The Uniform Special Deposits Act (“USDA” or the “Act”) is a product of the Uniform Law Commission and was approved at its 2023 Annual Meeting. After consideration and deliberation by the Uniform Law Commission’s Special Deposits Committee, the Uniform Special Deposits Act was drafted to provide clarity on an area of law that has been subject to uncertainty for a number of years.
Special deposits, as the name suggests, are a “special” type of deposit that has different characteristics than other deposits, such as checking or savings deposits. Unlike deposits that are payable on a customer’s order, special deposits are established for a particular purpose, and a beneficiary becomes entitled to payment after a determination is made that a specified contingency has occurred. Special deposits play an important role in commerce and industry and ensure that funds deposited will be available to the person entitled to them in the future once their established purpose has been satisfied. They can serve a variety of parties in a range of contexts, but their use has been diminished by a small number of legal uncertainties, the collective significance of which is large. For example, in the past, case law has described special deposits or special accounts as akin to trust, bailment, or custody arrangements, but they are not used that way in practice.
The USDA establishes a framework under state laws for interested parties to utilize special deposits with a greater understanding of how such deposits will be treated under various circumstances. The Act was drafted utilizing a “minimalist” philosophy, and the drafters sought only to address specific uncertainties that exist under current law. As a result, the Act does not disrupt existing law but rather builds on it, and it leaves matters not addressed by the Act to be governed by general laws already governing deposits or contractual arrangements.
Importantly, the USDA is an “opt-in” statute, which means that parties intending to enter into a special deposit must specify in the agreement establishing the special deposit that they intend to be covered by the USDA as enacted in a particular state. This feature of the Act permits existing relationships to continue undisturbed, and permits parties to choose to utilize the protections provided by the USDA when they wish, so parties can choose to utilize the protections for certain deposit products and not others. Parties are also permitted to amend existing agreements to be covered by the USDA after enactment if they satisfy the criteria to establish a special deposit under the Act.
There are four key legal uncertainties that the USDA is designed to remedy by establishing rules to eliminate those uncertainties without interfering with other aspects of laws governing deposits.
First, the “opt-in” characteristic performs a kind of double duty in the USDA. As described above, it enables freedom of contract—the parties establishing the special deposit decide whether the arrangement will be governed by contract law or by the USDA. In addition, the “opt-in” is the mechanism identifying the deposit as “special” and subject to the select set of rules set out in the USDA. A deposit designated as “special” and subject to the USDA must satisfy the objective criteria in Section 5 of the Act, which include that it be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii) for the benefit of at least two beneficiaries (one or more of which may be a depositor, which also has a specific definition in the Act that could include a person who establishes the special deposit even without funding it), (iii) denominated in money (defined in the Act as “a medium of exchange that is currently authorized or adopted by a domestic or foreign government,” which is borrowed from the Uniform Commercial Code), (iv) for a permissible purpose identified in the account agreement, and (v) subject to a contingency specified in the account agreement that is not certain to occur, but if it does occur, creates the bank’s obligation to pay a beneficiary.
The permissible purpose requirement is an important feature of the USDA that prevents the special deposit from being used inappropriately for fraudulent or abusive purposes—for example, to defraud creditors. A permissible purpose is defined in Section 2 as “a governmental, regulatory, commercial, charitable, or testamentary objective of the parties stated in the account agreement.” A special deposit must serve a permissible purpose from creation until termination. In addition, a deposit or transfer that is fraudulent would not be for a permissible purpose, and the voidability of the deposit under other law would not be affected by the USDA.
Second, the USDA provides clarity on the treatment of a special deposit in the event of the bankruptcy of a depositor. Under current law, there may be uncertainty as to whether funds deposited into a special deposit could be “swept” into the bankruptcy estate of the person who deposited them. A special deposit under the USDA is “bankruptcy remote” because Section 8 provides that neither a depositor nor a beneficiary has a property interest in a special deposit. The only property interest that may arise with respect to a special deposit is in the right to receive payment from the bank after the occurrence of a contingency. The USDA protects the special deposit, but not the accrued “payable” to a beneficiary after the contingency is determined.
Third, the Act provides clarity on the applicability of creditor process to a special deposit. Currently, the uncertainty as to whether a creditor can “freeze” a special deposit pending an adjudication by a court undermines the utility of the special deposit, because it could interfere with the purpose that the special deposit is designed to achieve. At the time the special deposit is established, the identity of the ultimate beneficiary has not yet been determined because the contingency has not yet occurred. Section 9 of the USDA provides that creditor process is not enforceable against the bank holding the special deposit, except in limited circumstances. Instead, creditor process may be enforceable against the bank holding a special deposit with respect to any amount that it must pay after the determination of a contingency, but not on the special deposit itself. Section 10 provides a similar limitation on using an injunction or temporary restraining order to achieve the same or a similar outcome. Like the provisions dealing with bankruptcy, the provisions dealing with creditor process protect the special deposit, but not an accrued payable to a beneficiary after the contingency is determined.
Fourth, the USDA provides clarity on the legality of the bank exercising a set off or right of recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances. And, as with the provisions dealing with bankruptcy and creditor process, the provisions dealing with setoff protect the special deposit but not an accrued payable to a beneficiary after the contingency is determined.
The USDA creates a mechanism for parties to a commercial transaction to obtain a low-cost and safe return of earnest money and provides protection to parties seeking to deposit funds for particular purpose to be determined at a future point in time. The USDA also provides clarity to other aspects of a special deposit relationship that have been muddled in the case law, for example, by expressly providing that the relationship between the bank and a beneficiary is a debtor-creditor relationship and that a bank does not have a fiduciary duty to any person in connection with a special deposit. Section 12 of the Act includes additional clarifications on the scope of a bank’s duties and liabilities, and to provide incentives such that banks will offer a special deposit product.
The four uncertainties described here require statutory solutions because they relate to third parties’ interactions with a special deposit and cannot easily or effectively be addressed by contractual agreements between the parties. The USDA is narrowly tailored to cure these four mischiefs and eliminate uncertainty so that parties can utilize special deposits with greater confidence that their expectations will be met. In addition, creating clear rules should reduce litigation risks and expenses for the parties and banks.
The Act is intended to provide needed benefits to depositors, beneficiaries, and banks, and also to be fair to other creditors of the participants in the arrangement. The drafters considered a wide range of potential arrangements where a special deposit governed by the Act may be useful, and the statute was drafted to allow flexibility for the parties to create an account agreement reflecting the circumstances of their particular transaction. The USDA includes a list of sample permissible purposes that highlights some of the use cases for special deposits, and for the avoidance of doubt as to the permissibility of those use cases. But it is not an exclusive list, and in the time since the USDA was approved by the Uniform Law Commission, additional potential uses have been raised as well.
This article is related to a CLE program that took place during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.
The views expressed in this article are the authors’ personal views and do not necessarily represent the views of the CFTC or the federal government.
