February 3, 1995
Mr. Stan C. Broadway Executive Director North Carolina State Educational Assistance Authority UNC Research Triangle Park Building 10 Alexander Drive Research Triangle Park, NC 27709
Re: Advisory Opinion — North Carolina State Educational Assistance Authority Proposed College Vision Fund Program; N.C.G.S.. § 116-204(8).
Dear Mr. Broadway:
This will respond to your request for a legal opinion regarding the powers vested in the North Carolina State Educational Assistance Authority ("NCSEAA") to carry out a proposed College Vision Fund Program (the "CVF Program").
In your letter of December 19, 1994, you provide a thorough explanation of the CVF Program operation. Reference is therefore made to that letter for a specific recitation of the facts. For the purposes of our response, we have taken the liberty to summarize those facts as follows.
Facts
NCSEAA proposes to offer a CVF Program which will permit participants to contribute to and accumulate funds in an account a number of years before a child enters college; to draw against these funds on deposit to meet college expenses; and, when the credit balance is exhausted, to borrow the remaining costs of educational expenses. Contributions to the CVF Program are designed to be a level amount and will be automatically debited from participants. As proposed, the CVF Program will be licensed and offered to North Carolina parents by NCSEAA. As such, NCSEAA will be the agent and lender of record for account funds and will provide loan capital, if needed, through issuance of bonds, if appropriate. College Foundation, Inc., as agent for NCSEAA, will market and service the plan. NCSEAA was established by the General Assembly in June 1965 in Article 23 of Chapter 116 of the General Statutes, N.C.G.S. §§ 116-201 through
209. Article 23 was modified in 1967 (adding §§ 209.1 through 209.24) to expand the scope of NCSEAA whose primary purpose is to develop a system of financial assistance for post secondary education.
Legal Issues
Based on the foregoing facts you have asked us to address the following issues:
- (1)
- Whether operation of the proposed CVF Program violates the provisions of N.C.G.S. § 116.204(8), which prohibits NCSEAA from engaging in banking or insurance business?
- (2)
- Whether NCSEAA has the power to create the CVF Program as agency trust funds and offer it to parents residing in North Carolina as a financing service for the costs of higher education?
For the reasons and under the circumstances described below, we conclude that NCSEAA may offer the CVF Program without violating N.C.G.S. § 116.204(8) and may receive program contributions as agency trust funds to be invested by the State Treasurer?
Discussion Of The Issues
A. CVF Program Authority
1. Banking Issues. In an October, 1993, Advisory Opinion to East Carolina University Counsel, Greg Hassler, we indicated that the question of whether or not the University may lawfully conduct a debit card program for the student body depended on whether or not acceptance of the underlying deposits would violate North Carolina or federal banking laws. We, therefore, focused on the purpose and character of the deposits and concluded that ECU was not accepting deposits "as a business" nor was there created the traditional relationship of debtor/creditor. We took the view that given the special or limited purpose of the deposits underlying the debit card program, there was created, at most, the relationship of bailor/bailee as between ECU and the student. Unlike a bank deposit, the student retained title to the funds and the risk of loss, absent some negligence on the part of the University.
We believe that this same analysis applies here and that the funds received from CVF Program participants do not constitute a banking relationship in the traditional sense. Although the term "deposit" has not been expressly defined by statute nor construed by case law in North Carolina, "(t)he term ‘deposit’ signifies the act of placing money in the ‘custody’ of a bank, to be withdrawn at the will of the depositor." 5A Michie on Banks and Banking, Ch. 9 § 3 at 34 (1994), citing Craig v. Gudim, 488 P.2d 316 (Wyo. 1971). While the relationship between a bank and its depositor is ordinarily that of debtor and creditor, Michie supra, Ch. 9 § 1, at p.1, (1994), a relationship other than that of debtor and creditor may be created by the nature of the deposit or the contract or the circumstances under which it is made.
The above principles of law provide NCSEAA with potentially two approaches to structuring its proposed CVF Program account without operating contrary to the banking law. First, so long as CVF participants retain title to their account contributions, they would appear to be creating merely the relationship of bailor/bailee (with the participant bearing the risk of loss absent some negligence on the part of the NCSEAA). Secondly, NCSEAA could establish CVF accounts such that a participant, as principal, would make account contributions to NCSEAA as agent, for the limited purpose of investing the same in order to fund college tuition and related expenses consistent with Article 23 of Chapter 116. Under either approach, NCSEAA could reasonably contend that it is not receiving deposits in the traditional sense of a bank and, therefore, it is not in violation of state and federal banking law nor the provisions of N.C.G.S. § 116-204(8).
2. Insurance Issues. Operation of the proposed CVF Program by NCSEAA would not, in our view, constitute the offering of insurance by NCSEAA and would not, therefore, conflict with the statutory prohibition against NCSEAA’s engaging in the insurance business.
Based upon the foregoing facts, it is our conclusion that the statutory definition of a "contract of insurance" is not met. N.C.G.S. § 58-1-10 provides as follows: A contract of insurance is an agreement by which the insurer is bound to pay money or its equivalent or to do some act of value to the insured upon, and as an indemnity or reimbursement for the destruction, loss, or injury of something in which the other party has an interest.
In Blackwelder v. City of Winston-Salem, 332 N.C. 319, 420 S.E.2d 432 (1992), the Court reviewed the statutory definition of an insurance contract and concluded that the City had not entered into an insurance contract with the Risk Acceptance Management Corporation (RAMCO) for the payment of certain tort claims because RAMCO had not agreed to pay any money or to do any act as an indemnity to the City for loss or injury. The Court referred to the definition of "indemnify" in Black’s Law Dictionary as "[t]o restore the victim of a loss, in whole or in part, by payment, repair, or replacement." 332 N.C. at 323.
Similarly, there appears to be no element of indemnification or reimbursement by NCSEAA in the proposed CVF Program.
The Court in Blackwelder also noted that one of the characteristic elements of an insurance contract is the shifting of a risk from the insured to the insurer. "If no risk is shifted there is not an insurance contract." Ibid. There appears to be no shifting of any risk from the participant in the CVF Program to the NCSEAA.
This Program, which is essentially a prepaid tuition plan, is not unlike prepaid legal services plans that are marketed in North Carolina. A prepaid legal services plan is subject to regulation by the Department of Insurance only if it is "offered by a company engaged in the insurance business or if the plan itself constitutes the offering of insurance." N.C.G.S. § 84-23.1(d). Prepaid legal services plans that are not offered by an insurance company rarely contain an element of indemnification.
3. Statutory Construction. Finally, we note that N.C.G.S. § 116-209.3 provides the NCSEAA with authority ". . . to develop and administer programs and perform all functions necessary or convenient to promote and facilitate the making and insuring student loans and providing such other student loan assistance and services as the Authority shall deem necessary or desirable for carrying out the purposes of (Article 23) . . . . " (Emphasis added). Additionally, N.C.G.S. § 116208 provides that Article 23 is to" . . . be liberally effectuated." In construing a statute, "[t]he intent and spirit of an act are controlling . . . ." 27 NC Index 4th, Statutes § 29 (1994). More importantly, "(a) construction which defeats or impairs the object of a statute must be avoided if that can reasonably be done without violence to the legislative intent . . . . " Ibid. We think the legislative intent here is clear — that NCSEAA is given wide authority to develop and administer post-secondary educational financing programs.
This very broad authority, together with an agreement carefully constructed so as to avoid traditional banking or insurance relationships, provides NCSEAA with a very substantial position that its proposed CVF Program does not violate the provisions of N.C.G.S. § 116-204(8) prohibiting it from engaging in the banking and insurance business.
B. Trust Fund Issues
As Deputy Treasurer, C. Douglas Chappel, points out in his letter to you of October 21, 1994,
when a state agency has authority to receive and hold funds for a program or activity, those funds
may be deposited with the State Treasurer for investment either as agency funds or agency trust
funds. The State Treasurer controls investment policy subject to limitations prescribed by statute.
See, N.C.G.S. § 147-69.2.
While N.C.G.S. § 147-69.2(a)(11) expressly authorizes the Treasurer to invest funds to the credit
of "[t]he State Education Assistance Authority," CVF Program contributions will belong to
participants and not NCSEAA. N.C.G.S. § 147-69.2(a)(18), however, permits the Treasurer to
invest "[a]ny other special fund created by or pursuant to law for purposes other than meeting
appropriations made pursuant to the Executive Budget Act." While the NCSEAA is itself subject
to the Executive Budget Act, CVF Program funds will be the property of program participants
and therefore outside the scope of such act. See, N.C.G.S. § 143-1.
Since, in our view, NCSEAA has the authority to create the CVF Program, and will receive
program contributions to be held for the benefit of participants, we conclude that the State
Treasurer may invest these funds as agency trust funds. We have consulted with the counsel to
the Department of the State Treasurer, Assistant Attorney General Doug Johnston, and he
concurs with our conclusion on this issue. Mr. Johnston also points out, and we refer you to the
procedure in an Office of State Budget and Management memorandum of November 22, 1993,
regarding the establishment of budget code. It would appear that you should contact that office
regarding the deposit of agency trust funds. We enclose a copy of the memorandum for your
benefit.
Summary
For the reasons set forth above, it is our opinion that NCSEAA may create and operate the CVF
Program without violating the restrictions of N.C.G.S. § 116-204(8) against the agency operating
a banking or insurance business. It is also our opinion that CVF Program contributions may be
received by NCSEAA and deposited with the State Treasurer for investment as agency trust
funds.
We trust that this satisfactorily addresses the issues you have presented to us. If, however, we
may be of further assistance, please do not hesitate to let us know.
Andrew A. Vanore, Jr.
Chief Deputy Attorney General
L. McNeil Chestnut
Assistant Attorney General