the Education Code impliedly applies to an "officer" or "employee." Accordingly, when a regent of Texas Woman's University is an employee and officer of a bank, the university board of regents may not enter into a contract with that bank.

                                   SUMMARY

           Under the common-law conflict of interest rule, an employee or officer of a bank has a pecuniary interest in the bank. When a regent of Texas Woman's University is an officer and employee of a bank, the university board of regents may not enter into a contract with that bank.

           Section 51.923 of the Texas Education Code authorizes a university to enter into certain contracts with a corporation in which one or more members of the governing board has a pecuniary interest as a stockholder or a director, as long as no board member has a beneficial interest in more than five percent of the corporation's outstanding capital stock. This Education Code provision does not, however, modify the common-law conflict of interest rule if the regent is an employee or officer of a business entity. Accordingly, section 51.923 of the Education Code does not authorize the board of regents of Texas Woman's University to contract with a bank where a regent serves as an officer and employee.

                                         JOHN CORNYN
                                         Attorney General of Texas

HOWARD G. BALDWIN, JR.
First Assistant Attorney General

NANCY FULLER
Deputy Attorney General - General Counsel

SUSAN D. GUSKY
Chair, Opinion Committee

Susan L. Garrison
Assistant Attorney General, Opinion Committee