AGO 84-2.

• Case Date: January 31, 1984
• Court: Colorado

Colorado Attorney General Opinions 1984. AGO 84-2. January 31, 1984Department of Law Attorney General Opinion FORMAL OPINION of DUANE WOODARD Attorney General Opinion No. 84-2 AG Alpha No. AD AD AGAMD A. Y. Levine Deputy Director Department of Administration 1525 Sherman Street, 7th Floor Denver, Colorado 80203 RE: Statutory and constitutional restrictions on the use by state educational institutions of installment purchase contracts to acquire personal property.Dear Mr. Levine: I am writing in response to the request of your office for a formal legal opinion concerning possible statutory and constitutional restrictions on the use by state educational institutions of installment purchase contracts to acquire data processing equipment and other personal property. QUESTIONS PRESENTED AND CONCLUSIONS Your inquiry raises two specific questions: Does C.R.S. 1973, 23-5-104, which appears to bar the governing boards of state educational institutions from creating mortgages upon institutional property, generally prohibit state educational institutions from acquiring personal property under installment purchase contracts which grant purchase money security interests in the acquired property to the sellers? My conclusion is "no." Does reservation by the seller of a purchase money security interest in personal property sold to the state under an installment purchase contract in and of itself give rise to constitutionally prohibited state debt? My conclusion is that it does not. ANALYSIS It is my understanding that the Divisions of Purchasing and Automated Data Processing (ADP) have for several years acquired data processing equipment on behalf of state agencies and institutions under installment purchase contracts which grant the seller a purchase money security interest in the equipment. On other occasions, the state has acquired similar equipment by lease-purchase from commercial lessors. Because title to leased equipment technically remains in the lessor, local taxing authorities have recently begun to levy personal property taxes against equipment leased to the state. Inasmuch as these taxes must be paid by the lessor, prospective lessors are now refusing to submit bids on proposed lease-purchases or are inflating the lease rentals quoted in their bids to reimburse themselves for any taxes which may be levied against the equipment. Conversely, because title passes to the buyer in an installment purchase transaction, equipment sold to the state under installment purchase contracts is exempt from local personal property taxation. See C.R.S. 1973, 39-3-301(d) (1982 repl. vol. 16B). As a result, bids received for proposed installment purchases have not increased the scheduled installment payments to compensate the prospective seller for personal property tax liability. Under these circumstances, it is financially advantageous to the state to acquire data processing equipment and other personal property by installment purchase instead of lease-purchase. However, unlike a lessor, whose retained title to the equipment and corresponding right of entry secures it against the lessee's nonrenewal of the lease or default, an installment seller who conveys title to the buyer must secure itself by reserving a purchase money security interest in the equipment. This has prompted the questions asked by your office. Security interests are the direct descendants of "chattel mortgages" which, before the adoption of the Uniform Commercial Code in Colorado, secured installment sellers against default. Since the language of C.R.S. 1973, 23-5-104 appears to bar state institutions of higher education from creating "mortgages" upon institutional property, it is necessary to ascertain whether this statutory prohibition applies to "chattel mortgages" or purchase money security interests reserved in personal property conveyed to state educational institutions under installment purchase contracts. The inquiry whether a security interest can be granted to a seller under C.R.S. 1973, 23-5-104, moreover, poses an even more fundamental question: whether reservation of a purchase money security interest by an installment seller in personal property purchased by the state creates constitutionally proscribed state debt under Colo. Const. art. XI, sec. 3. Unless installment purchase contracts which grant purchase money security interests to sellers are constitutionally permissible, it is self-evident that no state agency or institution may finance equipment acquisitions by these means. I have, therefore, considered whether installment purchase transactions similar to those utilized by the Divisions of Purchasing and ADP to acquire data processing equipment or other personal property pass constitutional muster under Colo. Const. art. XI, sec. 3.(fn1) C.R.S. 1973, 23-5-104 provides: The governing board of any state educational institution shall not create a mortgage upon any property belonging to the institution, nor shall the state be obligated for the purpose of securing the repayment of any funds advanced pursuant to the provisions of sections 23-5-102 to 23-5-105 or the interest on such funds. On its face, the first clause of this statute appears flatly to forbid governing boards to create mortgages upon institutional property, while its second clause disclaims the state's obligation to secure repayment of funds advanced pursuant to C.R.S. 1973, 23-5-102 to 23-5-105 and the interest on such funds. C.R.S. 1973, 23-5-102, -103 and - 105, in turn, empower institutional governing boards to issue and sell tax exempt revenue bonds or comparable debt obligations to finance certain types of income producing auxiliary facilities on their campuses.(fn2) The question to be decided is whether the prohibition against creating mortgages upon institutional property set forth in the first clause of section 23-5-104 is, as it appears to be, unqualified, or whether it applies only to mortgages pledged as additional security for the revenue bonds or other obligations issued pursuant to sections 23-5-102, -103 and -105. The statutes now codified as C.R.S. 1973, 23-5-102 to 23-5-105 were first enacted by the Thirty-ninth General Assembly in 1953 as H.B. 234: "An Act to Enable State Educational...