86-4

June 2, 1986

Re: Commercial Bank Investment in Convertible Debentures
Dear Mr. ________:
This is in response to your letter of December 6, 1985 which requested our opinion on whether California state-chartered banks have the authority pursuant to Sections 1335 and 1336 of the Financial Code to invest in convertible debentures of a corporation engaging in real estate development.
It is our opinion that under California law, a state-chartered bank has authority to invest in convertible debentures of a corporation pursuant to Sections 1335 and 1336 of the Financial Code. However, if a bank is investing in the debentures of a corporation engaging in real estate development, the bank must receive the prior approval of the Superintendent under Section 751.3 of the Financial Code before converting the debentures into shares of the corporation.
We do not by this letter express any opinion as to the authority of a state-chartered bank to invest in convertible debentures under statutes or regulations of appropriate federal regulatory agencies.
We apologize for the delay in responding to your request. If you have any questions, please do not hesitate to call.
Very truly yours,
LOUIS CARTER
Superintendent of Banks
By
CAROL L. MATSUNAGA
Counsel
CLM:lca

December 6, 1985

Mr. Craig Carlson
Dear Mr. Carlson:
Enclosed for your review is the Private Placement Memorandum to be used by ________, a California corporation engaged in real estate development (the “Company”), in connection with the private placement of $5,000,000 principal amount of its 15% Convertible Debentures (the “Debentures”). The purpose of this letter is to provide you with our analysis and opinion of the authority of California state-chartered banks to purchase the Debentures, and to request that you confirm that opinion.
The Company intends to offer and sell the Debentures to California state-chartered banks (among other financial institutions). The minimum purchase is $500,000 in principal amount. Each purchaser is entitled to receive per annum (i) minimum interest of 15% on his Debenture, plus (ii) contingent interest in an amount equal to the difference between (a) the product of 50% of the after-tax earnings of the Company (after deducting for the 15% minimum interest payment on the Debentures) multiplied by a fraction, the numerator of which is the principal amount of the Debentures purchased by the purchaser and the denominator of which is $5,000,000, and (b) the minimum interest. The Debentures are convertible prior to maturity into 100 shares of Common Stock of the Company per $1,000 principal amount ($10 per share).
After reviewing the applicable California laws and regulations, it is our view that California state-chartered banks may purchase the Debentures. Specifically, authority is granted by Sections 1335 and 1336 of the California Financial Code for state-chartered banks to invest no more than 15% of their shareholders’ equity in debt securities of any one corporation, without approval of the California State Banking Department. In addition, Sections 1335 and 1336 allow state-chartered banks to purchase debt securities of any one corporation in excess of 15% of its shareholder’s equity with the prior approval of the California State Banking Department. Accordingly, a state-chartered bank may invest in the Debentures provided the investment meets the foregoing provisions.
Prior to conversion of the Debentures, however, Section 751.3 of the California Financial Code requires a bank to file an application with the California State Banking Department to permit it to invest in the equity securities of a company that engages in real estate development. Accordingly, we believe that the prior approval of the Superintendent is required before a California state-chartered bank may convert the Debentures and acquire common stock in the Company.
We respectfully request the State Banking Department to review the Private Placement Memorandum and our analysis and confirm in writing that it is appropriate for California state-chartered banks to invest in the Debentures pursuant to Sections 1335 and 1336 and, upon approval of an application under Section 751.3, to convert the Debentures and acquire common stock of the Company.
Should you have any questions, please contact me directly.
Very truly yours,