District Of Columbia 2025-2026 Regular Session

District Of Columbia Council Bill B26-0032 Compare Versions

Only one version of the bill is available at this time.

Old	New	Differences
1	1
2	2
3	3	Government of the District of Columbia
4	4	UNIFORM LAW COMMISSION
5	5
6	6	
7	7	
8	8	
9	9
10	10
11	11	January 7, 2025
12	12
13	13	The Honorable Phil Mendelson
14	14	Chairman
15	15	Council of the District of Columbia
16	16	The John A. Wilson Building,
17	17	1350 Pennsylvania Avenue, NW
18	18	Washington, DC 20004
19	19
20	20	RE: Request for introduction of the Uniform Special Deposits Act.
21	21
22	22	Dear Chairman Mendelson:
23	23
24	24	Pursuant to Rule 401(b)(1) of the Rules of Organization and Procedure for the
25	25	Council, this is to request, on behalf of the District of Columbia Uniform Law
26	26	Commission, that you introduce the proposed “Uniform Special Deposits Act of 2025.”
27	27
28	28	A special deposit is a deposit of money at a bank created for a particular purpose
29	29	where the identity of the person entitled to payment is not determined until the
30	30	occurrence of a contingency specified at the time the deposit is created. Special deposits
31	31	play an important role in commerce and industry, but their use has been diminished
32	32	because of legal uncertainties. The uniform act establishes a framework for banks and
33	33	their customers to utilize special deposits with greater certainty as to how such deposits
34	34	will be treated under various circumstances. The act establishes clear criteria for special
35	35	deposits, clarifies the treatment of special deposits in the event of the bankruptcy of a
36	36	depositor, and clarifies the applicability of the creditor process on a special deposit. It is
37	37	an “opt-in” statute, which is available to banks and depositors to suit their needs for
38	38	particular purposes. The uniform act has been endorsed by the American College of
39	39	Commercial Finance Lawyers.
40	40
41	41	A proposed “Uniform Special Deposits Act of 2025” is being filed with this letter.
42	42	In addition, the following documents have been filed: (1) a summary of the uniform act;
43	43	(2) a statement as to why the uniform act should be adopted; and (3) the official version
44	44	of the uniform act with comments.
45	45
46	46	I would be pleased to answer any questions and to provide any additional
47	47	information requested. 2
48	48
49	49
50	50	Sincerely,
51	51
52	52
53	53
54	54
55	55
56	56
57	57	James C. McKay, Jr.
58	58	Chair
59	59	D.C. Uniform Law Commission
60	60
61	61	cc: Uniform Law Commissioners 1
62	62	2 airman Phil Mendelson at the request
63	63	of the
64	64	3 District
65	65	of Columbia Uniform Law Commission
66	66	4
67	67	5
68	68	6
69	69	7
70	70	8 A BILL
71	71	9
72	72	10
73	73	11 IN THE COUNCIL OF THE DISTRICT OF COLUMBIA
74	74	12
75	75	13 To enact the Uniform Special Deposits Act, to establish clear criteria for special deposits, to
76	76	14 clarify the treatment of special deposits in the event of the bankruptcy of a depositor, to
77	77	15 clarify the applicability of the creditor process on a special deposit, to clarify the legality
78	78	16 of a bank's right to exercise a setoff or right to recoupment against a special deposit that
79	79	17 its unrelated to the special deposit, and for other purposes.
80	80	18
81	81	19
82	82	BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA, That this
83	83	20 act may be cited as the "Uniform Special Deposits Act of 2025".
84	84	21 Sec. 2. Definitions.
85	85	22 In this act:
86	86	23 (1) "Account agreement" means an agreement that:
87	87	24 (A)
88	88	Is in a record between a bank and one or more depositors;
89	89	25 (B) May have one or more beneficiaries as additional parties; and
90	90	26 (C) States the intention
91	91	of the parties to establish a special deposit
92	92	27 governed by this act.
93	93	28 (2) "Bank" means a person engaged in the business of banking and includes a
94	94	29 savings bank, savings and loan association, credit union, and trust company. Each branch or
95	95	30 separate office of a bank is a separate bank for the purpose of this act.
96	96	31 (3) "Beneficiary" means a person that:
97	97	32 (A) Is identified as a beneficiary in an account agreement; or
98	98	1 2
99	99	(B) If not identified as a beneficiary in an account agreement, may be 33
100	100	entitled to payment from a special deposit: 34
101	101	(i) Under the account agreement; or 35
102	102	(ii) On termination of the special deposit. 36
103	103	(4) “Contingency” means an event or circumstance stated in an account 37
104	104	agreement that is not certain to occur but must occur before the bank is obligated to pay a 38
105	105	beneficiary. 39
106	106	(5) “Creditor process” means attachment, garnishment, levy, notice of lien, 40
107	107	sequestration, or similar process issued by or on behalf of a creditor or other claimant. 41
108	108	(6) “Depositor” means a person that establishes or funds a special deposit. 42
109	109	(7) “District” means the District of Columbia. 43
110	110	(8) “Good faith” means honesty in fact and observance of reasonable commercial 44
111	111	standards of fair dealing. 45
112	112	(9) “Knowledge” of a fact means: 46
113	113	(A) With respect to a beneficiary, actual knowledge of the fact; or 47
114	114	(B) With respect to a bank holding a special deposit: 48
115	115	(i) If the bank: 49
116	116	(I) Has established a reasonable routine for communicating 50
117	117	material information to an individual to whom the bank has assigned responsibility for the 51
118	118	special deposit; and 52
119	119	(II) Maintains reasonable compliance with the routine, 53
120	120	actual knowledge of the fact by that individual; or 54
121	121	(ii) If the bank has not established and maintained reasonable 55 3
122	122	compliance with a routine described in clause (i) or otherwise exercised due diligence, implied 56
123	123	knowledge of the fact that would have come to the attention of an individual to whom the bank 57
124	124	has assigned responsibility for the special deposit. 58
125	125	(10) “Obligated to pay a beneficiary” means a beneficiary is entitled under the 59
126	126	account agreement to receive from the bank a payment when: 60
127	127	(A) A contingency has occurred; and 61
128	128	(B) The bank has knowledge the contingency has occurred. 62
129	129	“Obligation to pay a beneficiary” has a corresponding meaning. 63
130	130	(11) “Permissible purpose” means a governmental, regulatory, commercial, 64
131	131	charitable, or testamentary objective of the parties stated in an account agreement. The term 65
132	132	includes an objective to: 66
133	133	(A) Hold funds: 67
134	134	(i) In escrow, including for a purchase and sale, lease, buyback, or 68
135	135	other transaction; 69
136	136	(ii) As a security deposit of a tenant; 70
137	137	(iii) That may be distributed to a person as remuneration, 71
138	138	retirement or other benefit, or compensation under a judgment, consent decree, court order, or 72
139	139	other decision of a tribunal; or 73
140	140	(iv) For distribution to a defined class of persons after 74
141	141	identification of the class members and their interest in the funds; 75
142	142	(B) Provide assurance with respect to an obligation created by contract, 76
143	143	such as earnest money to ensure a transaction closes; 77
144	144	(C) Settle an obligation that arises in the operation of a payment system, 78 4
145	145	securities settlement system, or other financial market infrastructure; 79
146	146	(D) Provide assurance with respect to an obligation that arises in the 80
147	147	operation of a payment system, securities settlement system, or other financial market 81
148	148	infrastructure; or 82
149	149	(E) Hold margin, other cash collateral, or funds that support the orderly 83
150	150	functioning of financial market infrastructure or the performance of an obligation with respect to 84
151	151	the infrastructure. 85
152	152	(12) “Person” means an individual, estate, business or nonprofit entity, 86
153	153	government or governmental subdivision, agency, or instrumentality, or other legal entity. The 87
154	154	term includes a protected series, however denominated, of an entity if the protected series is 88
155	155	established under law that limits, or limits if conditions specified under law are satisfied, the 89
156	156	ability of a creditor of the entity or of any other protected series of the entity to satisfy a claim 90
157	157	from assets of the protected series. 91
158	158	(13) “Record” means information: 92
159	159	(A) Inscribed on a tangible medium; or 93
160	160	(B) Stored in an electronic or other medium and retrievable in perceivable 94
161	161	form. 95
162	162	(14) “Special deposit” means a deposit that satisfies Section 5. 96
163	163	(15) “State” means a state of the United States, the District of Columbia, Puerto 97
164	164	Rico, the United States Virgin Islands, or any other territory or possession subject to the 98
165	165	jurisdiction of the United States. The term includes an agency or instrumentality of the state. 99
166	166	100
167	167	Sec. 3. Scope; choice of law; forum. 101
168	168	(a) This act applies to a special deposit under an account agreement that states the 102 5
169	169	intention of the parties to establish a special deposit governed by this act, regardless of whether a 103
170	170	party to the account agreement or a transaction related to the special deposit, or the special 104
171	171	deposit itself, has a reasonable relation tothe District. 105
172	172	(b) The parties to an account agreement may choose a forum in the District for settling a 106
173	173	dispute arising out of the special deposit, regardless of whether a party to the account agreement 107
174	174	or a transaction related to the special deposit, or the special deposit itself, has a reasonable 108
175	175	relation to the District. 109
176	176	(c) This act does not affect: 110
177	177	(1) A right or obligation relating to a deposit other than a special deposit under 111
178	178	this act; or 112
179	179	(2) The voidability of a deposit or transfer that is fraudulent or voidable under 113
180	180	other law. 114
181	181	Sec. 4. Variation by agreement or amendment. 115
182	182	(a) The effect of sections 2 through 6, 8 through 11, and 14 may not be varied by 116
183	183	agreement, except as provided in those sections. Subject to subsection (b) of this section, the 117
184	184	effect of sections 7, 12, and 13 may be varied by agreement. 118
185	185	(b) A provision in an account agreement or other record that substantially excuses 119
186	186	liability or substantially limits remedies for failure to perform an obligation under this act is not 120
187	187	sufficient to vary the effect of a provision of this act. 121
188	188	(c) If a beneficiary is a party to an account agreement, the bank and the depositor may 122
189	189	amend the agreement without the consent of the beneficiary only if the agreement expressly 123
190	190	permits the amendment. 124
191	191	(d) If a beneficiary is not a party to an account agreement and the bank and the depositor 125 6
192	192	know the beneficiary has knowledge of the agreement’s terms, the bank and the depositor may 126
193	193	amend the agreement without the consent of the beneficiary only if the amendment does not 127
194	194	adversely and materially affect a payment right of the beneficiary. 128
195	195	(e) If a beneficiary is not a party to an account agreement and the bank and the depositor 129
196	196	do not know whether the beneficiary has knowledge of the agreement’s terms, the bank and the 130
197	197	depositor may amend the agreement without the consent of the beneficiary only if the 131
198	198	amendment is made in good faith. 132
199	199	Sec. 5. Requirements for special deposit. 133
200	200	A deposit is a special deposit if it is: 134
201	201	(1) A deposit of funds in a bank under an account agreement; 135
202	202	(2) For the benefit of at least two beneficiaries, one or more of which may be a 136
203	203	depositor; 137
204	204	(3) Denominated in a medium of exchange that is currently authorized or adopted 138
205	205	by a domestic or foreign government; 139
206	206	(4) For a permissible purpose stated in the account agreement; and 140
207	207	(5) Subject to a contingency. 141
208	208	Sec. 6. Permissible purpose. 142
209	209	(a) A special deposit must serve at least one permissible purpose stated in the account 143
210	210	agreement from the time the special deposit is created in the account agreement until termination 144
211	211	of the special deposit. 145
212	212	(b) If, before termination of the special deposit, the bank or a court determines the special 146
213	213	deposit no longer satisfies subsection (a) of this section, sections 8 through 11 cease to apply to 147
214	214	any funds deposited in the special deposit after the special deposit ceases to satisfy subsection (a) 148 7
215	215	of this section. 149
216	216	(c) If, before termination of a special deposit, the bank determines the special deposit no 150
217	217	longer satisfies subsection (a) of this section, the bank may take action it believes is necessary 151
218	218	under the circumstances, including terminating the special deposit. 152
219	219	Sec. 7. Payment to beneficiary by bank. 153
220	220	(a) Unless the account agreement provides otherwise, the bank is obligated to pay a 154
221	221	beneficiary if there are sufficient actually and finally collected funds in the balance of the special 155
222	222	deposit. 156
223	223	(b) Except as provided in subsection (c) of this section, the obligation to pay the 157
224	224	beneficiary is excused if the funds available in the special deposit are insufficient to cover such 158
225	225	payment. 159
226	226	(c) Unless the account agreement provides otherwise, if the funds available in the special 160
227	227	deposit are insufficient to cover an obligation to pay a beneficiary, a beneficiary may elect to be 161
228	228	paid the funds that are available or, if there is more than one beneficiary, a pro rata share of the 162
229	229	funds available. Payment to the beneficiary making the election under this subsection discharges 163
230	230	the bank’s obligation to pay a beneficiary and does not constitute an accord and satisfaction with 164
231	231	respect to another person obligated to the beneficiary. 165
232	232	(d) Unless the account agreement provides otherwise, the obligation of the bank obligated 166
233	233	to pay a beneficiary is immediately due and payable. 167
234	234	(e) The bank may discharge its obligation under this section by: 168
235	235	(1) Crediting another transaction account of the beneficiary; or 169
236	236	(2) Taking other action that: 170
237	237	(i) Is permitted under the account agreement for the bank to obtain a 171 8
238	238	discharge; or 172
239	239	(ii) Otherwise would constitute a discharge under law. 173
240	240	(f) If the bank obligated to pay a beneficiary has incurred an obligation to discharge the 174
241	241	obligation of another person, the obligation of the other person is discharged if action by the 175
242	242	bank under subsection (e) of this section would constitute a discharge of the obligation of the 176
243	243	other person under law that determines whether an obligation is satisfied. 177
244	244	Sec. 8. Property interest of depositor or beneficiary. 178
245	245	(a) Neither a depositor nor a beneficiary has a property interest in a special deposit. 179
246	246	(b) Any property interest with respect to a special deposit is only in the right to receive 180
247	247	payment if the bank is obligated to pay a beneficiary and not in the special deposit itself. Any 181
248	248	property interest under this subsection is determined under other law. 182
249	249	Sec. 9. When creditor process enforceable against bank. 183
250	250	(a) Subject to subsection (b) of this section, creditor process with respect to a special 184
251	251	deposit is not enforceable against the bank holding the special deposit. 185
252	252	(b) Creditor process is enforceable against the bank holding a special deposit with respect 186
253	253	to an amount the bank is obligated to pay a beneficiary or a depositor if the process: 187
254	254	(1) Is served on the bank; 188
255	255	(2) Provides sufficient information to permit the bank to identify the depositor or 189
256	256	the beneficiary from the bank’s books and records; and 190
257	257	(3) Gives the bank a reasonable opportunity to act on the process. 191
258	258	(c) Creditor process served on a bank before it is enforceable against the bank under 192
259	259	subsection (b) of this section does not create a right of the creditor against the bank or a duty of 193
260	260	the bank to the creditor. Other law determines whether creditor process creates a lien enforceable 194 9
261	261	against the beneficiary on a contingent interest of a beneficiary, including a depositor as a 195
262	262	beneficiary, even if not enforceable against the bank. 196
263	263	Sec. 10. Injunction or similar relief. 197
264	264	A court may enjoin, or grant similar relief that would have the effect of enjoining, a bank 198
265	265	from paying a depositor or beneficiary only if payment would constitute a material fraud or 199
266	266	facilitate a material fraud with respect to a special deposit. 200
267	267	Sec. 11. Recoupment or setoff. 201
268	268	(a) Except as provided in subsection (b) or (c) of this section, a bank may not exercise a 202
269	269	right of recoupment or setoff against a special deposit. 203
270	270	(b) An account agreement may authorize the bank to debit the special deposit: 204
271	271	(1) When the bank becomes obligated to pay a beneficiary, in an amount that does 205
272	272	not exceed the amount necessary to discharge the obligation; 206
273	273	(2) For a fee assessed by the bank that relates to an overdraft in the special deposit 207
274	274	account; 208
275	275	(3) For costs incurred by the bank that relate directly to the special deposit; or 209
276	276	(4) To reverse an earlier credit posted by the bank to the balance of the special 210
277	277	deposit account, if the reversal occurs under an event or circumstance warranted under other law 211
278	278	of the District governing mistake and restitution. 212
279	279	(c) The bank holding a special deposit may exercise a right of recoupment or setoff 213
280	280	against an obligation to pay a beneficiary, even if the bank funds payment from the special 214
281	281	deposit. 215
282	282	Sec. 12. Duties and liability of bank. 216
283	283	(a) A bank does not have a fiduciary duty to any person with respect to a special deposit. 217 10
284	284	(b) When the bank holding a special deposit becomes obligated to pay a beneficiary, a 218
285	285	debtor-creditor relationship arises between the bank and beneficiary. 219
286	286	(c) The bank holding a special deposit has a duty to a beneficiary to comply with the 220
287	287	account agreement and this act. 221
288	288	(d) If the bank holding a special deposit does not comply with the account agreement or 222
289	289	this act, the bank is liable to a depositor or beneficiary only for damages proximately caused by 223
290	290	the noncompliance. Except as provided by other law of the District, the bank is not liable for 224
291	291	consequential, special, or punitive damages. 225
292	292	(e) The bank holding a special deposit may rely on records presented in compliance with 226
293	293	the account agreement to determine whether the bank is obligated to pay a beneficiary. 227
294	294	(f) If the account agreement requires payment on presentation of a record, the bank shall 228
295	295	determine within a reasonable time whether the record is sufficient to require payment. If the 229
296	296	agreement requires action by the bank on presentation of a record, the bank is not liable for 230
297	297	relying in good faith on the genuineness of the record if the record appears on its face to be 231
298	298	genuine. 232
299	299	(g) Unless the account agreement provides otherwise, the bank is not required to 233
300	300	determine whether a permissible purpose stated in the agreement continues to exist. 234
301	301	Sec 13. Term and termination. 235
302	302	(a) Unless otherwise provided in the account agreement, a special deposit terminates 5 236
303	303	years after the date the special deposit was first funded. 237
304	304	(b) Unless otherwise provided in the account agreement, if the bank cannot identify or 238
305	305	locate a beneficiary entitled to payment when the special deposit is terminated, and a balance 239
306	306	remains in the special deposit, the bank shall pay the balance to the depositor or depositors as a 240 11
307	307	beneficiary or beneficiaries. 241
308	308	(c) A bank that pays the remaining balance as provided under subsection (b) of this 242
309	309	section has no further obligation with respect to the special deposit. 243
310	310	Sec. 14. Principles of law and equity. 244
311	311	Subtitle I of Title 28 of the D.C. Code, consumer protection law, law governing deposits 245
312	312	generally, law related to escheat and abandoned or unclaimed property, and the principles of law 246
313	313	and equity, including law related to capacity to contract, principal and agent, estoppel, fraud, 247
314	314	misrepresentation, duress, coercion, mistake, and bankruptcy, supplement this act except to the 248
315	315	extent inconsistent with this act. 249
316	316	Sec. 15. Uniformity of application and construction. 250
317	317	In applying and construing this uniform act, a court shall consider the promotion of 251
318	318	uniformity of the law among jurisdictions that enact it. 252
319	319	Sec. 16. Transitional provision. 253
320	320	This act applies to: 254
321	321	(1) A special deposit made under an account agreement executed on or after the 255
322	322	effective date of this act; and 256
323	323	(2) A deposit made under an agreement executed before the effective date of this 257
324	324	act, if: 258
325	325	(A) All parties entitled to amend the agreement agree to make the deposit 259
326	326	a special deposit governed by this act; and 260
327	327	(B) The special deposit referenced in the amended agreement satisfies 261
328	328	Section 5. 262
329	329	263
330	330	Sec. 17. Fiscal impact statement. 264 12
331	331	The Council adopts the attached fiscal impact statement as the fiscal impact statement 265
332	332	required by section 602(c)(3) of the District of Columbia Home Rule Act, approved December 266
333	333	24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(3)). 267
334	334	Sec. 18. Effective Date 268
335	335	This act shall take effect following approval by the Mayor (or in the event of veto by the 269
336	336	Mayor, action by the Council to override the veto), a 30-day period of Congressional review as 270
337	337	provided in section 602(c)(1) of the District of Columbia Home Rule Act, approved December 271
338	338	24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(1)), and publication in the District of 272
339	339	Columbia Register. 273
340	340	274 Uniform Special Deposits Act
341	341	drafted by the
342	342	NATIONAL CONFERENCE OF COMMISSIONERS
343	343	ON UNIFORM STATE LAWS
344	344	and by it
345	345	APPROVED AND RECOMMENDED FOR ENACTMENT
346	346	IN ALL THE STATES
347	347	WITH PREFATORY NOTE AND COMMENTS
348	348	Copyright © 2023
349	349	By
350	350	NATIONAL CONFERENCE OF COMMISSIONERS
351	351	ON UNIFORM STATE LAWS
352	352	May 7, 2024 ABOUT ULC
353	353	The Uniform Law Commission (ULC), also known as National Conference of Commissioners
354	354	on Uniform State Laws (NCCUSL), now in its 132
355	355	nd
356	356	year, provides states with non-partisan,
357	357	well-conceived and well-drafted legislation that brings clarity and stability to critical areas of
358	358	state statutory law.
359	359	ULC members must be lawyers, qualified to practice law. They are practicing lawyers, judges,
360	360	legislators and legislative staff and law professors, who have been appointed by state
361	361	governments as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands to
362	362	research, draft and promote enactment of uniform state laws in areas of state law where
363	363	uniformity is desirable and practical.
364	364	• ULC strengthens the federal system by providing rules and procedures that are consistent from
365	365	state to state but that also reflect the diverse experience of the states.
366	366	• ULC statutes are representative of state experience because the organization is made up of
367	367	representatives from each state, appointed by state government.
368	368	• ULC keeps state law up to date by addressing important and timely legal issues.
369	369	• ULC’s efforts reduce the need for individuals and businesses to deal with different laws as
370	370	they move and do business in different states.
371	371	• ULC’s work facilitates economic development and provides a legal platform for foreign
372	372	entities to deal with U.S. citizens and businesses.
373	373	• Uniform Law Commissioners donate thousands of hours of their time and legal and drafting
374	374	expertise every year as a public service and receive no salary or compensation for their work.
375	375	• ULC’s deliberative and uniquely open drafting process draws on the expertise of
376	376	commissioners, but also utilizes input from legal experts, and advisors and observers
377	377	representing the views of other legal organizations or interests that will be subject to the
378	378	proposed laws.
379	379	• ULC is a state-supported organization that represents true value for the states, providing
380	380	services that most states could not otherwise afford or duplicate. Uniform Special Deposits Act
381	381	The committee appointed by and representing the Uniform Law Commission in preparing this
382	382	act consists of the following individuals:
383	383	Patrick A. Guida Rhode Island, Chair
384	384	John T. McGarvey Kentucky, Vice Chair
385	385	Timothy L. Amos Tennessee
386	386	Lani L. Ewart Hawaii
387	387	Greg Nibert New Mexico
388	388	Philip A. Nicholas Wyoming
389	389	Edwin E. Smith Massachusetts
390	390	William H. Henning Alabama, Division Chair
391	391	Dan Robbins California, President
392	392	Other Participants
393	393	Thomas C. Baxter Jr. New York, Co-Reporter
394	394	Michael Wiseman New York, Co-Reporter
395	395	Craig Ulman District of Columbia, American Bar Association
396	396	Section Advisor
397	397	Duane M. Searle Pennsylvania, Style Liaison
398	398	Tim Schnabel Illinois, Executive Director
399	399	Copies of this act may be obtained from:
400	400	Uniform Law Commission
401	401	111 N. Wabash Ave., Suite 1010
402	402	Chicago, IL 60602
403	403	(312) 450-6600
404	404	www.uniformlaws.org Uniform Special Deposits Act
405	405	Table of Contents
406	406	Prefatory Note ................................................................................................................................. 1
407	407	Section 1. Title .............................................................................................................................. 11
408	408	Section 2. Definitions.................................................................................................................... 11
409	409	Section 3. Scope; Choice of Law; Forum ..................................................................................... 17
410	410	Section 4. Variation by Agreement or Amendment...................................................................... 19
411	411	Section 5. Requirements for Special Deposit ............................................................................... 22
412	412	Section 6. Permissible Purpose ..................................................................................................... 23
413	413	Section 7. Payment to Beneficiary by Bank ................................................................................. 24
414	414	Section 8. Property Interest of Depositor or Beneficiary.............................................................. 27
415	415	Section 9. When Creditor Process Enforceable Against Bank ..................................................... 28
416	416	Section 10. Injunction or Similar Relief ....................................................................................... 29
417	417	Section 11. Recoupment or Set Off .............................................................................................. 30
418	418	Section 12. Duties and Liability of Bank ...................................................................................... 32
419	419	Section 13. Term and Termination ............................................................................................... 33
420	420	Section 14. Principles of Law and Equity..................................................................................... 34
421	421	Section 15. Uniformity of Application and Construction ............................................................. 35
422	422	Section 16. Transitional Provision................................................................................................ 35
423	423	[Section 17. Severability].............................................................................................................. 36
424	424	Section 18. Effective Date ............................................................................................................ 36 1
425	425	Uniform Special Deposits Act
426	426	Prefatory Note
427	427	The Uniform Law Commission has approved the Uniform Special Deposits Act.
428	428	Comments that follow each of the sections of the statute are the official comments. They explain
429	429	in detail the purpose and meaning of the various sections, and the policy considerations on which
430	430	they are based. This Prefatory Note sets out important background about special deposits,
431	431	including the reasons for enacting a Uniform Special Deposits Act and some of the overarching
432	432	considerations affecting the drafting of the Act.
433	433	Introduction
434	434	The Uniform Special Deposits Act addresses deposits at a bank where the identity of the
435	435	person entitled to payment is not determined until the occurrence of a contingency identified at
436	436	the time that the deposit is created. An example of such an account is an escrow account holding
437	437	funds that will be paid to one of two potential beneficiaries depending on the outcome of a
438	438	contingency. Although such accounts are commonly used, the legal protections afforded them
439	439	are uncertain. The fundamental purpose of the Uniform Special Deposits Act is t o provide a
440	440	vehicle that banks and their customers can elect to use providing greater legal certainty that the
441	441	expectations of users will be respected.
442	442	Historically courts have attempted to fashion protections for such accounts through,
443	443	among other measures, case law referring to special deposits, but the case law in this area is
444	444	murky and in some ways anachronistic in the context of modern banking. The Uniform Special
445	445	Deposits Act creates a vehicle that will provide certainty as to what protections will and will not
446	446	apply to the accounts of those electing to use it. Because its application is elective, persons not
447	447	electing to be covered by the Uniform Sp ecial Deposits Act will continue to be subject to
448	448	existing law.
449	449	Description of the Transactions Covered by the Uniform Special Deposits Act
450	450	The Uniform Special Deposits Act addresses concerns that have arisen about “special
451	451	deposits”, concerns that may undermine the use of special deposits as a useful vehicle to hold
452	452	funds that may be paid in the future to one or more persons depending on the resolution of one or
453	453	more specified contingencies. The legal uncertainty arises as to the attributes that make a deposit
454	454	“special”, the rights of the parties interested in the special deposit, their respective creditors, and
455	455	the bank holding the special deposit prior to the resolution of the contingency. These
456	456	uncertainties are not capable of resolution in bank-customer agreements because the agreed
457	457	terms cannot lawfully affect third parties who are not parties to such agreements. The Uniform
458	458	Special Deposits Act addresses the concerns by reducing the legal uncertainties.
459	459	An important threshold question is “what makes a deposit special”? The question arises
460	460	in a context where the law governing deposits generally is not uniform among the states. The
461	461	Uniform Special Deposits Act does not change that condition; the statutory changes touch only a
462	462	subcategory of general deposits (those which are considered to be “special”) and are limited in 2
463	463	application such that they address exclusively the concerns about the identified legal
464	464	uncertainties. The approach taken is a minimalist approach, meaning that the Uniform Special
465	465	Deposits Act offers statutory language only when necessary to address concerns.
466	466	The subcategory of general deposits designated as “special” receives that designation in
467	467	an account agreement between the bank and its customer, referred to as a “depositor” in the Act
468	468	(and where the deposit involves at least one beneficiary that is not that depositor). The depositor
469	469	is the bank’s customer, either because the depositor is funding the special deposit or because the
470	470	depositor is the party that established the special deposit (which might be funded by someone
471	471	else). The Uniform Special Deposits Act requires more than a customer’s designation of a
472	472	special deposit, although that is one indispensable element. In addition, the special deposit must
473	473	be denominated in money (language that is based on the Uniform Commercial Code’s definition
474	474	of money, as described below), must serve a permissible purpose specified in the account
475	475	agreement, and must be subject to a contingency that has not yet been determined. Consequently,
476	476	a general deposit becomes special under the Uniform Special Deposits Act if the deposit is so
477	477	designated in an account agreement and if the deposit meets the objective elements set forth in
478	478	sections of the Uniform Special Deposits Act.
479	479	The statutory requirement that the special deposit be denominated in a medium of
480	480	exchange that is currently authorized or adopted by a domestic or foreign government is a key
481	481	limitation on scope. The Uniform Special Deposits Act would not cover a bank’s securities
482	482	account for a customer, nor would it cover a safe-deposit account (which is a form of custody
483	483	account) or a loan account. This requirement would also mean that in most cases, cryptocurrency
484	484	accounts would not be covered. We are aware that at least one country, El Salvador, has adopted
485	485	Bitcoin as a legally recognized national currency, so it follows that it would be possible for a
486	486	special deposit account to be denominated in Bitcoin if the parties to the account agreement,
487	487	including the bank, all agreed.
488	488	The Uniform Special Deposits Act also requires that the special deposit be for one or
489	489	more specifically identified permissible purposes, and the special deposit must serve such
490	490	permissible purpose from the time the account agreement is executed until the special deposit is
491	491	terminated either under the account agreement or under Section 13 if the account agreement does
492	492	not include a termination provision. This key requirement is designed to address possible
493	493	unintended and adverse consequences of two of the remedial provisions of the Uniform Special
494	494	Deposits Act. In protecting the special deposit from a premature creditor attack and from
495	495	inappropriately being swept into the depositor’s bankruptcy estate, these protective provisions of
496	496	the Uniform Special Deposits Act could be abused. For example, if a depositor established a
497	497	special deposit “with the actual intent to hinder, delay, or defraud a creditor” of the depositor,
498	498	this purpose would not be permissible. Cf . Uniform Voidable Transactions Act, § 4(a)(1). There
499	499	are also provisions in the Uniform Special Deposits Act designed to protect against the risk of
500	500	abuse, including, but not limited to, the permissible purpose requirement. We also note that such
501	501	an impermissible purpose might develop at a later point in the history of the special deposit; a
502	502	purpose that is permissible at the outset may become impermissible as circumstances change. In
503	503	such an event, the protections of the Act will be lost at the appropriate time, and any credits to
504	504	the account after that time will not receive the Act’s protections. 3
505	505	There are four specific concerns that have hindered the “special deposit” from performing
506	506	what is widely seen as a legitimate aid to commerce and business. First, there exists uncertainty
507	507	about what makes a deposit “special”. The existing case law is not helpful in reducing
508	508	uncertainty, and perhaps even contributes to it, because decisions reference bank practices that
509	509	are no longer followed. The Act reduces this uncertainty by setting forth several elements for a
510	510	“special deposit” and by requiring the parties to the account agreement to clearly state their
511	511	intention to create a special deposit subject to the Act.
512	512	Second, there is uncertainty about the bank’s debt that arises from holding a special
513	513	deposit, and to whom and when that debt is due and owing. Is the debt to the depositor or is it to
514	514	a third person that the Uniform Special Deposits Act calls a beneficiary? Is it due and owing
515	515	when the deposit is funded or at a later point in time? These uncertainties render the special
516	516	deposit vulnerable to an attack by creditors of either the depositor or a beneficiary, and this
517	517	vulnerability has led many to avoid the use of special deposits. A deposit that is tied up in a
518	518	dispute with a creditor cannot perform its intended purpose. The Uniform Special Deposits Act
519	519	minimizes the vulnerability by making it clear that a special deposit is a debt owed to the
520	520	beneficiary after determination of a stated contingency.
521	521	Third, in certain situations described further below, the special deposit might be seen
522	522	inappropriately as an asset of the depositor, and vulnerable to being considered part of the
523	523	bankruptcy estate in the event of the depositor’s bankruptcy. This bankruptcy vulnerability, like
524	524	the uncertainty about a creditor attack, is remedied by the Uniform Special Deposits Act because
525	525	the depositor’s pecuniary interest in the special deposit is only as a potential beneficiary. The
526	526	statute makes clear that the special deposit is remote from a depositor’s bankruptcy estate unless
527	527	the depositor has a determined right to all or a part of the special deposit in its capacity as a
528	528	beneficiary after the determination of a contingency. To be sure, when a special deposit
529	529	terminates, the depositor may receive all or part of the balance back if the balance is not
530	530	distributed to a beneficiary, but it will receive that rebate in the capacity of a beneficiary, with
531	531	escheatment being the only alternative (an alternative that becomes much less likely as a result of
532	532	the provision).
533	533	Finally, a special deposit can be vulnerable to the bank holding the special deposit, which
534	534	might exercise a right of set off against the special deposit for a mature debt of the depositor or a
535	535	beneficiary. This vulnerability has led many to eschew the use of a special deposit because of the
536	536	legal uncertainty created by the prospect of a bank set off. The Uniform Special Deposits Act
537	537	reduces this uncertainty.
538	538	Legitimate and Salutary Types of Special Deposits
539	539	The Uniform Special Deposits Act establishes a non-exhaustive “white list” of certain
540	540	types of deposit accounts that might be appropriately designated as “special” and would perform
541	541	a permissible purpose. The idea here is to minimize uncertainty about a particular category of
542	542	special deposit and whether that category would be considered permissible.
543	543	The first listed special deposit is to “hold funds in escrow, including for a purchase and
544	544	sale, lease, buyback, or other transaction”. In the deliberative process leading the Uniform Law 4
545	545	Commission to authorize development of the Uniform Special Deposits Act, the Uniform Law
546	546	Commission Study Committee learned of the rising popularity of escrow accounts at banking
547	547	organizations. Parties doing purchase-and-sale transactions associated with many different asset
548	548	classes, ranging from the conveyance of real estate to the sale of a business, often structure their
549	549	transactions in two stages: there is the contract to sell and there is the closing of the sale. To
550	550	provide the seller with assurance that a buyer will proceed in good faith from contract to closing,
551	551	the contract of sale will often include a term providing for the payment of earnest money by the
552	552	purchaser. This earnest money will be held by a trusted third party between contract and closing,
553	553	and that trusted third party will often be a bank, especially when the amount of earnest money is
554	554	material (and there are occasions when the special deposit can be measured in billions of
555	555	dollars). Of course, one of the fundamental uncertainties about the deposit received by a bank
556	556	acting to facilitate such a sale transaction is the uncertainty about the future disbursement of the
557	557	deposited funds (for example, in the sale of the subsidiary, there may be significant “due
558	558	diligence” about the financial statements of the subsidiary that might adversely affect the buyer’s
559	559	willingness to proceed). When the parties get to closing, will the special deposit be paid to the
560	560	seller (yes, if the transaction closes) or will the special deposit be returned to the putative buyer
561	561	(if the transaction does not close)? It is the uncertainty about the bank’s ultimate “due to”
562	562	obligation that causes some of the concerns identified above. There is no doubt, however, that
563	563	the special deposit is serving a permissible purpose, namely, to provide assurance that the
564	564	putative purchaser is serious and has the financial capability to proceed in good faith from the
565	565	first step to the second step.
566	566	Consider also another white-listed special deposit – the escrow account with respect to a
567	567	landlord-tenant relationship. Envision a large commercial building in a major city, where there
568	568	might be 150 offices and 150 tenants. In each, there will be a lease between the landlord and the
569	569	tenant, and the landlord will require tenants to pre-pay rent as a “security deposit” (assume that
570	570	the security deposit equals one month of rent). The security deposits of all the tenants can be held
571	571	in a commingled special deposit that the landlord establishes with a bank. Again, there will be
572	572	the familiar uncertainty about the bank’s “due to” obligation. Will all or a part of the balance in
573	573	the special deposit be “due to” the landlord or will it be “due to” the tenant? If, at the expiry of
574	574	any leasehold, there is no damage to the leased property, and a definitive communication along
575	575	these lines is made to the bank, the tenant will be the “beneficiary” of the bank’s “due to”
576	576	obligation and presumably the bank will discharge this liability and pay the tenant out of the
577	577	special deposit. But the parties will not know whether this contingency is satisfied until the end
578	578	of the leasehold. If there is damage to the leased property, all or part of the deposit could be due
579	579	to the landlord. Notwithstanding the uncertain identity of the bank’s creditor, the special deposit
580	580	established by the landlord in the hypothetical situation will be for a permissible purpose, to
581	581	secure the leased property against all but ordinary wear and tear during the leasehold. The special
582	582	deposit facilitates the execution of an important term within the 150 leases in the building, and
583	583	significant funds can be held in a regulated bank, where they will be safe and secure. While
584	584	providing greater certainty and protection for such a special deposit, the Uniform Special
585	585	Deposits Act does not displace any provisions of state law that may exist regulating such
586	586	deposits, such as laws governing the payment of interest on such accounts.
587	587	The white list includes examples of funds that may be held for other purposes. In highly
588	588	sophisticated financial systems, including that in the United States, it is customary for employers 5
589	589	to collect funds in the form of pending transaction accounts to be used to meet required payrolls
590	590	(both salary payments and ERISA payments scheduled to be made to retirement accounts). It is a
591	591	common practice to collect the funds needed to discharge employer obligations to employees in a
592	592	special deposit and then to disburse the collected funds to employees in the form of salary, IRA,
593	593	or 401(k) payments. The Uniform Special Deposits Act would protect such special deposits and
594	594	facilitate the payout to employee/beneficiaries by freeing these deposits from an attack by
595	595	employer/creditors and by making such special deposits bankruptcy remote with respect to the
596	596	employer’s bankruptcy and free from a bank’s right of set off. Again, in this example, the
597	597	permissible purpose is to facilitate the discharge of the employer’s obligations to its employees.
598	598	A collection account to facilitate the settlement of a legal action or arbitral award is
599	599	another form of white-listed special deposit that “holds funds for distribution to a defined class
600	600	of persons”. In a class action settlement, for example, it would be typical for a settling defendant
601	601	to collect the funds needed to pay claimants in a special deposit that would, once the deposit is
602	602	fully funded, be used to pay out those claimants who are to be compensated by the court-
603	603	approved settlement. The Uniform Special Deposits Act would protect such settlement accounts
604	604	from the same kind of uncertainties previously identified. The permissible purpose of the special
605	605	deposit in this instance is the facilitation of compensation to injured class members.
606	606	Another white-listed special deposit is to “provide assurance with respect to an obligation
607	607	created by contract”. In modern economic systems, there is financial infrastructure that depends
608	608	on participants that have the necessary liquidity to settle not only their own obligations but also
609	609	the obligations of others. One technique to assure this capability to settle the obligations of third
610	610	parties is for the settling participant to establish a special deposit with a material balance, which
611	611	will “provide assurance” that the settling participant has the wherewithal to take on its role as a
612	612	settlement agent. In such situations, the balance of the special deposit might be large and needs
613	613	to be held by a reliable and creditworthy entity such as a regulated bank. In this example, the
614	614	special deposit is facilitating the operation of critical financial infrastructure, and the cash
615	615	balance needs protection from creditors, or the balance cannot have the necessary “assuring”
616	616	effect. There are specific examples where the functioning of critical infrastructure has been
617	617	jeopardized by creditor process, and in certain situations creditor process served on the bank
618	618	holding a special deposit has been used as a weapon to gain an advantage that is seen to be
619	619	“unfair”. With respect to sovereign debt where there has been a default, some “hold out”
620	620	creditors have jeopardized other bond holders who agreed to a bond restructuring by attaching
621	621	the special collection account through which restructured bond payments were to be made, on a
622	622	theory that the debtor (i.e., the sovereign that defaulted) had a property interest in the account
623	623	used to collect funds for the payout, and the account needed to be “frozen” until that property
624	624	interest could be adjudicated. The Uniform Special Deposits Act would insulate special deposits
625	625	of this kind from such creditor attacks, and the permissible purpose is to assist with the
626	626	functioning of critical infrastructure and to foster the settlement of financial disputes.
627	627	The statute’s “white list” also protects special deposits that exist to facilitate settlements
628	628	done across certain private sector payment systems, which often depend upon special deposit
629	629	accounts that are used for settlement or are used to provide assurance with respect to obligations
630	630	that arise in the operation of the system or otherwise support the orderly functioning of the
631	631	system. Even a short delay in the execution of a settlement, where the delay lasts only for as long 6
632	632	as it takes the parties to get to a judge and obtain relief, could pose a systemic risk to the
633	633	financial system. Without needed protection from the Uniform Special Deposits Act, the risk of a
634	634	suspended settlement arising from a levy or restraining order is always just a lawsuit away. The
635	635	Uniform Special Deposits Act would reduce and perhaps even eliminate this risk.
636	636	Finally, special deposits could potentially be used to protect accounts that hold cash
637	637	margin or other cash collateral required by regulators for reasons including customer protection
638	638	and mitigation of bilateral credit and systemic risk in securities transactions or transactions in
639	639	regulated derivatives (primarily swaps and futures). Several governmental authorities, including
640	640	the Commodity Futures Trading Commission and the Securities and Exchange Commission,
641	641	require that cash margin be held in an account akin to a “special deposit” where the bank holding
642	642	the account is contractually required to waive its set off rights against obligations of the broker or
643	643	dealer holding customer assets. See, e.g. , 17 C.F.R. §§ 1.20; 22.5; 23.17; 240.15c3–3; 240.18a–4.
644	644	If these deposits became covered under the Uniform Special Deposits Act, they would receive
645	645	the kind of protection regulators have required and may even enhance protections currently
646	646	provided under federal law. The language of the Uniform Special Deposits Act is sufficiently
647	647	flexible to cover similar future arrangements because the holding of cash margin appears to be a
648	648	trend in the more sophisticated financial centers. As for the permissible purpose, the purpose
649	649	would be coincident with the policy that has prompted regulatory action; the special deposit
650	650	provides confidence in the protection of customer assets and orderly operation of securities and
651	651	commodities settlement systems.
652	652	The key point about the white-listed special deposits is that these deposits are not
653	653	“special” only because they are so designated in the account agreement. They are special because
654	654	of the designation and because the deposits perform a unique public function in facilitating
655	655	important prudential, commercial, or governmental objectives. It is also appropriate to draw
656	656	attention to the wide diversity of special deposits, and to the beneficial function that they
657	657	perform.
658	658	Nature of the Relationship between the Bank Holding the Special Deposit and the Beneficiary
659	659	There is old case law that mistakenly characterizes the relationship formed in a special
660	660	deposit. The Uniform Special Deposits Act corrects the mistaken characterizations. The old case
661	661	law provides that when a bank receives a special deposit in the form of cash, the bank holds this
662	662	deposited cash in “custody” and the bank’s obligation to repay the cash is not reflected on the
663	663	bank’s balance sheet. In the survey preceding the drafting of the Uniform Special Deposits Act,
664	664	the Uniform Law Commission Study Committee learned that this practice contemplated by the
665	665	old case law is not followed. No bank today that receives cash on deposit from a customer fails
666	666	to record a debt to the customer on its balance sheet. The Uniform Special Deposits Act makes
667	667	clear that the bank does not hold funds in a custodial capacity in a special deposit situation. The
668	668	legal and accounting relationships are in harmony.
669	669	Another unhelpful vestige in old case law is a suggestion that the bank taking a special
670	670	deposit is acting as a kind of fiduciary vis-à-vis the depositor. As discussed below, the drafters
671	671	are aware of no evidence that this is the current commercial practice. When a bank intends to act
672	672	as a trustee, the relationship is clearly provided in a trust agreement and not in a deposit contract. 7
673	673	The Uniform Special Deposits Act provides expressly that any relationship between the
674	674	bank and a depositor or beneficiary arising from the special deposit is a debtor-creditor
675	675	relationship. Although banks may act as fiduciaries in certain situations, the relationship formed
676	676	when taking a special deposit is not a fiduciary relationship. The Uniform Special Deposits Act
677	677	reduces uncertainty on this issue, and if the intention is to change the relationship from debtor-
678	678	creditor to fiduciary, that change should be documented in a trust agreement rather than an
679	679	account agreement.
680	680	The Uniform Special Deposits Act also makes clear that the determination of the
681	681	occurrence of the contingency is the trigger event that ripens the generalized “due to” obligation
682	682	of the bank into a specific obligation to an entitlement holder, a person that the Uniform Special
683	683	Deposits Act calls a beneficiary. Before the determination of the occurrence of the contingency,
684	684	the bank has an indebtedness that is due not to any specifically identified legal person. That is,
685	685	the bank’s obligation to pay is not a contingent liability of the bank, it is a debt of the bank like
686	686	any other deposit. What depends on the resolution of the contingency is the identity of the person
687	687	entitled to payment. Consequently, there is no attachable property of a specific person until
688	688	determination of the occurrence of the contingency, which will identify the beneficiary.
689	689	The Uniform Special Deposits Act also clarifies when a debt is owed by the bank to a
690	690	beneficiary, which can arise only after determination of the occurrence of the contingency, and
691	691	explicitly states how that obligation may be paid. It is at that point when the debt of the bank to
692	692	the beneficiary can be subject to creditor process served on the bank by a creditor of the
693	693	beneficiary. However, if creditor process is served before the point when the contingency is
694	694	determined, then the bank holding the special deposit is not obliged to act on the process. There
695	695	is no debt due and owing by the bank to such a beneficiary before the determination point, and
696	696	the Uniform Special Deposits Act provides that any premature service will not accomplish its
697	697	restraining objective. These provisions of the Uniform Special Deposits Act minimize legal
698	698	uncertainty with clear and executable rules that will enable the special deposit to serve its
699	699	salutary function; it leaves the “due to” free of restraint until the beneficiary’s payment right
700	700	becomes fixed.
701	701	Enforcement Features of the Uniform Special Deposits Act
702	702	The Uniform Special Deposits Act also contains provisions dealing with enforcement,
703	703	which resolve some uncertainties currently found in the case law. The Uniform Special Deposits
704	704	Act is enforceable by a beneficiary, and it does not matter whether the beneficiary is a party to
705	705	the account agreement. In the wide diversity of special deposit arrangements, there will be some
706	706	account agreements where the beneficiary will be a party and others where the beneficiary will
707	707	not be a party. For example, if two companies are contracting for the sale of a business, the buyer
708	708	of the business will sometimes place a down payment of earnest money in a special deposit. The
709	709	down payment will later be applied against the purchase price when the sale of the business
710	710	closes. If the sale does not close, the down payment will typically be returned to the purported
711	711	buyer. In this arrangement, it would be common for the buyer and the seller to be parties to the
712	712	special deposit agreement with the bank holding the down payment. On the other hand, with
713	713	respect to a different kind of special deposit – the security deposits that are taken from tenants in
714	714	a commercial office park – it would not be unusual for the landlord to take security deposits from 8
715	715	tenants and place them in a special deposit at a bank. In this arrangement, the tenant/beneficiaries
716	716	would not typically be parties to the account agreement, which often will be between the bank
717	717	and the landlord.
718	718	The Uniform Special Deposits Act also makes clear that a depositor can enforce the
719	719	account agreement that creates the special deposit. The depositor’s standing is derived from the depositor being the person who established the special deposit, even if it placed no funds in the special deposit. Again, this would be typical of certain special deposits but not all special deposits, and the drafting committee envisioned tenant security deposits being placed into a special deposit established by a commercial landlord as a case in point.
720	720	The measure of damages for breach of the account agreement or the Uniform Special
721	721	Deposits Act is framed in terms of actual damages proximately caused by a breach of agreement or a statutory violation. This avoids the prospect of consequential damages against a bank holding a special deposit unless the bank expressly agrees to a more expanded measure of damages in the account agreement or provided by other law. The limitation of consequential damages is purposeful. It removes a sanction that might cause banks to avoid offering a special deposits product. Given the salutary functions that special deposits perform, the Uniform Special Deposits Act offers liability protection as an incentive to banks so that they will offer a special deposit product.
722	722	Self-Imposed Limitations of the Uniform Special Deposits Act
723	723	The Uniform Special Deposits Act contains several self-imposed limitations. The most
724	724	important limitation has already been referenced – the Uniform Special Deposits Act accepts, as
725	725	it must, that the law governing general deposits is not uniform among the 50 states. The drafters
726	726	had no mandate to write a uniform law governing deposits generally. To the contrary, the charge
727	727	to the Drafting Committee was to address the unique concerns that are inhibiting the
728	728	development of a special deposits product, and to do nothing more. Subjects including when a
729	729	deposit is received and when it is paid out are governed by general deposit law, and that general
730	730	law is left untouched by the Uniform Special Deposits Act. Further, many states have substantive
731	731	statutory protections dealing with discrete topics arising from certain types of bank deposits,
732	732	including customer protection measures for security deposits received by landlords. Another
733	733	example concerns adverse claims against a generic bank deposit. The Uniform Special Deposits
734	734	Act leaves all that state law untouched, whatever it happens to be. Further, the Uniform Special
735	735	Deposits Act relies upon existing general deposit law to “fill in the blanks” (e.g., when is a
736	736	special deposit received) and does not displace the general deposit law except when necessary to
737	737	accomplish a specific objective. For example, whether a special deposit will bear interest and if
738	738	so, at what rate, would be determined by other law and by the agreement between the parties.
739	739	The Uniform Special Deposits Act also expressly does not address certain other topics
740	740	that may affect a special deposit. One such topic is the insolvency of the bank holding a special
741	741	deposit. This is not addressed for two different reasons. First, in the Uniform Law Commission
742	742	Study Committee deliberations preceding the drafting of the Uniform Special Deposits Act, bank
743	743	insolvency was not identified as a problem or concern. In the United States, there is a well-
744	744	developed bank insolvency law and it has worked well for special deposits. Second, because of 9
745	745	widespread federal deposit insurance, bank insolvency law has largely become the product of
746	746	federal law, and state law including the Uniform Special Deposits Act can perform only a limited
747	747	role. Consequently, the Uniform Special Deposits Act does not address the insolvency of the
748	748	bank holding the special deposit and leaves that subject to federal law.
749	749	While bank insolvency is a topic that the Uniform Special Deposits Act does not cover,
750	750	the statute does address an insolvency topic that is a significant concern – the insolvency of a
751	751	depositor and the possibility that a special deposit might become part of the bankruptcy estate in
752	752	the event of the depositor’s bankruptcy. A specific suggestion was that the special deposit be
753	753	made bankruptcy remote in the event of a depositor bankruptcy, which could be done by
754	754	reducing any uncertainty whether a depositor has a property interest in a special deposit. The
755	755	Uniform Special Deposits Act provides this needed clarity, and the statute makes clear that the
756	756	depositor as a depositor has no property interest in a special deposit, and that its only property
757	757	interest is as a potential beneficiary. Of course, no beneficiary has any entitlement until
758	758	determination of the occurrence of the contingency. This should avoid the special deposit being
759	759	unhelpfully drawn into depositor bankruptcy proceedings and renders the special deposit
760	760	bankruptcy remote.
761	761	A final self-limitation of the Uniform Special Deposits Act is that it is applicable only if
762	762	the parties to the account agreement have opted in, meaning the bank and its customer have
763	763	elected that the deposit is special and will receive statutory coverage. In the absence of an agreed
764	764	“opt-in”, the statute does not apply. One of the key attributes of a special deposit that was
765	765	referenced repeatedly in the Uniform Law Commission Study Committee deliberations was the
766	766	importance of the “opt-in” to distinguish the covered special deposit from other bank deposits.
767	767	Currently, banks receive demand, time, savings, and trust deposits, and each of these must be
768	768	distinguished from the deposit that is “special”. Given the wide diversity of “special deposits”,
769	769	many practitioners told the Uniform Law Commission Study Committee that the designation
770	770	needed to be done by the account parties through an “opt-in” provision in the account agreement.
771	771	The parties to the account agreement, namely the bank and its depositor(s), would bes t
772	772	understand the special purpose being served.
773	773	Note also that no bank is required to offer a special deposit product, and some banks may
774	774	decide that this will not be among their offered suite of products, or that they will offer such a
775	775	product only under some circumstances, such as all the potential beneficiaries being parties to
776	776	the account agreement. The Uniform Special Deposits Act is drafted to provide for sufficient
777	777	flexibility that would enable the Uniform Special Deposits Act to minimize legal uncertainty and
778	778	maximize the salutary commercial benefits of this deposit type.
779	779	Choice of Law, Choice of Forum, and Effective Date
780	780	It is appropriate to say a few words about choice of law, choice of forum and the effective
781	781	date of the Uniform Special Deposits Act.
782	782	One of the distinguishing features of the Uniform Special Deposits Act is that it is an
783	783	“opt-in” statute. The parties to the account agreement, namely the bank and its depositor(s),
784	784	decide upon coverage. To maximize their freedom of choice, the parties can select to be 10
785	785	governed by the laws of a state which has enacted the Uniform Special Deposits Act,
786	786	notwithstanding whether there is a reasonable relation between a state that has enacted the
787	787	Uniform Special Deposits Act and the contracting parties, the forum state, the special deposit, or
788	788	any transaction associated with the special deposit. Given that the selection of the Uniform
789	789	Special Deposits Act would encompass certain statutory protections for the special deposit,
790	790	certainty of application with respect to applicable law is especially important. This certainty is
791	791	provided by maximizing the ability of the parties to the account agreement to select the
792	792	governing law. For the same policy reason, there is a choice-of-forum provision at Section 3 that
793	793	facilitates the selection of a forum for the resolution of disputes between the parties.
794	794	With respect to the effective date, one of the concerns that is addressed in the Uniform
795	795	Special Deposits Act relates to special deposits that are already existing at the time the statute is
796	796	enacted in a particular state. Will the new law apply to a pre-existing special deposit? The
797	797	answer is that it will apply if the necessary parties to the account agreement make the requisite
798	798	amendments to the existing agreement. Again, the rationale for this provision is legal certainty. 11
799	799	Uniform Special Deposits Act
800	800	Section 1. Title
801	801	This [act] may be cited as the Uniform Special Deposits Act.
802	802	Section 2. Definitions
803	803	In this [act]:
804	804	(1) “Account agreement” means an agreement that:
805	805	(A) is in a record between a bank and one or more depositors;
806	806	(B) may have one or more beneficiaries as additional parties; and
807	807	(C) states the intention of the parties to establish a special deposit
808	808	governed by this [act].
809	809	(2) “Bank” means a person engaged in the business of banking and includes a
810	810	savings bank, savings and loan association, credit union, [and] trust company[, and a bank as
811	811	defined in [cite to state statute]]. Each branch or separate office of a bank is a separate bank for
812	812	the purpose of this [act].
813	813	(3) “Beneficiary” means a person that:
814	814	(A) is identified as a beneficiary in an account agreement; or
815	815	(B) if not identified as a beneficiary in an account agreement, may be
816	816	entitled to payment from a special deposit:
817	817	(i) under the account agreement; or
818	818	(ii) on termination of the special deposit.
819	819	(4) “Contingency” means an event or circumstance stated in an account
820	820	agreement that is not certain to occur but must occur before the bank is obligated to pay a
821	821	beneficiary. 12
822	822	(5) “Creditor process” means attachment, garnishment, levy, notice of lien,
823	823	sequestration, or similar process issued by or on behalf of a creditor or other claimant.
824	824	(6) “Depositor” means a person that establishes or funds a special deposit.
825	825	(7) “Good faith” means honesty in fact and observance of reasonable commercial
826	826	standards of fair dealing.
827	827	(8) “Knowledge” of a fact means:
828	828	(A) with respect to a beneficiary, actual knowledge of the fact; or
829	829	(B) with respect to a bank holding a special deposit:
830	830	(i) if the bank:
831	831	(I) has established a reasonable routine for communicating
832	832	material information to an individual to whom the bank has assigned responsibility for the
833	833	special deposit; and
834	834	(II) maintains reasonable compliance with the routine,
835	835	actual knowledge of the fact by that individual; or
836	836	(ii) if the bank has not established and maintained reasonable
837	837	compliance with a routine described in clause (i) or otherwise exercised due diligence, implied
838	838	knowledge of the fact that would have come to the attention of an individual to whom the bank
839	839	has assigned responsibility for the special deposit.
840	840	(9) “Obligated to pay a beneficiary” means a beneficiary is entitled under the
841	841	account agreement to receive from the bank a payment when:
842	842	(A) a contingency has occurred; and
843	843	(B) the bank has knowledge the contingency has occurred.
844	844	“Obligation to pay a beneficiary” has a corresponding meaning. 13
845	845	(10) “Permissible purpose” means a governmental, regulatory, commercial,
846	846	charitable, or testamentary objective of the parties stated in an account agreement. The term
847	847	includes an objective to:
848	848	(A) hold funds:
849	849	(i) in escrow, including for a purchase and sale, lease, buyback, or
850	850	other transaction;
851	851	(ii) as a security deposit of a tenant;
852	852	(iii) that may be distributed to a person as remuneration, retirement
853	853	or other benefit, or compensation under a judgment, consent decree, court order, or other
854	854	decision of a tribunal; or
855	855	(iv) for distribution to a defined class of persons after identification
856	856	of the class members and their interest in the funds;
857	857	(B) provide assurance with respect to an obligation created by contract,
858	858	such as earnest money to ensure a transaction closes;
859	859	(C) settle an obligation that arises in the operation of a payment system,
860	860	securities settlement system, or other financial market infrastructure;
861	861	(D) provide assurance with respect to an obligation that arises in the
862	862	operation of a payment system, securities settlement system, or other financial market
863	863	infrastructure; or
864	864	(E) hold margin, other cash collateral, or funds that support the orderly
865	865	functioning of financial market infrastructure or the performance of an obligation with respect to
866	866	the infrastructure.
867	867	(11) “Person” means an individual, estate, business or nonprofit entity, 14
868	868	government or governmental subdivision, agency, or instrumentality, or other legal entity. The
869	869	term includes a protected series, however denominated, of an entity if the protected series is
870	870	established under law that limits, or limits if conditions specified under law are satisfied, the
871	871	ability of a creditor of the entity or of any other protected series of the entity to satisfy a claim
872	872	from assets of the protected series.
873	873	(12) “Record” means information:
874	874	(A) inscribed on a tangible medium; or
875	875	(B) stored in an electronic or other medium and retrievable in perceivable
876	876	form.
877	877	(13) “Special deposit” means a deposit that satisfies Section 5.
878	878	(14) “State” means a state of the United States, the District of Columbia, Puerto
879	879	Rico, the United States Virgin Islands, or any other territory or possession subject to the
880	880	jurisdiction of the United States. The term includes an agency or instrumentality of the state.
881	881	Legislative Note: The bracketed text in paragraph (2) should be included if a state defines
882	882	“bank” in another statute and intends for the definition to apply to this act.
883	883	A state should enact the definition of “person” in paragraph (11) regardless of whether the state
884	884	has enacted the Uniform Protected Series Act (2017) or otherwise recognizes a protected series
885	885	under its law. The Uniform Special Deposits Act does not require the enacting state to recognize
886	886	a limit on liability of a protected series organized under the law of another jurisdiction or a limit
887	887	on liability of the entity that established the protected series. The Uniform Special Deposits Act
888	888	clarifies the status of a protected series as a “person” under the choice-of-law and substantive
889	889	law rules of the enacting state under the Uniform Special Deposits Act.
890	890	Comment
891	891	1. Account Agreement. A fundamental question pervading the case law and among
892	892	parties considering the use of this banking product is what distinguishes the special deposit from other types of deposits, such as checking, savings, and time deposits. The Uniform Special Deposits Act resolves this fundamental question with a clear rule that distinguishes the special deposit by a plain statement of intent in the account agreement. The definition makes clear that the parties to the account agreement must recite a clear intention to constitute a special deposit
893	893	that is covered by the Uniform Special Deposits Act. The parties to the account agreement will 15
894	894	need to mutually agree to designate a deposit as “special” and identify one or more permissible
895	895	purposes that it serves. If this is not done, the deposit is not a special deposit under the Uniform
896	896	Special Deposits Act. If it is done, the deposit will be a special deposit if it meets the other
897	897	requirements that are set forth in Section 5.
898	898	No particular talismanic language is required to express the intent to be covered by the
899	899	Uniform Special Deposits Act. A statement referring to the title of the applicable state legislation
900	900	or the relevant sections of the state code embodying the Act or a reference to the Uniform
901	901	Special Deposits Act as enacted in the relevant state would certainly suffice. But other
902	902	formulations showing the intent to fall under the Uniform Special Deposits Act would also be
903	903	effective.
904	904	An account agreement is between a bank and at least one depositor, a term that is
905	905	intentionally defined broadly in the Uniform Special Deposits Act. Not all of the depositors must
906	906	be parties to the account agreement. In addition, a depositor may also be a beneficiary, but
907	907	persons that may be beneficiaries of a special deposit need not be parties to the account
908	908	agreement. For example, there may be persons that are initially identifiable as potential or actual
909	909	beneficiaries as a class but not as individual persons, or individual persons that may not be
910	910	identifiable at the time the account agreement is executed but will be identifiable before the bank
911	911	becomes obligated to pay a beneficiary. There may be a special deposit with one beneficiary
912	912	designated – for e xample, a seller in a sales contract may view the deposit of earnest money by
913	913	the purported purchaser as a sign that the purchaser is serious and has the capability of
914	914	proceeding to closing. The seller will, if the sale closes, be the solitary beneficiary who receives
915	915	the earnest money and the remainder of the purchase price. But, if the sale does not close, the
916	916	purchaser/depositor (who made the original deposit) may be treated as a beneficiary and obtain
917	917	its earnest money back. In this type of arrangement, the seller/depositor would be considered the
918	918	second potential beneficiary and should be reflected as such in the account agreement.
919	919	2. Bank. The definition of bank is based on Sections 1-201(b)(4), 4-105(1), and 4A-105
920	920	of the Uniform Commercial Code and provides the option to include other state-specific
921	921	definitions of a bank. The Uniform Special Deposits Act covers special deposits taken by banks;
922	922	it does not cover deposits taken by other persons who are not banks.
923	923	3. Beneficiary. The definition of a beneficiary under the Uniform Special Deposits Act is
924	924	tied to the account agreement, which may identify a beneficiary directly or indirectly in certain
925	925	circumstances (e.g., the determination of the occurrence of a contingency or termination of the
926	926	account agreement). A beneficiary does not need to be identified specifically and may be
927	927	identified as a member of a class (for example, in a class action settlement) or as a type (for
928	928	example, all tenants in a building). Such identification should become specific with the fruition
929	929	of the contingency. When the account agreement identifies specifically the beneficiary of a
930	930	special deposit, the account agreement may provide additional information as to the making of
931	931	the payment, including perhaps the beneficiary’s bank and account number. For example, the
932	932	account agreement may specify that payment to the beneficiary would be deemed made when
933	933	paid to a bank that is selected by such beneficiary. The original depositor may have a right to
934	934	payment, but that right arises only from its capacity as a beneficiary, either because it is specified
935	935	in the account agreement, or upon termination, which is also addressed in Section 13. 16
936	936	4. Contingency. The definition of “contingency” entails a measure of uncertainty with
937	937	respect to outcome. This is a common feature of the special deposit, where entitlement to
938	938	payment is dependent upon an uncertain event – the closing of a contract, the expiration of a
939	939	commercial lease with no damage to the leased property, settlement of a day’s payment activities
940	940	or daily trading activity, or the occurrence of an event that may or may not occur within a
941	941	specified period of time. The passage of time, without another event or criteria being satisfied or
942	942	being necessary to happen or occur, does not constitute a contingency.
943	943	5. Creditor Process. The definition of “creditor process” is based on Section 4A-502 of
944	944	the Uniform Commercial Code.
945	945	6. Depositor. The definition of “depositor” is somewhat counterintuitive in that it
946	946	encompasses a person who establishes a special deposit at a bank but does not necessarily
947	947	deposit any funds into the established account. This is designed to accommodate special deposits
948	948	that are established by a bank customer who is not depositing funds into the account but is best
949	949	positioned to establish a special deposit account to hold funds that will be paid out in the event a
950	950	particular contingency is determined. A paradigm example of this kind of special deposit is the
951	951	situation of a commercial landlord who establishes a special deposit to hold funds deposited by
952	952	tenants to secure individual leaseholds against the risk of property damage. In this situation, the
953	953	landlord will not place the landlord’s own funds in the special deposit; instead, the funds
954	954	comprising the special deposit will be placed by the tenants. But the landlord will likely
955	955	“establish” the special deposit, and this can be the most economical means to accomplish the
956	956	purpose – it is likely more efficient for an individual landlord to establish the special deposit than
957	957	for the many tenants to do so. In the landlord-tenant example, the landlord would be considered a
958	958	depositor and would be able to enforce the account agreement, which may be more efficient than
959	959	requiring the tenants to do so. A purpose of the Uniform Special Deposits Act is to foster
960	960	efficient, low-cost banking services meeting the needs of a diverse group of commercial actors.
961	961	By virtue of the individual’s status as a depositor, the individual can enforce the account
962	962	agreement and requirements of the Uniform Special Deposits Act.
963	963	As noted in comment 3 to this Section 2 above, a depositor may not always be a
964	964	beneficiary. A depositor may be a beneficiary to the extent that the determination of the
965	965	occurrence of a contingency provides such depositor with a right to payment, and only when that
966	966	interest has been determined and the bank has become obligated to pay the beneficiary. A
967	967	depositor may also become a beneficiary upon termination, which is addressed in Section 13.
968	968	7. Obligated to Pay a Beneficiary. A beneficiary’s interest in a special deposit is the
969	969	right to be paid by the bank holding the special deposit, which right will derive from the account
970	970	agreement but will also require additional criteria to satisfy the elements of the defined term,
971	971	“obligated to pay a beneficiary”. A beneficiary has no other right to payment where the proceeds
972	972	are sourced from a special deposit, which is a distinguishing feature of a special deposit from a
973	973	general deposit of a bank. A beneficiary’s right to be paid out of the special deposit arises when
974	974	the bank is obligated to pay a beneficiary. The disposition of the special deposit among
975	975	beneficiaries will be determined upon the resolution of a contingency. The bank’s obligation is
976	976	dependent on any contingency for payment to that beneficiary in the account agreement having
977	977	been determined and the bank having knowledge that such contingency has occurred. The 17
978	978	definition makes clear that the terms of the account agreement govern determination of the
979	979	occurrence of a contingency. The original depositor may have an entitlement to payment, but that
980	980	right arises only from its capacity as a beneficiary. If a bank will determine the occurrence of a
981	981	contingency in an account agreement based on the receipt of records, it is anticipated that it will
982	982	likely do so based on a review of records. It is expected that the bank’s determination will be
983	983	triggered by the receipt of records similar to the receipt of documents that may trigger payment
984	984	under a letter of credit.
985	985	8. Permissible Purpose. The Uniform Special Deposits Act requires that an account
986	986	agreement be created only for one or more permissible purposes and includes a non-exclusive list
987	987	of examples of special deposits that would be for permissible purposes. Special deposits may be
988	988	used for a wide variety of permissible purposes, and the inclusion of certain permissible purposes
989	989	in the statute as examples should not be interpreted to exclude any other purpose, including
990	990	because such purpose is a different type than the examples included. Even where a potential
991	991	purpose is included in the “white list” it is expected that in practice variations of the examples
992	992	will also serve as permissible purposes. For example, a permissible purpose could include a sale
993	993	or purchase transaction that involves a title company in addition to the seller and purchaser. It is
994	994	not possible to identify in advance the possible ways that the protections provided by the
995	995	Uniform Special Deposits Act could be abused and used to facilitate the inappropriate shielding
996	996	of assets from creditors. It is also not possible to identify all the salutary purposes that are served
997	997	by special deposits. With that understood, a special deposit established for the purpose of
998	998	defrauding or evading creditors until funds are disbursed would not be a permissible purpose
999	999	under the Uniform Special Deposits Act.
1000	1000	By design, the Uniform Special Deposits Act may delay a realization by a creditor until
1001	1001	after a determination of the occurrence of a contingency in an account agreement, but that delay
1002	1002	is for the purpose of facilitating an underlying public policy and is coincident with the
1003	1003	determination of the definitive property interest. A delay for the purpose of facilitating one of the
1004	1004	legitimate policy purposes on the “white list” would be for a permissible purpose; it must be
1005	1005	“stated” in the account agreement, and because of the provisions of Section 6, comport with the
1006	1006	permissible purpose for so long as the deposit is maintained. The requirement that the purpose be
1007	1007	stated is intended as a minimal discipline on the contracting parties; it reminds them that the
1008	1008	protections of the Uniform Special Deposits Act might not be available if the discretion of the
1009	1009	contracting parties is abused, and an example of such abuse would occur when a special deposit
1010	1010	is established for the purpose of defrauding or evading creditors.
1011	1011	Section 3. Scope; Choice of Law; Forum
1012	1012	(a) This [act] applies to a special deposit under an account agreement that states the
1013	1013	intention of the parties to establish a special deposit governed by this [act], regardless of whether
1014	1014	a party to the account agreement or a transaction related to the special deposit, or the special
1015	1015	deposit itself, has a reasonable relation to this state. 18
1016	1016	(b) The parties to an account agreement may choose a forum in this state for settling a
1017	1017	dispute arising out of the special deposit, regardless of whether a party to the account agreement
1018	1018	or a transaction related to the special deposit, or the special deposit itself, has a reasonable
1019	1019	relation to this state.
1020	1020	(c) This [act] does not affect:
1021	1021	(1) a right or obligation relating to a deposit other than a special deposit under this
1022	1022	[act]; or
1023	1023	(2) the voidability of a deposit or transfer that is fraudulent or voidable under
1024	1024	other law.
1025	1025	Comment
1026	1026	1. Choice of Law. The Uniform Special Deposits Act is an “opt-in” statute, meaning that
1027	1027	the parties to the account agreement must affirmatively decide to seek its protections. This also
1028	1028	means that the parties need to select the law of a state that has adopted the Uniform Special
1029	1029	Deposits Act, which could be the state where the parties are situated, or it is possible that the
1030	1030	parties are all situated in a state that has not adopted the Uniform Special Deposits Act, in which
1031	1031	case the parties will need to select an alternative governing law. The Uniform Special Deposits
1032	1032	Act facilitates such a selection, and the chosen governing law does not need to have a reasonable
1033	1033	relationship to the parties to the account agreement, the special deposit, or any transaction
1034	1034	associated with the special deposit. Although the parties to an account agreement are electing to
1035	1035	be governed by the law of a state that has enacted the Uniform Special Deposits Act, it is
1036	1036	possible that a court in the forum state will not enforce the parties’ intention to be governed by
1037	1037	law other than the law of the forum state. The court may apply the law of the forum state with
1038	1038	respect to creditors’ rights, injunctions, recoupment, and set off. The likelihood of such a result
1039	1039	may be reduced if the parties include an exclusive choice-of-forum clause in the account
1040	1040	agreement that selects as the exclusive forum a state that has also enacted the Uniform Special
1041	1041	Deposits Act.
1042	1042	2. Choice of Law Implications. If an account agreement does not choose to be governed
1043	1043	by the Uniform Special Deposits Act, then there has been no “opt in”, which is required for
1044	1044	statutory coverage. This type of deposit (i.e., a deposit where the account agreement does not
1045	1045	select coverage by the Uniform Special Deposits Act) will be governed by other law, most
1046	1046	probably the law of the jurisdiction in which the bank holding the deposit is located.
1047	1047	3. Choice of Forum. The same policy considerations supporting a broad choice-of-law
1048	1048	clause support the inclusion of a broad choice-of-forum provision. Given that the statute is an
1049	1049	“opt in”, it is especially important that banks have confidence in selecting the substantive law 19
1050	1050	and also in the predictability of the forum to resolve disputes. The choice-of-forum provision is
1051	1051	modeled after Section 5-116(e) of the Uniform Commercial Code.
1052	1052	4. Scope. Subsection (c)(1) acknowledges that there are other laws that may confer
1053	1053	special rights or obligations on certain deposits, including deposits that may be considered
1054	1054	“special deposits” under other law, and the Uniform Special Deposits Act is not intended in any
1055	1055	way to displace such other law. Subsection (c)(2) works with the permissible purpose
1056	1056	requirement and is intended to signal that a special deposit that is fraudulent or voidable under
1057	1057	other law would not constitute a special deposit under the Uniform Special Deposits Act. An
1058	1058	account agreement creating a special deposit that is fraudulent or voidable under other law is a
1059	1059	nullity, and would not be for a permissible purpose.
1060	1060	Section 4. Variation by Agreement or Amendment
1061	1061	(a) The effect of Sections 2 through 6, 8 through 11, and 14 may not be varied by
1062	1062	agreement, except as provided in those sections. Subject to subsection (b), the effect of Sections
1063	1063	7, 12, and 13 may be varied by agreement.
1064	1064	(b) A provision in an account agreement or other record that substantially excuses
1065	1065	liability or substantially limits remedies for failure to perform an obligation under this [act] is not
1066	1066	sufficient to vary the effect of a provision of this [act].
1067	1067	(c) If a beneficiary is a party to an account agreement, the bank and the depositor may
1068	1068	amend the agreement without the consent of the beneficiary only if the agreement expressly
1069	1069	permits the amendment.
1070	1070	(d) If a beneficiary is not a party to an account agreement and the bank and the depositor
1071	1071	know the beneficiary has knowledge of the agreement’s terms, the bank and the depositor may
1072	1072	amend the agreement without the consent of the beneficiary only if the amendment does not
1073	1073	adversely and materially affect a payment right of the beneficiary.
1074	1074	(e) If a beneficiary is not a party to an account agreement and the bank and the depositor
1075	1075	do not know whether the beneficiary has knowledge of the agreement’s terms, the bank and the
1076	1076	depositor may amend the agreement without the consent of the beneficiary only if the 20
1077	1077	amendment is made in good faith.
1078	1078	Comment
1079	1079	1. Variation by Agreement. The account agreement will designate the special deposit
1080	1080	and trigger coverage of the Uniform Special Deposits Act if the special deposit satisfies the
1081	1081	requirements in Section 5. The Uniform Special Deposits Act embraces freedom of contract, and
1082	1082	because the statute is drafted as an “opt in”, the drafters believed it important to enable the
1083	1083	parties to the account agreement to have flexibility. Consequently, the parties may vary the effect
1084	1084	of certain statutory rules. As with other uniform acts, the statute has particular rules that are so
1085	1085	fundamental that they may not be varied by agreement, such as the requirement that the special
1086	1086	deposit be for a permissible purpose. Because statutory application is itself the product of a
1087	1087	decision to “opt in”, it is in the parties’ control if they do not wish to be covered by the Uniform
1088	1088	Special Deposits Act. The sections that are variable by agreement, such as Sections 7 and 13,
1089	1089	include default rules that would be applicable if the parties to an account agreement failed to
1090	1090	address the topics that these sections cover.
1091	1091	The permitted variation by agreement does not need to be done in the account agreement
1092	1092	that establishes the special deposit. It may be done there, but it may also be done in another
1093	1093	agreement of the parties and the drafters are mindful that banks will customarily present
1094	1094	customers with several agreements covering different bank products. The Uniform Special
1095	1095	Deposits Act acknowledges and accommodates this banking practice.
1096	1096	2. General Exculpation Ineffective. Subsection (b) renders ineffective a generalized
1097	1097	provision excusing all liability, or a provision that effectively limits any effective remedies for a
1098	1098	breach. These types of provisions are rare, but they do exist and would interfere with
1099	1099	fundamental elements of the Uniform Special Deposits Act.
1100	1100	3. Beneficiary Protection. There is a wide range of special deposits and the account
1101	1101	agreements establishing such deposits are also diverse. In some, the beneficiary is a party and in
1102	1102	others the agreement is exclusively between the depositor and the bank as observed in the
1103	1103	Prefatory Note and described in the comments to Section 2. Subsection (c) covers the account
1104	1104	agreements where the beneficiary is a party and it recites a familiar rule – the account agreement
1105	1105	may not be amended without the beneficiary’s consent unless doing so is expressly permitted by
1106	1106	an agreement that the beneficiary executed. If multiple beneficiaries are parties to the account
1107	1107	agreement, each beneficiary’s consent would be required unless the account agreement provides
1108	1108	otherwise. Subsection (d) covers account agreements where the beneficiary is not a party but has
1109	1109	knowledge of the material terms of the agreement that is being amended (and the definitional
1110	1110	section provides that only actual knowledge is sufficient with respect to a beneficiary). In these
1111	1111	types of special deposits, the beneficiary may be injured if the account agreement is amended.
1112	1112	Subsection (d) renders an amendment ineffective if it should adversely and materially affect the
1113	1113	beneficiary’s payment rights. This provision is consistent with case law interpreting the right of a
1114	1114	third-party beneficiary who had similar knowledge. In the case of a special deposit, the
1115	1115	fundamental expectation of a beneficiary who has knowledge of the terms of the account
1116	1116	agreement concerning the special deposit relates to the beneficiary’s expectation that, depending
1117	1117	on resolution of the contingency, it will receive a payment funded with proceeds from the special 21
1118	1118	deposit. Therefore, Section 4 (d) more precisely protects that expectation than would a general
1119	1119	reliance on third-party beneficiary law. Under Section 4 (d), the beneficiary’s consent to amend
1120	1120	the account agreement is not required (and, again, this assumes the beneficiary is not a party to
1121	1121	the original account agreement) unless the amendment would adversely and materially affect a
1122	1122	payment right of the beneficiary, and the bank and the depositor have knowledge that the
1123	1123	beneficiary knows the terms of the original agreement.
1124	1124	A bank may wish to make provision in the account agreement for a representation and
1125	1125	warranty to be made by the depositor at the time the original account agreement is executed, and
1126	1126	repeated whenever it is amended, as to whether any beneficiary has knowledge of the account
1127	1127	agreement’s existence or terms. Further, because a beneficiary with payment expectations might
1128	1128	sustain damages in the event of an amendment that adversely and materially affects its payment
1129	1129	rights, a bank might require that the depositor reaffirm its representation and warranty “as of” the
1130	1130	time of payment, such that the bank has documentary assurance of a condition material to the
1131	1131	bank’s decision to agree to an amendment – namely, that the beneficiary has no knowledge of
1132	1132	the original account agreement or any amendment. If a beneficiary sustains damages from an
1133	1133	amendment that adversely and materially affects a beneficiary’s payment rights, and the bank has
1134	1134	relied on documentary assurance from the depositor that the beneficiary did not have the required
1135	1135	knowledge, the bank making payment would have a defense provided in Section 12 (f) of the
1136	1136	Act, which exculpates a bank for its reliance on the genuineness of a record when it makes a
1137	1137	payment. In this circumstance, the bank would have relied on the written assurance from the
1138	1138	depositor that no beneficiary had knowledge of the original account agreement or its amendment,
1139	1139	and this record would provide the bank with a liability defense, which is the intention underlying
1140	1140	Section 12 (f) of the Act. Of course, if the depositor cannot make the representation and
1141	1141	warranty, then the bank might appropriately decline to amend the original account agreement,
1142	1142	because of the risk that a beneficiary could sustain damages if the amendment adversely and
1143	1143	materially affects a payment right.
1144	1144	Subsection (e) covers the account agreements where the beneficiary is not a party and the
1145	1145	bank and depositor do not know if the beneficiary has knowledge of the material terms of the
1146	1146	agreement that is being amended, and renders the amendment ineffective if it is not made in
1147	1147	good faith by both the bank and depositor. This provision would also cover the scenario where
1148	1148	the bank and depositor know that the beneficiary does not have knowledge of the material terms
1149	1149	of the agreement that is being amended. This provision is consistent with case law interpreting
1150	1150	the right of a third-party beneficiary without the requisite knowledge, but the Uniform Special
1151	1151	Deposits Act contains what is regarded as a modern definition of “good faith”. The definition
1152	1152	includes the “observance of reasonable commercial standards of fair dealing”, a component that
1153	1153	may not be seen in some of the earlier cases. This component may provide additional protection
1154	1154	to a beneficiary as defined in the Uniform Special Deposits Act.
1155	1155	If the depositor does not know whether a beneficiary that is not a party to the account
1156	1156	agreement has knowledge of its terms, a bank may wish to make provision in the account
1157	1157	agreement for a representation and warranty to be made by the depositor at the time the original
1158	1158	account agreement is executed, and repeated whenever it is amended, stating that the depositor
1159	1159	does not know whether the beneficiary has knowledge of the account agreement’s terms and the
1160	1160	depositor is acting in good faith. Similarly as described above, if such a beneficiary is harmed 22
1161	1161	by an amendment to the account agreement and seeks recovery from the bank, the bank would be
1162	1162	protected by Section 12 (f) and may rely on the written assurance from the depositor that the
1163	1163	depositor did not know such beneficiary had knowledge of the account agreement’s terms and
1164	1164	was acting in good faith, and therefore the consent of such beneficiary was not required.
1165	1165	Section 5. Requirements for Special Deposit
1166	1166	A deposit is a special deposit if it is:
1167	1167	(1) a deposit of funds in a bank under an account agreement;
1168	1168	(2) for the benefit of at least two beneficiaries, one or more of which may be a
1169	1169	depositor;
1170	1170	(3) denominated in a medium of exchange that is currently authorized or adopted
1171	1171	by a domestic or foreign government;
1172	1172	(4) for a permissible purpose stated in the account agreement; and
1173	1173	(5) subject to a contingency.
1174	1174	Comment
1175	1175	Features of Special Deposits. This provision sets forth the required elements for a
1176	1176	special deposit. Consequently, a special deposit will be a subcategory of a general deposit in a bank. The objective criteria specified in Section 5 distinguish the special deposit from other general deposits. Subsection (1) contains the first required element – that the deposit be of funds in a bank under an account agreement. “Account agreement” is a defined term in Section 2.
1177	1177	Subsection (2) provides that the account agreement must be for the benefit of at least two
1178	1178	beneficiaries, although one or more of those beneficiaries may be a depositor. Thus, in the commercial real estate example that is discussed in the Prefatory Note and in the official comments to Section 2, an agreement between a landlord and the bank holding security deposits of commercial tenants would meet this required element. In some other situations, the account agreement will have as parties the bank, the depositor(s), and the beneficiaries; in this case too,
1179	1179	the required element will be satisfied. This requirement serves a salutary purpose, namely, to minimize the possibility of a person establishing a special deposit to shield its assets from creditors and not to serve a proper purpose (by establishing a special deposit naming themselves the only potential beneficiary). It is not the intent of the Uniform Special Deposits Act to enable
1180	1180	a depositor to shield assets from creditors; it is to facilitate the use of the special deposit to solve commercial or other problems and to provide clear rules to creditors for how they might properly reach mature debtor entitlements.
1181	1181	Subsection (3) requires that the special deposit be denominated in “a medium of 23
1182	1182	exchange that is currently authorized or adopted by a domestic or foreign government”; this
1183	1183	language is based on the Uniform Commercial Code’s definition of “money”. This element is
1184	1184	intended to include currencies adopted by governments, such as the U.S. dollar or the Euro. It is
1185	1185	also an important scope limitation and excludes deposits of securities, digital tokens,
1186	1186	cryptocurrency (unless it has been recognized as currency by a domestic or foreign government),
1187	1187	commodities and other non-monetary items that may be deposited in a bank. For example, El
1188	1188	Salvador has adopted Bitcoin as a legally recognized national currency, so it follows that it
1189	1189	would be possible for a special deposit account to be denominated in Bitcoin if the parties to the
1190	1190	account agreement, including the bank, all agreed.
1191	1191	Subsection (4) contains another important required element that the deposit be for a
1192	1192	permissible purpose, which is defined in Section 2 and further addressed in Section 6. Thi s
1193	1193	requirement is intended to provide some constraint to the kinds of general deposits that may be
1194	1194	designated as special. Because the Uniform Special Deposits Act affords special protection to the
1195	1195	special deposit, it is a required element that the protections apply to a limited subcategory of
1196	1196	general deposits, and deposits that are considered fraudulent or voidable under other law would
1197	1197	not qualify.
1198	1198	Subsection (5) requires that there be a contingency, another term defined in Section 2,
1199	1199	that will trigger the bank’s obligation to pay a beneficiary. While this payment obligation is
1200	1200	independent of the special deposit itself, the bank holding the special deposit will customarily
1201	1201	fund the “due to” beneficiary by debiting the special deposit. The contingency may concern the
1202	1202	resolution of conditions, occurrence of events, passage of time (with the occurrence of another
1203	1203	contingency), or combinations thereof. The requirement that the special deposit is subject to a
1204	1204	contingency is an important feature that distinguishes a special deposit from a general deposit
1205	1205	because it prevents each beneficiary from an entitlement to the special deposit until such time as
1206	1206	the contingency has occurred.
1207	1207	Section 6. Permissible Purpose
1208	1208	(a) A special deposit must serve at least one permissible purpose stated in the account
1209	1209	agreement from the time the special deposit is created in the account agreement until termination
1210	1210	of the special deposit.
1211	1211	(b) If, before termination of the special deposit, the bank or a court determines the special
1212	1212	deposit no longer satisfies subsection (a), Sections 8 through 11 cease to apply to any funds
1213	1213	deposited in the special deposit after the special deposit ceases to satisfy subsection (a).
1214	1214	(c) If, before termination of a special deposit, the bank determines the special deposit no
1215	1215	longer satisfies subsection (a), the bank may take action it believes is necessary under the 24
1216	1216	circumstances, including terminating the special deposit.
1217	1217	Comment
1218	1218	1. Permissible Purpose Requirement. Subsection (a) sets forth a fundamental feature of
1219	1219	a special deposit. A criterion making a deposit “special” is if the deposit is for one or more
1220	1220	permissible purposes designated in the account agreement. A special deposit must be for one or
1221	1221	more of these permissible purposes. A permissible purpose stated in the account agreement must
1222	1222	exist at the outset and continue for the duration of the special deposit. This is true whether
1223	1223	termination is determined under the account agreement or under Section 13 in the absence of a
1224	1224	termination provision in the agreement.
1225	1225	2. Permissible Purposes Over Time. Subsections (b) and (c) address the consequences
1226	1226	to the special deposit if the purpose of the special deposit changes over time. If, during the
1227	1227	pendency of a special deposit, no purpose stated in the account agreement remains a permissible
1228	1228	purpose, or if the parties use the special deposit for a different purpose than a purpose stated in
1229	1229	the account agreement, the protections of the Uniform Special Deposits Act are no longer
1230	1230	applicable with respect to any balance of the special deposit that is credited on or after that time.
1231	1231	A bank or a court of competent jurisdiction will make the necessary determination, and the date
1232	1232	the protections of the Uniform Special Deposits Act fall away will relate back to the time that the
1233	1233	purpose ceased to be a permissible purpose. This protects the existing balance of funds deposited
1234	1234	in the special deposit prior to such determination but does not extend the Uniform Special
1235	1235	Deposits Act’s protections when there is no longer a stated permissible purpose. The part of the
1236	1236	balance of the special deposit that is no longer protected will be treated as a general deposit, and
1237	1237	will be without the protections that Sections 8-11 provide in the event of depositor bankruptcy,
1238	1238	creditor process, and/or recoupment and set off. If a permissible purpose becomes impermissible
1239	1239	under other law, there may be additional consequences to the existing balance of the funds
1240	1240	deposited in the special deposit, which would be governed by other law.
1241	1241	In exercising its discretion, the bank holding the special deposit might decide that it must
1242	1242	terminate the entire relationship with the depositor (e.g., because it is exposed to material
1243	1243	liability under federal or state anti-money laundering laws). If the parties to an account
1244	1244	agreement are concerned about this possibility, they may include more detailed provisions in the
1245	1245	account agreement (perhaps referencing an “as of” debit to the special deposit and an offsetting
1246	1246	“as of” credit to a new general deposit). Similarly, if the parties to an account agreement
1247	1247	anticipate that the permissible purpose may need to change in the future, that can be addressed in
1248	1248	the account agreement to avoid inadvertently losing protection of the Uniform Special Deposits
1249	1249	Act. These provisions are intended to clarify the application of the protections of the Uniform
1250	1250	Special Deposits Act, and are not meant to disturb the general right afforded to banks under other
1251	1251	law to decide to close any account.
1252	1252	Section 7. Payment to Beneficiary by Bank
1253	1253	(a) Unless the account agreement provides otherwise, the bank is obligated to pay a
1254	1254	beneficiary if there are sufficient actually and finally collected funds in the balance of the special 25
1255	1255	deposit.
1256	1256	(b) Except as provided in subsection (c), the obligation to pay the beneficiary is excused
1257	1257	if the funds available in the special deposit are insufficient to cover such payment.
1258	1258	(c) Unless the account agreement provides otherwise, if the funds available in the special
1259	1259	deposit are insufficient to cover an obligation to pay a beneficiary, a beneficiary may elect to be
1260	1260	paid the funds that are available or, if there is more than one beneficiary, a pro rata share of the
1261	1261	funds available. Payment to the beneficiary making the election under this subsection discharges
1262	1262	the bank’s obligation to pay a beneficiary and does not constitute an accord and satisfaction with
1263	1263	respect to another person obligated to the beneficiary.
1264	1264	(d) Unless the account agreement provides otherwise, the obligation of the bank obligated
1265	1265	to pay a beneficiary is immediately due and payable.
1266	1266	(e) The bank may discharge its obligation under this section by:
1267	1267	(1) crediting another transaction account of the beneficiary; or
1268	1268	(2) taking other action that:
1269	1269	(A) is permitted under the account agreement for the bank to obtain a
1270	1270	discharge; or
1271	1271	(B) otherwise would constitute a discharge under law.
1272	1272	(f) If the bank obligated to pay a beneficiary has incurred an obligation to discharge the
1273	1273	obligation of another person, the obligation of the other person is discharged if action by the
1274	1274	bank under subsection (e) would constitute a discharge of the obligation of the other person
1275	1275	under law that determines whether an obligation is satisfied.
1276	1276	Comment
1277	1277	“Due to” Obligations. Section 7 implements one of the key features of a special deposit
1278	1278	governed by the Uniform Special Deposits Act. The special deposit receives protections in the 26
1279	1279	Uniform Special Deposits Act but the bank’s obligation to pay a beneficiary, and the bank’s
1280	1280	action to discharge that payable, do not receive such protections. Subsection (a) reflects that the
1281	1281	bank’s debt to the beneficiary accrues when a bank is obligated to pay a beneficiary. “Obligated
1282	1282	to pay a beneficiary” is defined in Section 2 with respect to the contingency being determined
1283	1283	and the bank having knowledge of the determination. Subsection (a) also provides for the
1284	1284	obvious – the bank holding the special deposit will fund the “due to” to the beneficiary by
1285	1285	debiting the special deposit. The “actually and finally collected funds” element of this subsection
1286	1286	clarifies that a bank is not obligated to pay a beneficiary if there are not sufficient funds in the
1287	1287	special deposit account. Similarly, subsection (b) acknowledges that a bank has no obligation to
1288	1288	satisfy a “due to” obligation to a beneficiary if the funds in the special deposit are not sufficient
1289	1289	to cover the entitlement to such beneficiary. This statutory language is meant to be consistent
1290	1290	with other areas of law, such as Section 4-401(a) of the Uniform Commercial Code and Section
1291	1291	10B(b)(4) of the Federal Reserve Act (12 U.S.C. § 347b), which make clear that a bank is not
1292	1292	tacitly committed to provide needed credit. Thus, a bank is not obligated to provide funds in
1293	1293	addition to those on deposit in the special deposit to satisfy a “due to” obligation to a beneficiary
1294	1294	if the funds in the special deposit are not sufficient. The parties may agree, however, to a
1295	1295	different arrangement if they wish. For example, the bank can agree to pay by overdraft or to
1296	1296	make a partial payment by including such terms in the account agreement or another agreement
1297	1297	between the parties.
1298	1298	Section 7(c) provides a default rule that when funds in a special deposit are insufficient to
1299	1299	pay fully a beneficiary entitled to payment, the beneficiary may elect to receive the available
1300	1300	funds and that payment of those funds discharges the bank’s obligation to pay the beneficiary.
1301	1301	The default rule in Section 7(c) may, under Section 4(a) and the express terms of Section 7(c), be
1302	1302	varied by agreement. Any person with an interest in a special deposit should be mindful that, if
1303	1303	Section 7(c) is not varied by agreement, the underlying obligor (assuming there is one) will not
1304	1304	be discharged on any obligation to pay a beneficiary, even though funds that may have been
1305	1305	allocated for that purpose and collected in a special deposit, have been paid out in their entirety
1306	1306	to one or more beneficiaries. The default rule created by subsection (c) with respect to payments
1307	1307	to be made to beneficiaries even if the funds in the special deposit account are insufficient to
1308	1308	meet the entire payment amount contemplated is intended as a protection for certain beneficiaries
1309	1309	who may not have the necessary bargaining power with respect to the counterparties to an
1310	1310	account agreement. This could represent a trap for an unwary obligor, and exposes such an
1311	1311	obligor to a risk of additional liability if the provision is not altered by agreement because the
1312	1312	underlying obligation remains outstanding even after substantially all the funds in the special
1313	1313	deposit are paid out to an electing beneficiary. Other law determines what credit the obligor will
1314	1314	receive for the partial payment from the special deposit. In other contexts, the default rule may
1315	1315	result in outcomes inconsistent with the wishes of the parties. For example, in payment and
1316	1316	clearing system rules, there may be elaborate arrangements made to deal with account shortfalls
1317	1317	that would be wholly inconsistent with the default rule in subsection (c). Similarly, the default
1318	1318	rule in subsection (c) may not be workable where there are multiple beneficiaries or payments
1319	1319	need to be made through payment systems, which rely almost exclusively on straight-through
1320	1320	processing. Therefore, parties considering the use of the Uniform Special Deposits Act should
1321	1321	pay careful attention to whether it is necessary in the context of their transactions to draft an
1322	1322	alternate approach to the default rule in the account agreement. Section 4(a) and Section 7(c)
1323	1323	permit such a variation. 27
1324	1324	Subsection (d) addresses the remaining detail as to when the bank’s obligation to the
1325	1325	beneficiary is due and payable and provides that this “due to” is immediately due and payable
1326	1326	unless the account agreement provides differently. In some cases, a bank could have multiple
1327	1327	obligations that arise from an initial obligation to pay a beneficiary.
1328	1328	Subsection (e) addresses the next obvious issue, and that is how the bank discharges its
1329	1329	“due to” to the beneficiary. This section provides that a bank obligated to pay a beneficiary
1330	1330	might fulfill its payment obligation by crediting another deposit account of the beneficiary with
1331	1331	the obligated bank. This identical issue is addressed in Section 4A-405 of the Uniform
1332	1332	Commercial Code, which covers the obligation of the beneficiary’s bank to pay a beneficiary of
1333	1333	a funds transfer. In substance, subsection (e) is drafted to incorporate the substantially similar
1334	1334	concepts from Article 4A. The purpose of this subsection is to protect the special deposit itself
1335	1335	but not the obligation of the bank to pay the beneficiary or the actual payment to the beneficiary.
1336	1336	Subsection (f) addresses the situation where the bank’s obligation to pay a beneficiary
1337	1337	will discharge the obligation of another person or persons (for example, in a simple escrow
1338	1338	between a buyer and a seller, it would be typical for the bank holding the earnest money in a
1339	1339	special deposit to pay it to the seller on closing, thereby helping to discharge the buyer’s overall
1340	1340	obligation to pay the purchase price), and explains that payment of the bank’s obligation to a
1341	1341	beneficiary will discharge the other underlying obligation to another person or persons.
1342	1342	Subsection (f) is of special importance to financial market infrastructures where an infrastructure
1343	1343	payment may discharge the underlying obligations of many participants.
1344	1344	Section 8. Property Interest of Depositor or Beneficiary
1345	1345	(a) Neither a depositor nor a beneficiary has a property interest in a special deposit.
1346	1346	(b) Any property interest with respect to a special deposit is only in the right to receive
1347	1347	payment if the bank is obligated to pay a beneficiary and not in the special deposit itself. Any
1348	1348	property interest under this subsection is determined under other law.
1349	1349	Comment
1350	1350	1. No Property Interest in Special Deposit. Section 8 contains one of the key protective
1351	1351	provisions of the Uniform Special Deposits Act that makes the special deposit “bankruptcy
1352	1352	remote” from the depositor. Neither a depositor nor a beneficiary has a property interest in a
1353	1353	special deposit. Any interest that the depositor has with respect to a special deposit relates to its
1354	1354	capacity as a beneficiary and rights that are triggered by the determination of the occurrence of
1355	1355	the contingency. If the depositor is not a beneficiary, then it has no rights in the special deposit.
1356	1356	Note that a depositor may have rights as a beneficiary if there is a residual in a special deposit
1357	1357	after all other beneficiaries have been paid out because of Section 13(b). But in this narrow
1358	1358	instance, the depositor’s property right is contingent on the bank being obligated to pay the
1359	1359	residual balance to the depositor, who is considered a beneficiary for this purpose. 28
1360	1360	2. Property Interest in Right to Receive Payment. Although Section 8(a) makes it clear
1361	1361	that a beneficiary has no property interest in the special deposit, under other law a beneficiary
1362	1362	may presently have a property interest in the beneficiary’s contingent right to receive payment
1363	1363	after the bank has become obligated to pay the beneficiary. Under other law, a creditor of the
1364	1364	beneficiary may be able to create a lien on that contingent right of the beneficiary that may be
1365	1365	enforced against the beneficiary after the bank has become obligated to pay the beneficiary.
1366	1366	However, under Section 9 such a lien is not enforceable against the bank until it has actually
1367	1367	become obligated to pay the beneficiary and then only as provided in Section 9(b).
1368	1368	Section 9. When Creditor Process Enforceable Against Bank
1369	1369	(a) Subject to subsection (b), creditor process with respect to a special deposit is not
1370	1370	enforceable against the bank holding the special deposit.
1371	1371	(b) Creditor process is enforceable against the bank holding a special deposit with respect
1372	1372	to an amount the bank is obligated to pay a beneficiary or a depositor if the process:
1373	1373	(1) is served on the bank;
1374	1374	(2) provides sufficient information to permit the bank to identify the depositor or
1375	1375	the beneficiary from the bank’s books and records; and
1376	1376	(3) gives the bank a reasonable opportunity to act on the process.
1377	1377	(c) Creditor process served on a bank before it is enforceable against the bank under
1378	1378	subsection (b) does not create a right of the creditor against the bank or a duty of the bank to the
1379	1379	creditor. Other law determines whether creditor process creates a lien enforceable against the
1380	1380	beneficiary on a contingent interest of a beneficiary, including a depositor as a beneficiary, even
1381	1381	if not enforceable against the bank.
1382	1382	Comment
1383	1383	1. Protection from Creditor Process. Section 9 is another key protective provision of
1384	1384	the Uniform Special Deposits Act. This protects the special deposit from creditor process that
1385	1385	might cause the bank holding the special deposit to “freeze” all or part of the special deposit,
1386	1386	which would disable the special deposit from performing its permissible purpose. Creditor
1387	1387	process is only enforceable on a bank if the requirements in subsection (b) are met, and then the
1388	1388	process restrains only the bank’s obligation to pay a beneficiary. “Obligated to pay a
1389	1389	beneficiary” is defined in Section 2, and requires that a contingency has already occurred, and 29
1390	1390	that the bank has knowledge of that fact and as a result, a beneficiary is entitled to payment.
1391	1391	Creditor process cannot be effective against the special deposit itself, or any funds in the special
1392	1392	deposit that have not already been determined under the account agreement to be subject to an
1393	1393	obligation to pay a specific beneficiary. Again, the special deposit is protected from creditor
1394	1394	process so that the special deposit might foster the policy objectives of the special deposit.
1395	1395	Protecting the special deposit from premature creditor process is a fundamental protection of the
1396	1396	Uniform Special Deposits Act. The term depositor is included in 9(b) for the elimination of any
1397	1397	doubt, but it should be noted that the only time a depositor would have any rights would be in its
1398	1398	capacity as a beneficiary.
1399	1399	2. Examples. Example 1: Creditor obtains a judgment against beneficiary, which is a
1400	1400	beneficiary of a special deposit held by bank. After bank becomes obligated to pay beneficiary
1401	1401	(after a contingency has occurred and the bank has knowledge), creditor serves a writ of
1402	1402	garnishment on bank. The writ is enforceable if the writ provides sufficient information to permit
1403	1403	bank to identify, from bank’s books and records, beneficiary’s interest in the special deposit and
1404	1404	affords bank a reasonable amount of time to act on the process before paying.
1405	1405	Example 2: Creditor obtains a judgment against beneficiary, which is a beneficiary of a
1406	1406	special deposit held by bank. Creditor serves a writ of garnishment on bank before bank becomes
1407	1407	obligated to pay beneficiary (i.e., before determination of the contingency). The premature
1408	1408	garnishment is not enforceable against bank either at the time it is served or later, after
1409	1409	determination of the contingency, when the bank becomes obligated to pay beneficiary
1410	1410	(additional process would need to be served after determination of the contingency). Whether a
1411	1411	beneficiary has a property interest in bank’s contingent obligation to pay all or any portion of the
1412	1412	special deposit to beneficiary, and whether service of the writ of garnishment creates a present
1413	1413	lien on such a property interest enforceable against the beneficiary, rather than the bank holding
1414	1414	the special deposit, is determined by other law.
1415	1415	Where a special deposit is intended to serve a payment or clearing system account with
1416	1416	multiple beneficiaries, a creditor’s writ of garnishment on the bank can only be enforceable
1417	1417	against a determined payment right of a beneficiary, and not against the special deposit itself.
1418	1418	Section 10. Injunction or Similar Relief
1419	1419	A court may enjoin, or grant similar relief that would have the effect of enjoining, a bank
1420	1420	from paying a depositor or beneficiary only if payment would constitute a material fraud or
1421	1421	facilitate a material fraud with respect to a special deposit.
1422	1422	Comment
1423	1423	Protection from Injunctions. Section 9, above, protects the special deposit from creditor
1424	1424	process. Typically, creditor process is a remedy that is addressed to a property interest of some
1425	1425	kind. The same or a similar result can be obtained by seeking a temporary restraining order or
1426	1426	preliminary injunction against a bank holding a special deposit. This section avoids that result, 30
1427	1427	and creates a safeguard for situations of fraud that might occur that is modeled after Section 5-
1428	1428	109(b) of the Uniform Commercial Code, which addresses fraud with respect to the issuer of a
1429	1429	letter of credit.
1430	1430	Section 11. Recoupment or Set Off
1431	1431	(a) Except as provided in subsection (b) or (c), a bank may not exercise a right of
1432	1432	recoupment or set off against a special deposit.
1433	1433	(b) An account agreement may authorize the bank to debit the special deposit:
1434	1434	(1) when the bank becomes obligated to pay a beneficiary, in an amount that does
1435	1435	not exceed the amount necessary to discharge the obligation;
1436	1436	(2) for a fee assessed by the bank that relates to an overdraft in the special deposit
1437	1437	account;
1438	1438	(3) for costs incurred by the bank that relate directly to the special deposit; or
1439	1439	(4) to reverse an earlier credit posted by the bank to the balance of the special
1440	1440	deposit account, if the reversal occurs under an event or circumstance warranted under other law
1441	1441	of this state governing mistake and restitution.
1442	1442	(c) The bank holding a special deposit may exercise a right of recoupment or set off
1443	1443	against an obligation to pay a beneficiary, even if the bank funds payment from the special
1444	1444	deposit.
1445	1445	Comment
1446	1446	Limited Exceptions to No Set Off. The special deposit receives protections under the
1447	1447	Uniform Special Deposits Act, including protection from the bank’s right of recoupment or set
1448	1448	off. This general rule is codified in (a). There are some significant exceptions. First, it is
1449	1449	important to clarify that the prohibition of set off and recoupment would not prohibit a bank
1450	1450	funding its obligation to pay a beneficiary with a debit to the special deposit. This is
1451	1451	fundamental and it is inherent in the special deposit that it exists to fund future payments to
1452	1452	beneficiaries. Subsection (b)(1) makes this clear.
1453	1453	Note, too, that the funding of the “payable” to a beneficiary shows that there is now an
1454	1454	independent obligation of the bank to a beneficiary separate and distinct from the special deposit, 31
1455	1455	where, before the determination of the contingency, the payment recipient was not yet
1456	1456	determined. This obligation to pay a beneficiary is not protected by the Uniform Special
1457	1457	Deposits Act and is within the reach of either the bank creditor or a third-party creditor.
1458	1458	Subsections (b)(2)-(4) address other common operational issues with respect to a current
1459	1459	account. Subsection (b)(2) addresses the current account when the balance is negative, meaning
1460	1460	that the account owes the bank an amount sufficient to bring the balance to zero, together with
1461	1461	interest on the deficit balance. Typically, the bank will also assess some kind of fee for the
1462	1462	overdraft, and the fee will often be added to the deficit balance. The subsection permits this.
1463	1463	Subsection (b)(3) permits the bank to debit the special deposit for “costs” that “relate
1464	1464	directly to the special deposit”. One example would be costs associated with the bank’s defense
1465	1465	of a creditor attack on the special deposit, including the bank’s attorneys’ fees. The costs might
1466	1466	also be borne by a third party like a securities custodian, who might also need to hire counsel to
1467	1467	defend securities held in custody and might be indemnified by the bank for performing this
1468	1468	function on behalf of the bank as a custodian. It is also useful to consider a “cost” that would not
1469	1469	be recoverable here. Let us suppose that the Depositor has defaulted under a separate credit
1470	1470	agreement between the bank holding the special deposit and the Depositor, and that the bank has
1471	1471	declared a default and accelerated the amount due under the credit agreement. This amount
1472	1472	could not be set off against the balance of the special deposit, because the credit agreement is not
1473	1473	directly related to the special deposit. However, if there is an amount due to the depositor as a
1474	1474	beneficiary, it might be subject to a set off under Subsection (c). This result is consistent with
1475	1475	the application of setoff principles in the context of the structure of the Act. Under the Act, the
1476	1476	depositor has no ownership interest in the special deposit other than a possible payment right as a
1477	1477	beneficiary, in the event that a contingency is determined triggering such a payment right, at
1478	1478	which point the necessary mutuality of obligation could exist. Note that the scope of what is
1479	1479	considered a “cost” not only includes amounts paid to third parties by the bank related to the
1480	1480	special deposit, but also losses suffered by the bank as a result of its performance of the account
1481	1481	agreement governing the special deposit, such as unpaid fees under the account agreement.
1482	1482	Subsection (b)(4) enables the bank holding the special deposit to debit the special deposit
1483	1483	to reverse an earlier credit. There are occasions when mistakes are made in handling a funds
1484	1484	transfer. See, e.g., Citibank, N.A. v. Brigade Capital Management, 49 F.4
1485	1485	th
1486	1486	42 (2d Cir. 2022)
1487	1487	(involving a mistake that affected $900 million in funds transfers). This provision enables the
1488	1488	bank to correct a mistaken transfer that increases the balance of a special deposit. Subsection
1489	1489	(b)(4) could address both an event or circumstance prescribed under the state’s laws governing
1490	1490	mistake or restitution, or may simply be a mistaken credit by the bank due to a clerical or other
1491	1491	error.
1492	1492	Subsection (c) exists for a different purpose and that is to make clear that, upon accrual of
1493	1493	the bank’s obligation to pay the beneficiary, that independent obligation is subject to the bank’s
1494	1494	right of recoupment or set off (if the beneficiary has a mature undischarged debt to the bank, that
1495	1495	debt can be set off against the obligation of the bank to pay the beneficiary, again assuming that
1496	1496	it is immediately due and payable, which is the default rule). This is not an obligation that arises
1497	1497	from the special deposit itself, but rather from the contingency being determined, which triggers
1498	1498	the independent obligation of the bank to pay the beneficiary. 32
1499	1499	Section 12. Duties and Liability of Bank
1500	1500	(a) A bank does not have a fiduciary duty to any person with respect to a special deposit.
1501	1501	(b) When the bank holding a special deposit becomes obligated to pay a beneficiary, a
1502	1502	debtor-creditor relationship arises between the bank and beneficiary.
1503	1503	(c) The bank holding a special deposit has a duty to a beneficiary to comply with the
1504	1504	account agreement and this [act].
1505	1505	(d) If the bank holding a special deposit does not comply with the account agreement or
1506	1506	this [act], the bank is liable to a depositor or beneficiary only for damages proximately caused by
1507	1507	the noncompliance. Except as provided by other law of this state, the bank is not liable for
1508	1508	consequential, special, or punitive damages.
1509	1509	(e) The bank holding a special deposit may rely on records presented in compliance with
1510	1510	the account agreement to determine whether the bank is obligated to pay a beneficiary.
1511	1511	(f) If the account agreement requires payment on presentation of a record, the bank shall
1512	1512	determine within a reasonable time whether the record is sufficient to require payment. If the
1513	1513	agreement requires action by the bank on presentation of a record, the bank is not liable for
1514	1514	relying in good faith on the genuineness of the record if the record appears on its face to be
1515	1515	genuine.
1516	1516	(g) Unless the account agreement provides otherwise, the bank is not required to
1517	1517	determine whether a permissible purpose stated in the agreement continues to exist.
1518	1518	Comment
1519	1519	1. Relationship between Bank and Beneficiary. A special deposit is a form of deposit
1520	1520	which, like all bank deposits, establishes a debtor-creditor relationship between the bank and its
1521	1521	customer. Some existing case law addressing “special deposits” suggesting that the bank holding
1522	1522	the funds deposited holds it in “custody” and the relationship is in the nature of a bailment is
1523	1523	rejected in the Uniform Special Deposits Act. In modern commercial practice, no financial
1524	1524	institution takes funds from a customer and holds funds in custody. This bailment concept is 33
1525	1525	anachronistic and not feasible in modern banking practice. It is also sometimes observed that a
1526	1526	special deposit is a “poor man’s trust”, where the special deposit creates a trust relationship
1527	1527	between the bank, as trustee, and the persons entitled to be paid, the trust “beneficiaries”. This
1528	1528	conception is rejected by the Uniform Special Deposits Act as well. If the parties want to create a
1529	1529	trust, they should create a trust and not use a special deposit. The Uniform Special Deposits Act
1530	1530	also makes clear that it does not create a fiduciary relationship between the bank and any person.
1531	1531	Any argument that a bank is acting as a fiduciary would likely come from a beneficiary, but there
1532	1532	could be other scenarios.
1533	1533	2. Duties and Breach. Importantly, the Uniform Special Deposits Act makes clear that
1534	1534	the ultimate obligation of a bank holding a covered special deposit will be due to a beneficiary
1535	1535	once the occurrence of a contingency is determined. If a duty expressed in either the account
1536	1536	agreement or the Uniform Special Deposits Act is breached by the bank, the bank may be liable
1537	1537	to the beneficiary for damages (not including consequential, special, or punitive damages), and is
1538	1538	not liable to any other person, including a depositor. The duty runs only to a beneficiary (which
1539	1539	could include a depositor) as a person that the bank is obligated to pay from the special deposit.
1540	1540	However, the depositor or beneficiary may enforce the account agreement against the bank
1541	1541	holding the special deposit. The depositor could be the person who established the special
1542	1542	deposit and might be the best-positioned person to enforce the account agreement. In the
1543	1543	landlord-tenant example, the landlord that establishes the special deposit may be better
1544	1544	positioned to enforce the account agreement against the bank than the individual tenants that
1545	1545	have deposited funds.
1546	1546	3. Reliance on Documents. The Uniform Special Deposits Act embraces current
1547	1547	commercial practice where the bank holding the special deposit will rely upon a record, if it,
1548	1548	rather than a third party, is to determine the contingency. This determination function, because it
1549	1549	is so consequential, will usually be memorialized in careful detail in the account agreement.
1550	1550	Although the parties may rely on the presentation of records, a special deposit is not a letter of
1551	1551	credit under Article 5 of the Uniform Commercial Code, and it would be prudent for the account
1552	1552	agreement to so state. On other occasions, a bank might rely upon an authenticated payment
1553	1553	order, perhaps as specified in Section 4A-202 of the Uniform Commercial Code. If so, the
1554	1554	payment order and its acceptance or rejection will be governed by Article 4A, which is
1555	1555	incorporated through Section 14, infr a.
1556	1556	4. Permissible Purpose. Notwithstanding the requirement in Section 6 that a permissible
1557	1557	purpose exist for the duration of the special deposit, a bank does not have a duty under the
1558	1558	Uniform Special Deposits Act to make such a determination, but it may be required under other
1559	1559	law to make such a determination (for example, to determine under federal or state anti-money
1560	1560	laundering law if a special deposit violates prohibitions against money laundering), or it may be
1561	1561	required to act because another person has made such a determination under other law, including
1562	1562	a court of competent jurisdiction.
1563	1563	Section 13. Term and Termination
1564	1564	(a) Unless otherwise provided in the account agreement, a special deposit terminates five 34
1565	1565	years after the date the special deposit was first funded.
1566	1566	(b) Unless otherwise provided in the account agreement, if the bank cannot identify or
1567	1567	locate a beneficiary entitled to payment when the special deposit is terminated, and a balance
1568	1568	remains in the special deposit, the bank shall pay the balance to the depositor or depositors as a
1569	1569	beneficiary or beneficiaries.
1570	1570	(c) A bank that pays the remaining balance as provided under subsection (b) has no
1571	1571	further obligation with respect to the special deposit.
1572	1572	Comment
1573	1573	1. Applicability of Termination Provision. The account agreement would normally be
1574	1574	expected to provide, and should provide, a termination provision. The terms of Section 13(a)
1575	1575	provide a default rule if the account agreement is silent about termination. The default rule would
1576	1576	end the special deposit five years after the special deposit was first funded. A special deposit is
1577	1577	first funded when a transfer of funds into the special deposit produces its first positive balance.
1578	1578	2. Right of Remission. Subsection (b) deals with the situation where, notwithstanding a
1579	1579	diligent effort to locate all of the beneficiaries, the bank holding the special deposit is unable to
1580	1580	do so. In this situation, whoever deposited funds into the special deposit will be considered a
1581	1581	beneficiary and the funds will be repaid to such depositor as a beneficiary. The provision avoids
1582	1582	a forfeiture of the remaining balance to the state, which is the probable result of the escheatment
1583	1583	law of most states. The drafters assume that the deposited funds will be apportioned among
1584	1584	depositors, appropriately taking into account the amount of their deposits into the account, prior
1585	1585	payments from the account, and earnings on the account.
1586	1586	Section 14. Principles of Law and Equity
1587	1587	[Cite to state’s Uniform Commercial Code], consumer protection law, law governing
1588	1588	deposits generally, law related to escheat and abandoned or unclaimed property, and the
1589	1589	principles of law and equity, including law related to capacity to contract, principal and agent,
1590	1590	estoppel, fraud, misrepresentation, duress, coercion, mistake, and bankruptcy, supplement this
1591	1591	[act] except to the extent inconsistent with this [act].
1592	1592	Comment
1593	1593	1. Applicability of Supplemental Principles of Law. This Section 14 is based on the 35
1594	1594	language from Section 1-103 of the Uniform Commercial Code, with the express addition of the
1595	1595	Uniform Commercial Code, consumer protection law, law governing deposits generally, and law
1596	1596	related to escheat and abandoned property. Certain provisions from the Uniform Commercial
1597	1597	Code, specifically Articles 1, 3, 4, 4A, 5, and 9, are likely to supplement this Uniform Special
1598	1598	Deposits Act for certain special deposits. As noted in the official comment to Section 1-103, this
1599	1599	language “states the basic relationship of the Uniform Commercial Code to supplemental bodies
1600	1600	of law”. Further, as noted in earlier comments, the special deposit is a subcategory of the general
1601	1601	deposit, and it is appropriate to supplement provisions of the Uniform Special Deposits Act with
1602	1602	general deposit law if that law does not conflict with any provision of the Act. When consumers
1603	1603	are affected, as in residential leases, it may be important to consider consumer protection
1604	1604	measures implemented by a state to protect consumers. It is not the intent of the drafters to
1605	1605	displace any applicable consumer protection law. The Uniform Special Deposits Act was drafted
1606	1606	in accordance with a minimalist philosophy, meaning that the drafters understood it would be
1607	1607	supplemented by other law, and the principal sources of such law are listed in Section 14.
1608	1608	Implicit in this drafting approach is the importance of contract law, as many features of the
1609	1609	special deposit arrangement will be determined by the parties in the account agreement.
1610	1610	Questions including when a deposit is received by a bank, who can make a deposit into a bank
1611	1611	account, and how adverse claims are treated will all be governed by the general law of deposits
1612	1612	in a state. It is understood that Section 14 will import that law to fill in coverage gaps.
1613	1613	2. Other Deposits. Section 3(c), supra, limits the effect of the Uniform Special Deposits
1614	1614	Act on other deposits taken by the bank.
1615	1615	Section 15. Uniformity of Application and Construction
1616	1616	In applying and construing this uniform act, a court shall consider the promotion of
1617	1617	uniformity of the law among jurisdictions that enact it.
1618	1618	Section 16. Transitional Provision
1619	1619	This [act] applies to:
1620	1620	(1) a special deposit made under an account agreement executed on or after [the
1621	1621	effective date of this [act]]; and
1622	1622	(2) a deposit made under an agreement executed before [the effective date of this
1623	1623	[act]], if:
1624	1624	(A) all parties entitled to amend the agreement agree to make the deposit a
1625	1625	special deposit governed by this [act]; and
1626	1626	(B) the special deposit referenced in the amended agreement satisfies 36
1627	1627	Section 5.
1628	1628	Comment
1629	1629	Existing Special Deposits. A number of commentators observed that parties to existing
1630	1630	special deposits might wish to be covered by the Uniform Special Deposits Act when it is
1631	1631	enacted. Section 16 provides that this can be accommodated through a simple amendment to the
1632	1632	account agreement. However, it is also important that the special deposit meet all the criteria set
1633	1633	out for special deposits in Section 5. Further, the amended agreement must set forth its
1634	1634	permissible purpose, which is another requirement of Section 5. While it is easy to apply the
1635	1635	Uniform Special Deposits Act to what might be called a “legacy special deposit”, some analysis
1636	1636	will nevertheless be necessary.
1637	1637	[Section 17. Severability]
1638	1638	[If a provision of this [act] or its application to a person or circumstance is held invalid,
1639	1639	the invalidity does not affect another provision or application that can be given effect without the
1640	1640	invalid provision.]
1641	1641	Legislative Note: Include this section only if the state lacks a general severability statute or a
1642	1642	decision by the highest court of the state stating a general rule of severability.
1643	1643	Section 18. Effective Date
1644	1644	This [act] takes effect . . . The ULC is a nonprofit formed in 1892 to create nonpartisan state legislation. Over 350 volunteer commissioners—lawyers,
1645	1645	judges, law professors, legislative staff, and others—work together to draft laws ranging from the Uniform Commercial Code to
1646	1646	acts on property, trusts and estates, family law, criminal law and other areas where uniformity of state law is desirable.
1647	1647	NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
1648	1648	Uniform Law Commission
1649	1649	111 N. Wabash Ave.
1650	1650	Suite 1010
1651	1651	Chicago, IL 60602
1652	1652	(312) 450- 6600 tel
1653	1653	www.uniformlaws.org
1654	1654	UNIFORM SPECIAL DEPOSITS ACT (2023)
1655	1655	Summary
1656	1656	The Uniform Law Commission drafted the Uniform Special Deposits Act (the “Act”) to provide
1657	1657	clarity on an area of law that has been subject to uncertainty for many years. A special deposit is
1658	1658	a deposit of money at a bank created for a particular purpose where the person entitled to the
1659	1659	money is only determined after a specified event or contingency occurs.
1660	1660	Special deposits play an important role in commerce and industry, but their use has been
1661	1661	diminished because of legal uncertainties. Various state laws improperly characterize special
1662	1662	deposits as something akin to a trust, bailment, or agency – which do not accurately describe how
1663	1663	special deposits are used in practice. Existing case law creates even more confusion because it
1664	1664	refers to bank practices that are no longer followed.
1665	1665	The Act establishes a framework for banks and their customers to utilize special deposits with
1666	1666	greater certainty of how such deposits will be treated under various circumstances. Importantly,
1667	1667	the Act is an “opt in” statute. Banks and their customers must specify in their account agreement
1668	1668	that they intend to be covered by the Uniform Special Deposits Act as enacted in a particular state.
1669	1669	This feature permits existing relationships to continue undisturbed, and lets parties choose to
1670	1670	utilize the protections provided by the Act when they wish. Matters not addressed by the Act are
1671	1671	controlled by general laws already governing deposits or contractual arrangements.
1672	1672	The Act remedies four key legal uncertainties. First, the Act clarifies what a “special deposit” is.
1673	1673	It establishes clear criteria for a deposit to be considered “special” under the Act. A special deposit
1674	1674	must be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii)
1675	1675	for the benefit of at least two beneficiaries (one or more of which may be a depositor), (iii)
1676	1676	denominated in money, (iv) for a permissible purpose identified in the account agreement, and (v)
1677	1677	subject to a contingency specified in the account agreement that is not certain to occur, but if it
1678	1678	does occur, creates the bank’s obligation to pay a beneficiary. If all those criteria are satisfied, the
1679	1679	deposit is a special deposit.
1680	1680	Second, the Act clarifies the treatment of a special deposit in the event of the bankruptcy of a
1681	1681	depositor. Under the current law of many states, it is unclear whether funds deposited into a special
1682	1682	deposit could be swept into the bankruptcy estate of the person who deposited them. A special
1683	1683	deposit under the Act is “bankruptcy remote” because Section 8 provides that neither a depositor
1684	1684	nor a beneficiary has a property interest in a special deposit. No person is entitled to funds in a
1685	1685	special deposit until the bank becomes obligated to pay a beneficiary. The only property interest
1686	1686	that may arise with respect to a special deposit is in the right to receive payment from the bank
1687	1687	after the occurrence of a contingency. 2
1688	1688	Third, the Act clarifies the applicability of creditor process on a special deposit. Under the current
1689	1689	law, a creditor can freeze a special deposit and interfere with the purpose that the deposit is
1690	1690	designed to achieve.
1691	1691	Section 9 of the Act provides that creditor process is not enforceable against the bank holding the
1692	1692	special deposit, except in limited circumstances. Instead, creditor process may be enforceable
1693	1693	against the bank holding a special deposit with respect to any amount that it must pay after the
1694	1694	determination of a contingency, but not on the special deposit itself. Section 10 provides a similar
1695	1695	limitation on using an injunction or temporary restraining order to achieve the same outcome.
1696	1696	Fourth, the Act provides clarity on the legality of the bank exercising a set off or right of
1697	1697	recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special
1698	1698	deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances.
1699	1699	Once a special deposit has been established under the Act, it creates an assignable and pledgeable
1700	1700	interest for a beneficiary – a definite and clear right to payment upon the occurrence of a
1701	1701	contingency and notice to the bank, where one may not otherwise exist. The Uniform Special
1702	1702	Deposits Act creates a mechanism for parties to a commercial transaction to obtain a low cost and
1703	1703	safe return on earnest money. The Uniform Special Deposits Act is narrowly tailored to cure these
1704	1704	four legal uncertainties and eliminate doubts so that parties can utilize special deposits with greater
1705	1705	confidence.
1706	1706	For more information about the Uniform Special Deposits Act, please contact Legislative Counsel
1707	1707	Kari Bearman at (312) 450-6617 or kbearman@uniformlaws.org. The ULC is a nonprofit formed in 1892 to create nonpartisan state legislation. Over 350 volunteer commissioners—lawyers,
1708	1708	judges, law professors, legislative staff, and others—work together to draft laws ranging from the Uniform Commercial Code to
1709	1709	acts on property, trusts and estates, family law, criminal law and other areas where uniformity of state law is desirable.
1710	1710	NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
1711	1711	Uniform Law Commission
1712	1712	111 N. Wabash Ave.
1713	1713	Suite 1010
1714	1714	Chicago, IL 60602
1715	1715	(312) 450- 6600 tel
1716	1716	www.uniformlaws.org
1717	1717	WHY STATES SHOULD ADOPT THE UNIFORM SPECIAL DEPOSITS ACT
1718	1718	A special deposit is a deposit of money at a bank where the person entitled to the money is only
1719	1719	determined after a contingency occurs. Special deposits perform important work in commerce and
1720	1720	industry throughout the United States. For example, consider a security deposit paid by a tenant to
1721	1721	a landlord, or the deposit to an account that will fund the payment to members of a court-approved
1722	1722	class action settlement. Special deposits could serve a variety of parties in business, commerce,
1723	1723	and other various contexts, but legal uncertainties have led many to avoid using them.
1724	1724	The Uniform Special Deposits Act (the “Act”) cures the legal uncertainties that prevent businesses
1725	1725	and commercial actors from making full use of the special deposit. Under the Act, parties will be
1726	1726	able to utilize special deposits with greater confidence that their expectations will be met. Below
1727	1727	are some of the reasons why stat es should adopt the Uniform Special Deposits Act.
1728	1728	• The Act is an “opt in” statute. The parties must specifically elect to be covered by the Act in
1729	1729	their account agreement. This means parties can elect to utilize the protections for certain
1730	1730	deposit products and not others. Th e optional nature of the Act allows banks to add special
1731	1731	deposits to the suite of products they offer without impacting existing arrangements. A bank
1732	1732	can choose when and to what extent it will offer a special deposit to customers.
1733	1733	• The Act was drafted with a minimalist philosophy. The Act does not duplicate provisions
1734	1734	of law governing deposits generally. Instead, it remedies uncertainties in the law surrounding
1735	1735	the special deposit. Existing commercial and consumer protection laws supplement the Act,
1736	1736	except where inconsistent.
1737	1737	• The Act prevents parties from using a special deposit to defraud or hinder creditors. A
1738	1738	special deposit must serve a specified permissible purpose from the time the deposit is created
1739	1739	until termination. If the deposit ceases to serve a permissible purpose before termination, the
1740	1740	protections of the Act fall away, and the funds are subject to the payee’s creditors. For example,
1741	1741	a deposit or transfer that is fraudulent or voidable under other law is not protected.
1742	1742	• Under the Act, a special deposit cannot be swept into the bankruptcy estate of the
1743	1743	depositor if there is a bankruptcy filing. Under the current law of many states, a depositor
1744	1744	will have rights to the special deposit before the determination of a contingency that resolves
1745	1745	ownership of all or part of the balance of a special deposit. The Act makes it clear that any
1746	1746	property interest with respect to a special deposit is the right to receive payment after the
1747	1747	occurrence of the contingency—there is no property interest in the special deposit itself .
1748	1748	• The Act protects special deposits from premature creditor process. Under current law,
1749	1749	creditor process can “freeze” a special deposit and interfere with the purpose that the deposit
1750	1750	is designed to achieve. When the special deposit is established, the identity of the bank’s
1751	1751	ultimate creditor has not been determined. Under the Act, creditor process is only enforceable
1752	1752	against the bank holding the special deposit after the determination of a contingency. 2
1753	1753	• The Act protects the special deposit from the bank’s set off right. Under current law of
1754	1754	certain states, a bank might exercise a right of set off or recoupment that is unrelated to a
1755	1755	payment to a beneficiary (or to the special deposit itself). This has discouraged some from
1756	1756	using special deposits. The Act prevents the bank from exercising a right of set off or
1757	1757	recoupment to its own advantage with respect to unrelated debtor -creditor relationships.
1758	1758	The Act also clarifies other aspects of a special deposit relationship that have been muddled in the
1759	1759	case law. For example, it expressly provides that the relationship between the bank and a
1760	1760	beneficiary is a debtor-creditor relationship and that bank does not have a fiduciary duty to any
1761	1761	person in connection with a special deposit.
1762	1762	For more information about the Uniform Special Deposits Act, please contact Legislative Counsel
1763	1763	Kari Bearman at (312) 450-6617 or kbearman@uniformlaws.org.