Government of the District of Columbia
UNIFORM LAW COMMISSION
January 7, 2025
The Honorable Phil Mendelson
Chairman
Council of the District of Columbia
The John A. Wilson Building,
1350 Pennsylvania Avenue, NW
Washington, DC 20004
RE: Request for introduction of the Uniform Special Deposits Act.
Dear Chairman Mendelson:
Pursuant to Rule 401(b)(1) of the Rules of Organization and Procedure for the
Council, this is to request, on behalf of the District of Columbia Uniform Law
Commission, that you introduce the proposed “Uniform Special Deposits Act of 2025.”
A special deposit is a deposit of money at a bank created for a particular purpose
where the identity of the person entitled to payment is not determined until the
occurrence of a contingency specified at the time the deposit is created. Special deposits
play an important role in commerce and industry, but their use has been diminished
because of legal uncertainties. The uniform act establishes a framework for banks and
their customers to utilize special deposits with greater certainty as to how such deposits
will be treated under various circumstances. The act establishes clear criteria for special
deposits, clarifies the treatment of special deposits in the event of the bankruptcy of a
depositor, and clarifies the applicability of the creditor process on a special deposit. It is
an “opt-in” statute, which is available to banks and depositors to suit their needs for
particular purposes. The uniform act has been endorsed by the American College of
Commercial Finance Lawyers.
A proposed “Uniform Special Deposits Act of 2025” is being filed with this letter.
In addition, the following documents have been filed: (1) a summary of the uniform act;
(2) a statement as to why the uniform act should be adopted; and (3) the official version
of the uniform act with comments.
I would be pleased to answer any questions and to provide any additional
information requested. 2
Sincerely,
James C. McKay, Jr.
Chair
D.C. Uniform Law Commission
cc: Uniform Law Commissioners 1
2 airman Phil Mendelson at the request
of the
3 District
of Columbia Uniform Law Commission
4
5
6
7
8 A BILL
9
10
11 IN THE COUNCIL OF THE DISTRICT OF COLUMBIA
12
13 To enact the Uniform Special Deposits Act, to establish clear criteria for special deposits, to
14 clarify the treatment of special deposits in the event of the bankruptcy of a depositor, to
15 clarify the applicability of the creditor process on a special deposit, to clarify the legality
16 of a bank's right to exercise a setoff or right to recoupment against a special deposit that
17 its unrelated to the special deposit, and for other purposes.
18
19
BE IT ENACTED BY THE COUNCIL OF THE DISTRICT OF COLUMBIA, That this
20 act may be cited as the "Uniform Special Deposits Act of 2025".
21 Sec. 2. Definitions.
22 In this act:
23 (1) "Account agreement" means an agreement that:
24 (A)
Is in a record between a bank and one or more depositors;
25 (B) May have one or more beneficiaries as additional parties; and
26 (C) States the intention
of the parties to establish a special deposit
27 governed by this act.
28 (2) "Bank" means a person engaged in the business of banking and includes a
29 savings bank, savings and loan association, credit union, and trust company. Each branch or
30 separate office of a bank is a separate bank for the purpose of this act.
31 (3) "Beneficiary" means a person that:
32 (A) Is identified as a beneficiary in an account agreement; or
1 2
(B) If not identified as a beneficiary in an account agreement, may be 33
entitled to payment from a special deposit: 34
(i) Under the account agreement; or 35
(ii) On termination of the special deposit. 36
(4) “Contingency” means an event or circumstance stated in an account 37
agreement that is not certain to occur but must occur before the bank is obligated to pay a 38
beneficiary. 39
(5) “Creditor process” means attachment, garnishment, levy, notice of lien, 40
sequestration, or similar process issued by or on behalf of a creditor or other claimant. 41
(6) “Depositor” means a person that establishes or funds a special deposit. 42
(7) “District” means the District of Columbia. 43
(8) “Good faith” means honesty in fact and observance of reasonable commercial 44
standards of fair dealing. 45
(9) “Knowledge” of a fact means: 46
(A) With respect to a beneficiary, actual knowledge of the fact; or 47
(B) With respect to a bank holding a special deposit: 48
(i) If the bank: 49
(I) Has established a reasonable routine for communicating 50
material information to an individual to whom the bank has assigned responsibility for the 51
special deposit; and 52
(II) Maintains reasonable compliance with the routine, 53
actual knowledge of the fact by that individual; or 54
(ii) If the bank has not established and maintained reasonable 55 3
compliance with a routine described in clause (i) or otherwise exercised due diligence, implied 56
knowledge of the fact that would have come to the attention of an individual to whom the bank 57
has assigned responsibility for the special deposit. 58
(10) “Obligated to pay a beneficiary” means a beneficiary is entitled under the 59
account agreement to receive from the bank a payment when: 60
(A) A contingency has occurred; and 61
(B) The bank has knowledge the contingency has occurred. 62
“Obligation to pay a beneficiary” has a corresponding meaning. 63
(11) “Permissible purpose” means a governmental, regulatory, commercial, 64
charitable, or testamentary objective of the parties stated in an account agreement. The term 65
includes an objective to: 66
(A) Hold funds: 67
(i) In escrow, including for a purchase and sale, lease, buyback, or 68
other transaction; 69
(ii) As a security deposit of a tenant; 70
(iii) That may be distributed to a person as remuneration, 71
retirement or other benefit, or compensation under a judgment, consent decree, court order, or 72
other decision of a tribunal; or 73
(iv) For distribution to a defined class of persons after 74
identification of the class members and their interest in the funds; 75
(B) Provide assurance with respect to an obligation created by contract, 76
such as earnest money to ensure a transaction closes; 77
(C) Settle an obligation that arises in the operation of a payment system, 78 4
securities settlement system, or other financial market infrastructure; 79
(D) Provide assurance with respect to an obligation that arises in the 80
operation of a payment system, securities settlement system, or other financial market 81
infrastructure; or 82
(E) Hold margin, other cash collateral, or funds that support the orderly 83
functioning of financial market infrastructure or the performance of an obligation with respect to 84
the infrastructure. 85
(12) “Person” means an individual, estate, business or nonprofit entity, 86
government or governmental subdivision, agency, or instrumentality, or other legal entity. The 87
term includes a protected series, however denominated, of an entity if the protected series is 88
established under law that limits, or limits if conditions specified under law are satisfied, the 89
ability of a creditor of the entity or of any other protected series of the entity to satisfy a claim 90
from assets of the protected series. 91
(13) “Record” means information: 92
(A) Inscribed on a tangible medium; or 93
(B) Stored in an electronic or other medium and retrievable in perceivable 94
form. 95
(14) “Special deposit” means a deposit that satisfies Section 5. 96
(15) “State” means a state of the United States, the District of Columbia, Puerto 97
Rico, the United States Virgin Islands, or any other territory or possession subject to the 98
jurisdiction of the United States. The term includes an agency or instrumentality of the state. 99
100
Sec. 3. Scope; choice of law; forum. 101
(a) This act applies to a special deposit under an account agreement that states the 102 5
intention of the parties to establish a special deposit governed by this act, regardless of whether a 103
party to the account agreement or a transaction related to the special deposit, or the special 104
deposit itself, has a reasonable relation tothe District. 105
(b) The parties to an account agreement may choose a forum in the District for settling a 106
dispute arising out of the special deposit, regardless of whether a party to the account agreement 107
or a transaction related to the special deposit, or the special deposit itself, has a reasonable 108
relation to the District. 109
(c) This act does not affect: 110
(1) A right or obligation relating to a deposit other than a special deposit under 111
this act; or 112
(2) The voidability of a deposit or transfer that is fraudulent or voidable under 113
other law. 114
Sec. 4. Variation by agreement or amendment. 115
(a) The effect of sections 2 through 6, 8 through 11, and 14 may not be varied by 116
agreement, except as provided in those sections. Subject to subsection (b) of this section, the 117
effect of sections 7, 12, and 13 may be varied by agreement. 118
(b) A provision in an account agreement or other record that substantially excuses 119
liability or substantially limits remedies for failure to perform an obligation under this act is not 120
sufficient to vary the effect of a provision of this act. 121
(c) If a beneficiary is a party to an account agreement, the bank and the depositor may 122
amend the agreement without the consent of the beneficiary only if the agreement expressly 123
permits the amendment. 124
(d) If a beneficiary is not a party to an account agreement and the bank and the depositor 125 6
know the beneficiary has knowledge of the agreement’s terms, the bank and the depositor may 126
amend the agreement without the consent of the beneficiary only if the amendment does not 127
adversely and materially affect a payment right of the beneficiary. 128
(e) If a beneficiary is not a party to an account agreement and the bank and the depositor 129
do not know whether the beneficiary has knowledge of the agreement’s terms, the bank and the 130
depositor may amend the agreement without the consent of the beneficiary only if the 131
amendment is made in good faith. 132
Sec. 5. Requirements for special deposit. 133
A deposit is a special deposit if it is: 134
(1) A deposit of funds in a bank under an account agreement; 135
(2) For the benefit of at least two beneficiaries, one or more of which may be a 136
depositor; 137
(3) Denominated in a medium of exchange that is currently authorized or adopted 138
by a domestic or foreign government; 139
(4) For a permissible purpose stated in the account agreement; and 140
(5) Subject to a contingency. 141
Sec. 6. Permissible purpose. 142
(a) A special deposit must serve at least one permissible purpose stated in the account 143
agreement from the time the special deposit is created in the account agreement until termination 144
of the special deposit. 145
(b) If, before termination of the special deposit, the bank or a court determines the special 146
deposit no longer satisfies subsection (a) of this section, sections 8 through 11 cease to apply to 147
any funds deposited in the special deposit after the special deposit ceases to satisfy subsection (a) 148 7
of this section. 149
(c) If, before termination of a special deposit, the bank determines the special deposit no 150
longer satisfies subsection (a) of this section, the bank may take action it believes is necessary 151
under the circumstances, including terminating the special deposit. 152
Sec. 7. Payment to beneficiary by bank. 153
(a) Unless the account agreement provides otherwise, the bank is obligated to pay a 154
beneficiary if there are sufficient actually and finally collected funds in the balance of the special 155
deposit. 156
(b) Except as provided in subsection (c) of this section, the obligation to pay the 157
beneficiary is excused if the funds available in the special deposit are insufficient to cover such 158
payment. 159
(c) Unless the account agreement provides otherwise, if the funds available in the special 160
deposit are insufficient to cover an obligation to pay a beneficiary, a beneficiary may elect to be 161
paid the funds that are available or, if there is more than one beneficiary, a pro rata share of the 162
funds available. Payment to the beneficiary making the election under this subsection discharges 163
the bank’s obligation to pay a beneficiary and does not constitute an accord and satisfaction with 164
respect to another person obligated to the beneficiary. 165
(d) Unless the account agreement provides otherwise, the obligation of the bank obligated 166
to pay a beneficiary is immediately due and payable. 167
(e) The bank may discharge its obligation under this section by: 168
(1) Crediting another transaction account of the beneficiary; or 169
(2) Taking other action that: 170
(i) Is permitted under the account agreement for the bank to obtain a 171 8
discharge; or 172
(ii) Otherwise would constitute a discharge under law. 173
(f) If the bank obligated to pay a beneficiary has incurred an obligation to discharge the 174
obligation of another person, the obligation of the other person is discharged if action by the 175
bank under subsection (e) of this section would constitute a discharge of the obligation of the 176
other person under law that determines whether an obligation is satisfied. 177
Sec. 8. Property interest of depositor or beneficiary. 178
(a) Neither a depositor nor a beneficiary has a property interest in a special deposit. 179
(b) Any property interest with respect to a special deposit is only in the right to receive 180
payment if the bank is obligated to pay a beneficiary and not in the special deposit itself. Any 181
property interest under this subsection is determined under other law. 182
Sec. 9. When creditor process enforceable against bank. 183
(a) Subject to subsection (b) of this section, creditor process with respect to a special 184
deposit is not enforceable against the bank holding the special deposit. 185
(b) Creditor process is enforceable against the bank holding a special deposit with respect 186
to an amount the bank is obligated to pay a beneficiary or a depositor if the process: 187
(1) Is served on the bank; 188
(2) Provides sufficient information to permit the bank to identify the depositor or 189
the beneficiary from the bank’s books and records; and 190
(3) Gives the bank a reasonable opportunity to act on the process. 191
(c) Creditor process served on a bank before it is enforceable against the bank under 192
subsection (b) of this section does not create a right of the creditor against the bank or a duty of 193
the bank to the creditor. Other law determines whether creditor process creates a lien enforceable 194 9
against the beneficiary on a contingent interest of a beneficiary, including a depositor as a 195
beneficiary, even if not enforceable against the bank. 196
Sec. 10. Injunction or similar relief. 197
A court may enjoin, or grant similar relief that would have the effect of enjoining, a bank 198
from paying a depositor or beneficiary only if payment would constitute a material fraud or 199
facilitate a material fraud with respect to a special deposit. 200
Sec. 11. Recoupment or setoff. 201
(a) Except as provided in subsection (b) or (c) of this section, a bank may not exercise a 202
right of recoupment or setoff against a special deposit. 203
(b) An account agreement may authorize the bank to debit the special deposit: 204
(1) When the bank becomes obligated to pay a beneficiary, in an amount that does 205
not exceed the amount necessary to discharge the obligation; 206
(2) For a fee assessed by the bank that relates to an overdraft in the special deposit 207
account; 208
(3) For costs incurred by the bank that relate directly to the special deposit; or 209
(4) To reverse an earlier credit posted by the bank to the balance of the special 210
deposit account, if the reversal occurs under an event or circumstance warranted under other law 211
of the District governing mistake and restitution. 212
(c) The bank holding a special deposit may exercise a right of recoupment or setoff 213
against an obligation to pay a beneficiary, even if the bank funds payment from the special 214
deposit. 215
Sec. 12. Duties and liability of bank. 216
(a) A bank does not have a fiduciary duty to any person with respect to a special deposit. 217 10
(b) When the bank holding a special deposit becomes obligated to pay a beneficiary, a 218
debtor-creditor relationship arises between the bank and beneficiary. 219
(c) The bank holding a special deposit has a duty to a beneficiary to comply with the 220
account agreement and this act. 221
(d) If the bank holding a special deposit does not comply with the account agreement or 222
this act, the bank is liable to a depositor or beneficiary only for damages proximately caused by 223
the noncompliance. Except as provided by other law of the District, the bank is not liable for 224
consequential, special, or punitive damages. 225
(e) The bank holding a special deposit may rely on records presented in compliance with 226
the account agreement to determine whether the bank is obligated to pay a beneficiary. 227
(f) If the account agreement requires payment on presentation of a record, the bank shall 228
determine within a reasonable time whether the record is sufficient to require payment. If the 229
agreement requires action by the bank on presentation of a record, the bank is not liable for 230
relying in good faith on the genuineness of the record if the record appears on its face to be 231
genuine. 232
(g) Unless the account agreement provides otherwise, the bank is not required to 233
determine whether a permissible purpose stated in the agreement continues to exist. 234
Sec 13. Term and termination. 235
(a) Unless otherwise provided in the account agreement, a special deposit terminates 5 236
years after the date the special deposit was first funded. 237
(b) Unless otherwise provided in the account agreement, if the bank cannot identify or 238
locate a beneficiary entitled to payment when the special deposit is terminated, and a balance 239
remains in the special deposit, the bank shall pay the balance to the depositor or depositors as a 240 11
beneficiary or beneficiaries. 241
(c) A bank that pays the remaining balance as provided under subsection (b) of this 242
section has no further obligation with respect to the special deposit. 243
Sec. 14. Principles of law and equity. 244
Subtitle I of Title 28 of the D.C. Code, consumer protection law, law governing deposits 245
generally, law related to escheat and abandoned or unclaimed property, and the principles of law 246
and equity, including law related to capacity to contract, principal and agent, estoppel, fraud, 247
misrepresentation, duress, coercion, mistake, and bankruptcy, supplement this act except to the 248
extent inconsistent with this act. 249
Sec. 15. Uniformity of application and construction. 250
In applying and construing this uniform act, a court shall consider the promotion of 251
uniformity of the law among jurisdictions that enact it. 252
Sec. 16. Transitional provision. 253
This act applies to: 254
(1) A special deposit made under an account agreement executed on or after the 255
effective date of this act; and 256
(2) A deposit made under an agreement executed before the effective date of this 257
act, if: 258
(A) All parties entitled to amend the agreement agree to make the deposit 259
a special deposit governed by this act; and 260
(B) The special deposit referenced in the amended agreement satisfies 261
Section 5. 262
263
Sec. 17. Fiscal impact statement. 264 12
The Council adopts the attached fiscal impact statement as the fiscal impact statement 265
required by section 602(c)(3) of the District of Columbia Home Rule Act, approved December 266
24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(3)). 267
Sec. 18. Effective Date 268
This act shall take effect following approval by the Mayor (or in the event of veto by the 269
Mayor, action by the Council to override the veto), a 30-day period of Congressional review as 270
provided in section 602(c)(1) of the District of Columbia Home Rule Act, approved December 271
24, 1973 (87 Stat. 813; D.C. Official Code § 1-206.02(c)(1)), and publication in the District of 272
Columbia Register. 273
274 Uniform Special Deposits Act
drafted by the
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
and by it
APPROVED AND RECOMMENDED FOR ENACTMENT
IN ALL THE STATES
WITH PREFATORY NOTE AND COMMENTS
Copyright © 2023
By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
May 7, 2024 ABOUT ULC
The Uniform Law Commission (ULC), also known as National Conference of Commissioners
on Uniform State Laws (NCCUSL), now in its 132
nd
year, provides states with non-partisan,
well-conceived and well-drafted legislation that brings clarity and stability to critical areas of
state statutory law.
ULC members must be lawyers, qualified to practice law. They are practicing lawyers, judges,
legislators and legislative staff and law professors, who have been appointed by state
governments as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands to
research, draft and promote enactment of uniform state laws in areas of state law where
uniformity is desirable and practical.
• ULC strengthens the federal system by providing rules and procedures that are consistent from
state to state but that also reflect the diverse experience of the states.
• ULC statutes are representative of state experience because the organization is made up of
representatives from each state, appointed by state government.
• ULC keeps state law up to date by addressing important and timely legal issues.
• ULC’s efforts reduce the need for individuals and businesses to deal with different laws as
they move and do business in different states.
• ULC’s work facilitates economic development and provides a legal platform for foreign
entities to deal with U.S. citizens and businesses.
• Uniform Law Commissioners donate thousands of hours of their time and legal and drafting
expertise every year as a public service and receive no salary or compensation for their work.
• ULC’s deliberative and uniquely open drafting process draws on the expertise of
commissioners, but also utilizes input from legal experts, and advisors and observers
representing the views of other legal organizations or interests that will be subject to the
proposed laws.
• ULC is a state-supported organization that represents true value for the states, providing
services that most states could not otherwise afford or duplicate. Uniform Special Deposits Act
The committee appointed by and representing the Uniform Law Commission in preparing this
act consists of the following individuals:
Patrick A. Guida Rhode Island, Chair
John T. McGarvey Kentucky, Vice Chair
Timothy L. Amos Tennessee
Lani L. Ewart Hawaii
Greg Nibert New Mexico
Philip A. Nicholas Wyoming
Edwin E. Smith Massachusetts
William H. Henning Alabama, Division Chair
Dan Robbins California, President
Other Participants
Thomas C. Baxter Jr. New York, Co-Reporter
Michael Wiseman New York, Co-Reporter
Craig Ulman District of Columbia, American Bar Association
Section Advisor
Duane M. Searle Pennsylvania, Style Liaison
Tim Schnabel Illinois, Executive Director
Copies of this act may be obtained from:
Uniform Law Commission
111 N. Wabash Ave., Suite 1010
Chicago, IL 60602
(312) 450-6600
www.uniformlaws.org Uniform Special Deposits Act
Table of Contents
Prefatory Note ................................................................................................................................. 1
Section 1. Title .............................................................................................................................. 11
Section 2. Definitions.................................................................................................................... 11
Section 3. Scope; Choice of Law; Forum ..................................................................................... 17
Section 4. Variation by Agreement or Amendment...................................................................... 19
Section 5. Requirements for Special Deposit ............................................................................... 22
Section 6. Permissible Purpose ..................................................................................................... 23
Section 7. Payment to Beneficiary by Bank ................................................................................. 24
Section 8. Property Interest of Depositor or Beneficiary.............................................................. 27
Section 9. When Creditor Process Enforceable Against Bank ..................................................... 28
Section 10. Injunction or Similar Relief ....................................................................................... 29
Section 11. Recoupment or Set Off .............................................................................................. 30
Section 12. Duties and Liability of Bank ...................................................................................... 32
Section 13. Term and Termination ............................................................................................... 33
Section 14. Principles of Law and Equity..................................................................................... 34
Section 15. Uniformity of Application and Construction ............................................................. 35
Section 16. Transitional Provision................................................................................................ 35
[Section 17. Severability].............................................................................................................. 36
Section 18. Effective Date ............................................................................................................ 36 1
Uniform Special Deposits Act
Prefatory Note
The Uniform Law Commission has approved the Uniform Special Deposits Act.
Comments that follow each of the sections of the statute are the official comments. They explain
in detail the purpose and meaning of the various sections, and the policy considerations on which
they are based. This Prefatory Note sets out important background about special deposits,
including the reasons for enacting a Uniform Special Deposits Act and some of the overarching
considerations affecting the drafting of the Act.
Introduction
The Uniform Special Deposits Act addresses deposits at a bank where the identity of the
person entitled to payment is not determined until the occurrence of a contingency identified at
the time that the deposit is created. An example of such an account is an escrow account holding
funds that will be paid to one of two potential beneficiaries depending on the outcome of a
contingency. Although such accounts are commonly used, the legal protections afforded them
are uncertain. The fundamental purpose of the Uniform Special Deposits Act is t o provide a
vehicle that banks and their customers can elect to use providing greater legal certainty that the
expectations of users will be respected.
Historically courts have attempted to fashion protections for such accounts through,
among other measures, case law referring to special deposits, but the case law in this area is
murky and in some ways anachronistic in the context of modern banking. The Uniform Special
Deposits Act creates a vehicle that will provide certainty as to what protections will and will not
apply to the accounts of those electing to use it. Because its application is elective, persons not
electing to be covered by the Uniform Sp ecial Deposits Act will continue to be subject to
existing law.
Description of the Transactions Covered by the Uniform Special Deposits Act
The Uniform Special Deposits Act addresses concerns that have arisen about “special
deposits”, concerns that may undermine the use of special deposits as a useful vehicle to hold
funds that may be paid in the future to one or more persons depending on the resolution of one or
more specified contingencies. The legal uncertainty arises as to the attributes that make a deposit
“special”, the rights of the parties interested in the special deposit, their respective creditors, and
the bank holding the special deposit prior to the resolution of the contingency. These
uncertainties are not capable of resolution in bank-customer agreements because the agreed
terms cannot lawfully affect third parties who are not parties to such agreements. The Uniform
Special Deposits Act addresses the concerns by reducing the legal uncertainties.
An important threshold question is “what makes a deposit special”? The question arises
in a context where the law governing deposits generally is not uniform among the states. The
Uniform Special Deposits Act does not change that condition; the statutory changes touch only a
subcategory of general deposits (those which are considered to be “special”) and are limited in 2
application such that they address exclusively the concerns about the identified legal
uncertainties. The approach taken is a minimalist approach, meaning that the Uniform Special
Deposits Act offers statutory language only when necessary to address concerns.
The subcategory of general deposits designated as “special” receives that designation in
an account agreement between the bank and its customer, referred to as a “depositor” in the Act
(and where the deposit involves at least one beneficiary that is not that depositor). The depositor
is the bank’s customer, either because the depositor is funding the special deposit or because the
depositor is the party that established the special deposit (which might be funded by someone
else). The Uniform Special Deposits Act requires more than a customer’s designation of a
special deposit, although that is one indispensable element. In addition, the special deposit must
be denominated in money (language that is based on the Uniform Commercial Code’s definition
of money, as described below), must serve a permissible purpose specified in the account
agreement, and must be subject to a contingency that has not yet been determined. Consequently,
a general deposit becomes special under the Uniform Special Deposits Act if the deposit is so
designated in an account agreement and if the deposit meets the objective elements set forth in
sections of the Uniform Special Deposits Act.
The statutory requirement that the special deposit be denominated in a medium of
exchange that is currently authorized or adopted by a domestic or foreign government is a key
limitation on scope. The Uniform Special Deposits Act would not cover a bank’s securities
account for a customer, nor would it cover a safe-deposit account (which is a form of custody
account) or a loan account. This requirement would also mean that in most cases, cryptocurrency
accounts would not be covered. We are aware that at least one country, El Salvador, has adopted
Bitcoin as a legally recognized national currency, so it follows that it would be possible for a
special deposit account to be denominated in Bitcoin if the parties to the account agreement,
including the bank, all agreed.
The Uniform Special Deposits Act also requires that the special deposit be for one or
more specifically identified permissible purposes, and the special deposit must serve such
permissible purpose from the time the account agreement is executed until the special deposit is
terminated either under the account agreement or under Section 13 if the account agreement does
not include a termination provision. This key requirement is designed to address possible
unintended and adverse consequences of two of the remedial provisions of the Uniform Special
Deposits Act. In protecting the special deposit from a premature creditor attack and from
inappropriately being swept into the depositor’s bankruptcy estate, these protective provisions of
the Uniform Special Deposits Act could be abused. For example, if a depositor established a
special deposit “with the actual intent to hinder, delay, or defraud a creditor” of the depositor,
this purpose would not be permissible. Cf . Uniform Voidable Transactions Act, § 4(a)(1). There
are also provisions in the Uniform Special Deposits Act designed to protect against the risk of
abuse, including, but not limited to, the permissible purpose requirement. We also note that such
an impermissible purpose might develop at a later point in the history of the special deposit; a
purpose that is permissible at the outset may become impermissible as circumstances change. In
such an event, the protections of the Act will be lost at the appropriate time, and any credits to
the account after that time will not receive the Act’s protections. 3
There are four specific concerns that have hindered the “special deposit” from performing
what is widely seen as a legitimate aid to commerce and business. First, there exists uncertainty
about what makes a deposit “special”. The existing case law is not helpful in reducing
uncertainty, and perhaps even contributes to it, because decisions reference bank practices that
are no longer followed. The Act reduces this uncertainty by setting forth several elements for a
“special deposit” and by requiring the parties to the account agreement to clearly state their
intention to create a special deposit subject to the Act.
Second, there is uncertainty about the bank’s debt that arises from holding a special
deposit, and to whom and when that debt is due and owing. Is the debt to the depositor or is it to
a third person that the Uniform Special Deposits Act calls a beneficiary? Is it due and owing
when the deposit is funded or at a later point in time? These uncertainties render the special
deposit vulnerable to an attack by creditors of either the depositor or a beneficiary, and this
vulnerability has led many to avoid the use of special deposits. A deposit that is tied up in a
dispute with a creditor cannot perform its intended purpose. The Uniform Special Deposits Act
minimizes the vulnerability by making it clear that a special deposit is a debt owed to the
beneficiary after determination of a stated contingency.
Third, in certain situations described further below, the special deposit might be seen
inappropriately as an asset of the depositor, and vulnerable to being considered part of the
bankruptcy estate in the event of the depositor’s bankruptcy. This bankruptcy vulnerability, like
the uncertainty about a creditor attack, is remedied by the Uniform Special Deposits Act because
the depositor’s pecuniary interest in the special deposit is only as a potential beneficiary. The
statute makes clear that the special deposit is remote from a depositor’s bankruptcy estate unless
the depositor has a determined right to all or a part of the special deposit in its capacity as a
beneficiary after the determination of a contingency. To be sure, when a special deposit
terminates, the depositor may receive all or part of the balance back if the balance is not
distributed to a beneficiary, but it will receive that rebate in the capacity of a beneficiary, with
escheatment being the only alternative (an alternative that becomes much less likely as a result of
the provision).
Finally, a special deposit can be vulnerable to the bank holding the special deposit, which
might exercise a right of set off against the special deposit for a mature debt of the depositor or a
beneficiary. This vulnerability has led many to eschew the use of a special deposit because of the
legal uncertainty created by the prospect of a bank set off. The Uniform Special Deposits Act
reduces this uncertainty.
Legitimate and Salutary Types of Special Deposits
The Uniform Special Deposits Act establishes a non-exhaustive “white list” of certain
types of deposit accounts that might be appropriately designated as “special” and would perform
a permissible purpose. The idea here is to minimize uncertainty about a particular category of
special deposit and whether that category would be considered permissible.
The first listed special deposit is to “hold funds in escrow, including for a purchase and
sale, lease, buyback, or other transaction”. In the deliberative process leading the Uniform Law 4
Commission to authorize development of the Uniform Special Deposits Act, the Uniform Law
Commission Study Committee learned of the rising popularity of escrow accounts at banking
organizations. Parties doing purchase-and-sale transactions associated with many different asset
classes, ranging from the conveyance of real estate to the sale of a business, often structure their
transactions in two stages: there is the contract to sell and there is the closing of the sale. To
provide the seller with assurance that a buyer will proceed in good faith from contract to closing,
the contract of sale will often include a term providing for the payment of earnest money by the
purchaser. This earnest money will be held by a trusted third party between contract and closing,
and that trusted third party will often be a bank, especially when the amount of earnest money is
material (and there are occasions when the special deposit can be measured in billions of
dollars). Of course, one of the fundamental uncertainties about the deposit received by a bank
acting to facilitate such a sale transaction is the uncertainty about the future disbursement of the
deposited funds (for example, in the sale of the subsidiary, there may be significant “due
diligence” about the financial statements of the subsidiary that might adversely affect the buyer’s
willingness to proceed). When the parties get to closing, will the special deposit be paid to the
seller (yes, if the transaction closes) or will the special deposit be returned to the putative buyer
(if the transaction does not close)? It is the uncertainty about the bank’s ultimate “due to”
obligation that causes some of the concerns identified above. There is no doubt, however, that
the special deposit is serving a permissible purpose, namely, to provide assurance that the
putative purchaser is serious and has the financial capability to proceed in good faith from the
first step to the second step.
Consider also another white-listed special deposit – the escrow account with respect to a
landlord-tenant relationship. Envision a large commercial building in a major city, where there
might be 150 offices and 150 tenants. In each, there will be a lease between the landlord and the
tenant, and the landlord will require tenants to pre-pay rent as a “security deposit” (assume that
the security deposit equals one month of rent). The security deposits of all the tenants can be held
in a commingled special deposit that the landlord establishes with a bank. Again, there will be
the familiar uncertainty about the bank’s “due to” obligation. Will all or a part of the balance in
the special deposit be “due to” the landlord or will it be “due to” the tenant? If, at the expiry of
any leasehold, there is no damage to the leased property, and a definitive communication along
these lines is made to the bank, the tenant will be the “beneficiary” of the bank’s “due to”
obligation and presumably the bank will discharge this liability and pay the tenant out of the
special deposit. But the parties will not know whether this contingency is satisfied until the end
of the leasehold. If there is damage to the leased property, all or part of the deposit could be due
to the landlord. Notwithstanding the uncertain identity of the bank’s creditor, the special deposit
established by the landlord in the hypothetical situation will be for a permissible purpose, to
secure the leased property against all but ordinary wear and tear during the leasehold. The special
deposit facilitates the execution of an important term within the 150 leases in the building, and
significant funds can be held in a regulated bank, where they will be safe and secure. While
providing greater certainty and protection for such a special deposit, the Uniform Special
Deposits Act does not displace any provisions of state law that may exist regulating such
deposits, such as laws governing the payment of interest on such accounts.
The white list includes examples of funds that may be held for other purposes. In highly
sophisticated financial systems, including that in the United States, it is customary for employers 5
to collect funds in the form of pending transaction accounts to be used to meet required payrolls
(both salary payments and ERISA payments scheduled to be made to retirement accounts). It is a
common practice to collect the funds needed to discharge employer obligations to employees in a
special deposit and then to disburse the collected funds to employees in the form of salary, IRA,
or 401(k) payments. The Uniform Special Deposits Act would protect such special deposits and
facilitate the payout to employee/beneficiaries by freeing these deposits from an attack by
employer/creditors and by making such special deposits bankruptcy remote with respect to the
employer’s bankruptcy and free from a bank’s right of set off. Again, in this example, the
permissible purpose is to facilitate the discharge of the employer’s obligations to its employees.
A collection account to facilitate the settlement of a legal action or arbitral award is
another form of white-listed special deposit that “holds funds for distribution to a defined class
of persons”. In a class action settlement, for example, it would be typical for a settling defendant
to collect the funds needed to pay claimants in a special deposit that would, once the deposit is
fully funded, be used to pay out those claimants who are to be compensated by the court-
approved settlement. The Uniform Special Deposits Act would protect such settlement accounts
from the same kind of uncertainties previously identified. The permissible purpose of the special
deposit in this instance is the facilitation of compensation to injured class members.
Another white-listed special deposit is to “provide assurance with respect to an obligation
created by contract”. In modern economic systems, there is financial infrastructure that depends
on participants that have the necessary liquidity to settle not only their own obligations but also
the obligations of others. One technique to assure this capability to settle the obligations of third
parties is for the settling participant to establish a special deposit with a material balance, which
will “provide assurance” that the settling participant has the wherewithal to take on its role as a
settlement agent. In such situations, the balance of the special deposit might be large and needs
to be held by a reliable and creditworthy entity such as a regulated bank. In this example, the
special deposit is facilitating the operation of critical financial infrastructure, and the cash
balance needs protection from creditors, or the balance cannot have the necessary “assuring”
effect. There are specific examples where the functioning of critical infrastructure has been
jeopardized by creditor process, and in certain situations creditor process served on the bank
holding a special deposit has been used as a weapon to gain an advantage that is seen to be
“unfair”. With respect to sovereign debt where there has been a default, some “hold out”
creditors have jeopardized other bond holders who agreed to a bond restructuring by attaching
the special collection account through which restructured bond payments were to be made, on a
theory that the debtor (i.e., the sovereign that defaulted) had a property interest in the account
used to collect funds for the payout, and the account needed to be “frozen” until that property
interest could be adjudicated. The Uniform Special Deposits Act would insulate special deposits
of this kind from such creditor attacks, and the permissible purpose is to assist with the
functioning of critical infrastructure and to foster the settlement of financial disputes.
The statute’s “white list” also protects special deposits that exist to facilitate settlements
done across certain private sector payment systems, which often depend upon special deposit
accounts that are used for settlement or are used to provide assurance with respect to obligations
that arise in the operation of the system or otherwise support the orderly functioning of the
system. Even a short delay in the execution of a settlement, where the delay lasts only for as long 6
as it takes the parties to get to a judge and obtain relief, could pose a systemic risk to the
financial system. Without needed protection from the Uniform Special Deposits Act, the risk of a
suspended settlement arising from a levy or restraining order is always just a lawsuit away. The
Uniform Special Deposits Act would reduce and perhaps even eliminate this risk.
Finally, special deposits could potentially be used to protect accounts that hold cash
margin or other cash collateral required by regulators for reasons including customer protection
and mitigation of bilateral credit and systemic risk in securities transactions or transactions in
regulated derivatives (primarily swaps and futures). Several governmental authorities, including
the Commodity Futures Trading Commission and the Securities and Exchange Commission,
require that cash margin be held in an account akin to a “special deposit” where the bank holding
the account is contractually required to waive its set off rights against obligations of the broker or
dealer holding customer assets. See, e.g. , 17 C.F.R. §§ 1.20; 22.5; 23.17; 240.15c3–3; 240.18a–4.
If these deposits became covered under the Uniform Special Deposits Act, they would receive
the kind of protection regulators have required and may even enhance protections currently
provided under federal law. The language of the Uniform Special Deposits Act is sufficiently
flexible to cover similar future arrangements because the holding of cash margin appears to be a
trend in the more sophisticated financial centers. As for the permissible purpose, the purpose
would be coincident with the policy that has prompted regulatory action; the special deposit
provides confidence in the protection of customer assets and orderly operation of securities and
commodities settlement systems.
The key point about the white-listed special deposits is that these deposits are not
“special” only because they are so designated in the account agreement. They are special because
of the designation and because the deposits perform a unique public function in facilitating
important prudential, commercial, or governmental objectives. It is also appropriate to draw
attention to the wide diversity of special deposits, and to the beneficial function that they
perform.
Nature of the Relationship between the Bank Holding the Special Deposit and the Beneficiary
There is old case law that mistakenly characterizes the relationship formed in a special
deposit. The Uniform Special Deposits Act corrects the mistaken characterizations. The old case
law provides that when a bank receives a special deposit in the form of cash, the bank holds this
deposited cash in “custody” and the bank’s obligation to repay the cash is not reflected on the
bank’s balance sheet. In the survey preceding the drafting of the Uniform Special Deposits Act,
the Uniform Law Commission Study Committee learned that this practice contemplated by the
old case law is not followed. No bank today that receives cash on deposit from a customer fails
to record a debt to the customer on its balance sheet. The Uniform Special Deposits Act makes
clear that the bank does not hold funds in a custodial capacity in a special deposit situation. The
legal and accounting relationships are in harmony.
Another unhelpful vestige in old case law is a suggestion that the bank taking a special
deposit is acting as a kind of fiduciary vis-à-vis the depositor. As discussed below, the drafters
are aware of no evidence that this is the current commercial practice. When a bank intends to act
as a trustee, the relationship is clearly provided in a trust agreement and not in a deposit contract. 7
The Uniform Special Deposits Act provides expressly that any relationship between the
bank and a depositor or beneficiary arising from the special deposit is a debtor-creditor
relationship. Although banks may act as fiduciaries in certain situations, the relationship formed
when taking a special deposit is not a fiduciary relationship. The Uniform Special Deposits Act
reduces uncertainty on this issue, and if the intention is to change the relationship from debtor-
creditor to fiduciary, that change should be documented in a trust agreement rather than an
account agreement.
The Uniform Special Deposits Act also makes clear that the determination of the
occurrence of the contingency is the trigger event that ripens the generalized “due to” obligation
of the bank into a specific obligation to an entitlement holder, a person that the Uniform Special
Deposits Act calls a beneficiary. Before the determination of the occurrence of the contingency,
the bank has an indebtedness that is due not to any specifically identified legal person. That is,
the bank’s obligation to pay is not a contingent liability of the bank, it is a debt of the bank like
any other deposit. What depends on the resolution of the contingency is the identity of the person
entitled to payment. Consequently, there is no attachable property of a specific person until
determination of the occurrence of the contingency, which will identify the beneficiary.
The Uniform Special Deposits Act also clarifies when a debt is owed by the bank to a
beneficiary, which can arise only after determination of the occurrence of the contingency, and
explicitly states how that obligation may be paid. It is at that point when the debt of the bank to
the beneficiary can be subject to creditor process served on the bank by a creditor of the
beneficiary. However, if creditor process is served before the point when the contingency is
determined, then the bank holding the special deposit is not obliged to act on the process. There
is no debt due and owing by the bank to such a beneficiary before the determination point, and
the Uniform Special Deposits Act provides that any premature service will not accomplish its
restraining objective. These provisions of the Uniform Special Deposits Act minimize legal
uncertainty with clear and executable rules that will enable the special deposit to serve its
salutary function; it leaves the “due to” free of restraint until the beneficiary’s payment right
becomes fixed.
Enforcement Features of the Uniform Special Deposits Act
The Uniform Special Deposits Act also contains provisions dealing with enforcement,
which resolve some uncertainties currently found in the case law. The Uniform Special Deposits
Act is enforceable by a beneficiary, and it does not matter whether the beneficiary is a party to
the account agreement. In the wide diversity of special deposit arrangements, there will be some
account agreements where the beneficiary will be a party and others where the beneficiary will
not be a party. For example, if two companies are contracting for the sale of a business, the buyer
of the business will sometimes place a down payment of earnest money in a special deposit. The
down payment will later be applied against the purchase price when the sale of the business
closes. If the sale does not close, the down payment will typically be returned to the purported
buyer. In this arrangement, it would be common for the buyer and the seller to be parties to the
special deposit agreement with the bank holding the down payment. On the other hand, with
respect to a different kind of special deposit – the security deposits that are taken from tenants in
a commercial office park – it would not be unusual for the landlord to take security deposits from 8
tenants and place them in a special deposit at a bank. In this arrangement, the tenant/beneficiaries
would not typically be parties to the account agreement, which often will be between the bank
and the landlord.
The Uniform Special Deposits Act also makes clear that a depositor can enforce the
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.
The measure of damages for breach of the account agreement or the Uniform Special
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.
Self-Imposed Limitations of the Uniform Special Deposits Act
The Uniform Special Deposits Act contains several self-imposed limitations. The most
important limitation has already been referenced – the Uniform Special Deposits Act accepts, as
it must, that the law governing general deposits is not uniform among the 50 states. The drafters
had no mandate to write a uniform law governing deposits generally. To the contrary, the charge
to the Drafting Committee was to address the unique concerns that are inhibiting the
development of a special deposits product, and to do nothing more. Subjects including when a
deposit is received and when it is paid out are governed by general deposit law, and that general
law is left untouched by the Uniform Special Deposits Act. Further, many states have substantive
statutory protections dealing with discrete topics arising from certain types of bank deposits,
including customer protection measures for security deposits received by landlords. Another
example concerns adverse claims against a generic bank deposit. The Uniform Special Deposits
Act leaves all that state law untouched, whatever it happens to be. Further, the Uniform Special
Deposits Act relies upon existing general deposit law to “fill in the blanks” (e.g., when is a
special deposit received) and does not displace the general deposit law except when necessary to
accomplish a specific objective. For example, whether a special deposit will bear interest and if
so, at what rate, would be determined by other law and by the agreement between the parties.
The Uniform Special Deposits Act also expressly does not address certain other topics
that may affect a special deposit. One such topic is the insolvency of the bank holding a special
deposit. This is not addressed for two different reasons. First, in the Uniform Law Commission
Study Committee deliberations preceding the drafting of the Uniform Special Deposits Act, bank
insolvency was not identified as a problem or concern. In the United States, there is a well-
developed bank insolvency law and it has worked well for special deposits. Second, because of 9
widespread federal deposit insurance, bank insolvency law has largely become the product of
federal law, and state law including the Uniform Special Deposits Act can perform only a limited
role. Consequently, the Uniform Special Deposits Act does not address the insolvency of the
bank holding the special deposit and leaves that subject to federal law.
While bank insolvency is a topic that the Uniform Special Deposits Act does not cover,
the statute does address an insolvency topic that is a significant concern – the insolvency of a
depositor and the possibility that a special deposit might become part of the bankruptcy estate in
the event of the depositor’s bankruptcy. A specific suggestion was that the special deposit be
made bankruptcy remote in the event of a depositor bankruptcy, which could be done by
reducing any uncertainty whether a depositor has a property interest in a special deposit. The
Uniform Special Deposits Act provides this needed clarity, and the statute makes clear that the
depositor as a depositor has no property interest in a special deposit, and that its only property
interest is as a potential beneficiary. Of course, no beneficiary has any entitlement until
determination of the occurrence of the contingency. This should avoid the special deposit being
unhelpfully drawn into depositor bankruptcy proceedings and renders the special deposit
bankruptcy remote.
A final self-limitation of the Uniform Special Deposits Act is that it is applicable only if
the parties to the account agreement have opted in, meaning the bank and its customer have
elected that the deposit is special and will receive statutory coverage. In the absence of an agreed
“opt-in”, the statute does not apply. One of the key attributes of a special deposit that was
referenced repeatedly in the Uniform Law Commission Study Committee deliberations was the
importance of the “opt-in” to distinguish the covered special deposit from other bank deposits.
Currently, banks receive demand, time, savings, and trust deposits, and each of these must be
distinguished from the deposit that is “special”. Given the wide diversity of “special deposits”,
many practitioners told the Uniform Law Commission Study Committee that the designation
needed to be done by the account parties through an “opt-in” provision in the account agreement.
The parties to the account agreement, namely the bank and its depositor(s), would bes t
understand the special purpose being served.
Note also that no bank is required to offer a special deposit product, and some banks may
decide that this will not be among their offered suite of products, or that they will offer such a
product only under some circumstances, such as all the potential beneficiaries being parties to
the account agreement. The Uniform Special Deposits Act is drafted to provide for sufficient
flexibility that would enable the Uniform Special Deposits Act to minimize legal uncertainty and
maximize the salutary commercial benefits of this deposit type.
Choice of Law, Choice of Forum, and Effective Date
It is appropriate to say a few words about choice of law, choice of forum and the effective
date of the Uniform Special Deposits Act.
One of the distinguishing features of the Uniform Special Deposits Act is that it is an
“opt-in” statute. The parties to the account agreement, namely the bank and its depositor(s),
decide upon coverage. To maximize their freedom of choice, the parties can select to be 10
governed by the laws of a state which has enacted the Uniform Special Deposits Act,
notwithstanding whether there is a reasonable relation between a state that has enacted the
Uniform Special Deposits Act and the contracting parties, the forum state, the special deposit, or
any transaction associated with the special deposit. Given that the selection of the Uniform
Special Deposits Act would encompass certain statutory protections for the special deposit,
certainty of application with respect to applicable law is especially important. This certainty is
provided by maximizing the ability of the parties to the account agreement to select the
governing law. For the same policy reason, there is a choice-of-forum provision at Section 3 that
facilitates the selection of a forum for the resolution of disputes between the parties.
With respect to the effective date, one of the concerns that is addressed in the Uniform
Special Deposits Act relates to special deposits that are already existing at the time the statute is
enacted in a particular state. Will the new law apply to a pre-existing special deposit? The
answer is that it will apply if the necessary parties to the account agreement make the requisite
amendments to the existing agreement. Again, the rationale for this provision is legal certainty. 11
Uniform Special Deposits Act
Section 1. Title
This [act] may be cited as the Uniform Special Deposits Act.
Section 2. Definitions
In this [act]:
(1) “Account agreement” means an agreement that:
(A) is in a record between a bank and one or more depositors;
(B) may have one or more beneficiaries as additional parties; and
(C) states the intention of the parties to establish a special deposit
governed by this [act].
(2) “Bank” means a person engaged in the business of banking and includes a
savings bank, savings and loan association, credit union, [and] trust company[, and a bank as
defined in [cite to state statute]]. Each branch or separate office of a bank is a separate bank for
the purpose of this [act].
(3) “Beneficiary” means a person that:
(A) is identified as a beneficiary in an account agreement; or
(B) if not identified as a beneficiary in an account agreement, may be
entitled to payment from a special deposit:
(i) under the account agreement; or
(ii) on termination of the special deposit.
(4) “Contingency” means an event or circumstance stated in an account
agreement that is not certain to occur but must occur before the bank is obligated to pay a
beneficiary. 12
(5) “Creditor process” means attachment, garnishment, levy, notice of lien,
sequestration, or similar process issued by or on behalf of a creditor or other claimant.
(6) “Depositor” means a person that establishes or funds a special deposit.
(7) “Good faith” means honesty in fact and observance of reasonable commercial
standards of fair dealing.
(8) “Knowledge” of a fact means:
(A) with respect to a beneficiary, actual knowledge of the fact; or
(B) with respect to a bank holding a special deposit:
(i) if the bank:
(I) has established a reasonable routine for communicating
material information to an individual to whom the bank has assigned responsibility for the
special deposit; and
(II) maintains reasonable compliance with the routine,
actual knowledge of the fact by that individual; or
(ii) if the bank has not established and maintained reasonable
compliance with a routine described in clause (i) or otherwise exercised due diligence, implied
knowledge of the fact that would have come to the attention of an individual to whom the bank
has assigned responsibility for the special deposit.
(9) “Obligated to pay a beneficiary” means a beneficiary is entitled under the
account agreement to receive from the bank a payment when:
(A) a contingency has occurred; and
(B) the bank has knowledge the contingency has occurred.
“Obligation to pay a beneficiary” has a corresponding meaning. 13
(10) “Permissible purpose” means a governmental, regulatory, commercial,
charitable, or testamentary objective of the parties stated in an account agreement. The term
includes an objective to:
(A) hold funds:
(i) in escrow, including for a purchase and sale, lease, buyback, or
other transaction;
(ii) as a security deposit of a tenant;
(iii) that may be distributed to a person as remuneration, retirement
or other benefit, or compensation under a judgment, consent decree, court order, or other
decision of a tribunal; or
(iv) for distribution to a defined class of persons after identification
of the class members and their interest in the funds;
(B) provide assurance with respect to an obligation created by contract,
such as earnest money to ensure a transaction closes;
(C) settle an obligation that arises in the operation of a payment system,
securities settlement system, or other financial market infrastructure;
(D) provide assurance with respect to an obligation that arises in the
operation of a payment system, securities settlement system, or other financial market
infrastructure; or
(E) hold margin, other cash collateral, or funds that support the orderly
functioning of financial market infrastructure or the performance of an obligation with respect to
the infrastructure.
(11) “Person” means an individual, estate, business or nonprofit entity, 14
government or governmental subdivision, agency, or instrumentality, or other legal entity. The
term includes a protected series, however denominated, of an entity if the protected series is
established under law that limits, or limits if conditions specified under law are satisfied, the
ability of a creditor of the entity or of any other protected series of the entity to satisfy a claim
from assets of the protected series.
(12) “Record” means information:
(A) inscribed on a tangible medium; or
(B) stored in an electronic or other medium and retrievable in perceivable
form.
(13) “Special deposit” means a deposit that satisfies Section 5.
(14) “State” means a state of the United States, the District of Columbia, Puerto
Rico, the United States Virgin Islands, or any other territory or possession subject to the
jurisdiction of the United States. The term includes an agency or instrumentality of the state.
Legislative Note: The bracketed text in paragraph (2) should be included if a state defines
“bank” in another statute and intends for the definition to apply to this act.
A state should enact the definition of “person” in paragraph (11) regardless of whether the state
has enacted the Uniform Protected Series Act (2017) or otherwise recognizes a protected series
under its law. The Uniform Special Deposits Act does not require the enacting state to recognize
a limit on liability of a protected series organized under the law of another jurisdiction or a limit
on liability of the entity that established the protected series. The Uniform Special Deposits Act
clarifies the status of a protected series as a “person” under the choice-of-law and substantive
law rules of the enacting state under the Uniform Special Deposits Act.
Comment
1. Account Agreement. A fundamental question pervading the case law and among
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
that is covered by the Uniform Special Deposits Act. The parties to the account agreement will 15
need to mutually agree to designate a deposit as “special” and identify one or more permissible
purposes that it serves. If this is not done, the deposit is not a special deposit under the Uniform
Special Deposits Act. If it is done, the deposit will be a special deposit if it meets the other
requirements that are set forth in Section 5.
No particular talismanic language is required to express the intent to be covered by the
Uniform Special Deposits Act. A statement referring to the title of the applicable state legislation
or the relevant sections of the state code embodying the Act or a reference to the Uniform
Special Deposits Act as enacted in the relevant state would certainly suffice. But other
formulations showing the intent to fall under the Uniform Special Deposits Act would also be
effective.
An account agreement is between a bank and at least one depositor, a term that is
intentionally defined broadly in the Uniform Special Deposits Act. Not all of the depositors must
be parties to the account agreement. In addition, a depositor may also be a beneficiary, but
persons that may be beneficiaries of a special deposit need not be parties to the account
agreement. For example, there may be persons that are initially identifiable as potential or actual
beneficiaries as a class but not as individual persons, or individual persons that may not be
identifiable at the time the account agreement is executed but will be identifiable before the bank
becomes obligated to pay a beneficiary. There may be a special deposit with one beneficiary
designated – for e xample, a seller in a sales contract may view the deposit of earnest money by
the purported purchaser as a sign that the purchaser is serious and has the capability of
proceeding to closing. The seller will, if the sale closes, be the solitary beneficiary who receives
the earnest money and the remainder of the purchase price. But, if the sale does not close, the
purchaser/depositor (who made the original deposit) may be treated as a beneficiary and obtain
its earnest money back. In this type of arrangement, the seller/depositor would be considered the
second potential beneficiary and should be reflected as such in the account agreement.
2. Bank. The definition of bank is based on Sections 1-201(b)(4), 4-105(1), and 4A-105
of the Uniform Commercial Code and provides the option to include other state-specific
definitions of a bank. The Uniform Special Deposits Act covers special deposits taken by banks;
it does not cover deposits taken by other persons who are not banks.
3. Beneficiary. The definition of a beneficiary under the Uniform Special Deposits Act is
tied to the account agreement, which may identify a beneficiary directly or indirectly in certain
circumstances (e.g., the determination of the occurrence of a contingency or termination of the
account agreement). A beneficiary does not need to be identified specifically and may be
identified as a member of a class (for example, in a class action settlement) or as a type (for
example, all tenants in a building). Such identification should become specific with the fruition
of the contingency. When the account agreement identifies specifically the beneficiary of a
special deposit, the account agreement may provide additional information as to the making of
the payment, including perhaps the beneficiary’s bank and account number. For example, the
account agreement may specify that payment to the beneficiary would be deemed made when
paid to a bank that is selected by such beneficiary. The original depositor may have a right to
payment, but that right arises only from its capacity as a beneficiary, either because it is specified
in the account agreement, or upon termination, which is also addressed in Section 13. 16
4. Contingency. The definition of “contingency” entails a measure of uncertainty with
respect to outcome. This is a common feature of the special deposit, where entitlement to
payment is dependent upon an uncertain event – the closing of a contract, the expiration of a
commercial lease with no damage to the leased property, settlement of a day’s payment activities
or daily trading activity, or the occurrence of an event that may or may not occur within a
specified period of time. The passage of time, without another event or criteria being satisfied or
being necessary to happen or occur, does not constitute a contingency.
5. Creditor Process. The definition of “creditor process” is based on Section 4A-502 of
the Uniform Commercial Code.
6. Depositor. The definition of “depositor” is somewhat counterintuitive in that it
encompasses a person who establishes a special deposit at a bank but does not necessarily
deposit any funds into the established account. This is designed to accommodate special deposits
that are established by a bank customer who is not depositing funds into the account but is best
positioned to establish a special deposit account to hold funds that will be paid out in the event a
particular contingency is determined. A paradigm example of this kind of special deposit is the
situation of a commercial landlord who establishes a special deposit to hold funds deposited by
tenants to secure individual leaseholds against the risk of property damage. In this situation, the
landlord will not place the landlord’s own funds in the special deposit; instead, the funds
comprising the special deposit will be placed by the tenants. But the landlord will likely
“establish” the special deposit, and this can be the most economical means to accomplish the
purpose – it is likely more efficient for an individual landlord to establish the special deposit than
for the many tenants to do so. In the landlord-tenant example, the landlord would be considered a
depositor and would be able to enforce the account agreement, which may be more efficient than
requiring the tenants to do so. A purpose of the Uniform Special Deposits Act is to foster
efficient, low-cost banking services meeting the needs of a diverse group of commercial actors.
By virtue of the individual’s status as a depositor, the individual can enforce the account
agreement and requirements of the Uniform Special Deposits Act.
As noted in comment 3 to this Section 2 above, a depositor may not always be a
beneficiary. A depositor may be a beneficiary to the extent that the determination of the
occurrence of a contingency provides such depositor with a right to payment, and only when that
interest has been determined and the bank has become obligated to pay the beneficiary. A
depositor may also become a beneficiary upon termination, which is addressed in Section 13.
7. Obligated to Pay a Beneficiary. A beneficiary’s interest in a special deposit is the
right to be paid by the bank holding the special deposit, which right will derive from the account
agreement but will also require additional criteria to satisfy the elements of the defined term,
“obligated to pay a beneficiary”. A beneficiary has no other right to payment where the proceeds
are sourced from a special deposit, which is a distinguishing feature of a special deposit from a
general deposit of a bank. A beneficiary’s right to be paid out of the special deposit arises when
the bank is obligated to pay a beneficiary. The disposition of the special deposit among
beneficiaries will be determined upon the resolution of a contingency. The bank’s obligation is
dependent on any contingency for payment to that beneficiary in the account agreement having
been determined and the bank having knowledge that such contingency has occurred. The 17
definition makes clear that the terms of the account agreement govern determination of the
occurrence of a contingency. The original depositor may have an entitlement to payment, but that
right arises only from its capacity as a beneficiary. If a bank will determine the occurrence of a
contingency in an account agreement based on the receipt of records, it is anticipated that it will
likely do so based on a review of records. It is expected that the bank’s determination will be
triggered by the receipt of records similar to the receipt of documents that may trigger payment
under a letter of credit.
8. Permissible Purpose. The Uniform Special Deposits Act requires that an account
agreement be created only for one or more permissible purposes and includes a non-exclusive list
of examples of special deposits that would be for permissible purposes. Special deposits may be
used for a wide variety of permissible purposes, and the inclusion of certain permissible purposes
in the statute as examples should not be interpreted to exclude any other purpose, including
because such purpose is a different type than the examples included. Even where a potential
purpose is included in the “white list” it is expected that in practice variations of the examples
will also serve as permissible purposes. For example, a permissible purpose could include a sale
or purchase transaction that involves a title company in addition to the seller and purchaser. It is
not possible to identify in advance the possible ways that the protections provided by the
Uniform Special Deposits Act could be abused and used to facilitate the inappropriate shielding
of assets from creditors. It is also not possible to identify all the salutary purposes that are served
by special deposits. With that understood, a special deposit established for the purpose of
defrauding or evading creditors until funds are disbursed would not be a permissible purpose
under the Uniform Special Deposits Act.
By design, the Uniform Special Deposits Act may delay a realization by a creditor until
after a determination of the occurrence of a contingency in an account agreement, but that delay
is for the purpose of facilitating an underlying public policy and is coincident with the
determination of the definitive property interest. A delay for the purpose of facilitating one of the
legitimate policy purposes on the “white list” would be for a permissible purpose; it must be
“stated” in the account agreement, and because of the provisions of Section 6, comport with the
permissible purpose for so long as the deposit is maintained. The requirement that the purpose be
stated is intended as a minimal discipline on the contracting parties; it reminds them that the
protections of the Uniform Special Deposits Act might not be available if the discretion of the
contracting parties is abused, and an example of such abuse would occur when a special deposit
is established for the purpose of defrauding or evading creditors.
Section 3. Scope; Choice of Law; Forum
(a) This [act] applies to a special deposit under an account agreement that states the
intention of the parties to establish a special deposit governed by this [act], regardless of whether
a party to the account agreement or a transaction related to the special deposit, or the special
deposit itself, has a reasonable relation to this state. 18
(b) The parties to an account agreement may choose a forum in this state for settling a
dispute arising out of the special deposit, regardless of whether a party to the account agreement
or a transaction related to the special deposit, or the special deposit itself, has a reasonable
relation to this state.
(c) This [act] does not affect:
(1) a right or obligation relating to a deposit other than a special deposit under this
[act]; or
(2) the voidability of a deposit or transfer that is fraudulent or voidable under
other law.
Comment
1. Choice of Law. The Uniform Special Deposits Act is an “opt-in” statute, meaning that
the parties to the account agreement must affirmatively decide to seek its protections. This also
means that the parties need to select the law of a state that has adopted the Uniform Special
Deposits Act, which could be the state where the parties are situated, or it is possible that the
parties are all situated in a state that has not adopted the Uniform Special Deposits Act, in which
case the parties will need to select an alternative governing law. The Uniform Special Deposits
Act facilitates such a selection, and the chosen governing law does not need to have a reasonable
relationship to the parties to the account agreement, the special deposit, or any transaction
associated with the special deposit. Although the parties to an account agreement are electing to
be governed by the law of a state that has enacted the Uniform Special Deposits Act, it is
possible that a court in the forum state will not enforce the parties’ intention to be governed by
law other than the law of the forum state. The court may apply the law of the forum state with
respect to creditors’ rights, injunctions, recoupment, and set off. The likelihood of such a result
may be reduced if the parties include an exclusive choice-of-forum clause in the account
agreement that selects as the exclusive forum a state that has also enacted the Uniform Special
Deposits Act.
2. Choice of Law Implications. If an account agreement does not choose to be governed
by the Uniform Special Deposits Act, then there has been no “opt in”, which is required for
statutory coverage. This type of deposit (i.e., a deposit where the account agreement does not
select coverage by the Uniform Special Deposits Act) will be governed by other law, most
probably the law of the jurisdiction in which the bank holding the deposit is located.
3. Choice of Forum. The same policy considerations supporting a broad choice-of-law
clause support the inclusion of a broad choice-of-forum provision. Given that the statute is an
“opt in”, it is especially important that banks have confidence in selecting the substantive law 19
and also in the predictability of the forum to resolve disputes. The choice-of-forum provision is
modeled after Section 5-116(e) of the Uniform Commercial Code.
4. Scope. Subsection (c)(1) acknowledges that there are other laws that may confer
special rights or obligations on certain deposits, including deposits that may be considered
“special deposits” under other law, and the Uniform Special Deposits Act is not intended in any
way to displace such other law. Subsection (c)(2) works with the permissible purpose
requirement and is intended to signal that a special deposit that is fraudulent or voidable under
other law would not constitute a special deposit under the Uniform Special Deposits Act. An
account agreement creating a special deposit that is fraudulent or voidable under other law is a
nullity, and would not be for a permissible purpose.
Section 4. Variation by Agreement or Amendment
(a) The effect of Sections 2 through 6, 8 through 11, and 14 may not be varied by
agreement, except as provided in those sections. Subject to subsection (b), the effect of Sections
7, 12, and 13 may be varied by agreement.
(b) A provision in an account agreement or other record that substantially excuses
liability or substantially limits remedies for failure to perform an obligation under this [act] is not
sufficient to vary the effect of a provision of this [act].
(c) If a beneficiary is a party to an account agreement, the bank and the depositor may
amend the agreement without the consent of the beneficiary only if the agreement expressly
permits the amendment.
(d) If a beneficiary is not a party to an account agreement and the bank and the depositor
know the beneficiary has knowledge of the agreement’s terms, the bank and the depositor may
amend the agreement without the consent of the beneficiary only if the amendment does not
adversely and materially affect a payment right of the beneficiary.
(e) If a beneficiary is not a party to an account agreement and the bank and the depositor
do not know whether the beneficiary has knowledge of the agreement’s terms, the bank and the
depositor may amend the agreement without the consent of the beneficiary only if the 20
amendment is made in good faith.
Comment
1. Variation by Agreement. The account agreement will designate the special deposit
and trigger coverage of the Uniform Special Deposits Act if the special deposit satisfies the
requirements in Section 5. The Uniform Special Deposits Act embraces freedom of contract, and
because the statute is drafted as an “opt in”, the drafters believed it important to enable the
parties to the account agreement to have flexibility. Consequently, the parties may vary the effect
of certain statutory rules. As with other uniform acts, the statute has particular rules that are so
fundamental that they may not be varied by agreement, such as the requirement that the special
deposit be for a permissible purpose. Because statutory application is itself the product of a
decision to “opt in”, it is in the parties’ control if they do not wish to be covered by the Uniform
Special Deposits Act. The sections that are variable by agreement, such as Sections 7 and 13,
include default rules that would be applicable if the parties to an account agreement failed to
address the topics that these sections cover.
The permitted variation by agreement does not need to be done in the account agreement
that establishes the special deposit. It may be done there, but it may also be done in another
agreement of the parties and the drafters are mindful that banks will customarily present
customers with several agreements covering different bank products. The Uniform Special
Deposits Act acknowledges and accommodates this banking practice.
2. General Exculpation Ineffective. Subsection (b) renders ineffective a generalized
provision excusing all liability, or a provision that effectively limits any effective remedies for a
breach. These types of provisions are rare, but they do exist and would interfere with
fundamental elements of the Uniform Special Deposits Act.
3. Beneficiary Protection. There is a wide range of special deposits and the account
agreements establishing such deposits are also diverse. In some, the beneficiary is a party and in
others the agreement is exclusively between the depositor and the bank as observed in the
Prefatory Note and described in the comments to Section 2. Subsection (c) covers the account
agreements where the beneficiary is a party and it recites a familiar rule – the account agreement
may not be amended without the beneficiary’s consent unless doing so is expressly permitted by
an agreement that the beneficiary executed. If multiple beneficiaries are parties to the account
agreement, each beneficiary’s consent would be required unless the account agreement provides
otherwise. Subsection (d) covers account agreements where the beneficiary is not a party but has
knowledge of the material terms of the agreement that is being amended (and the definitional
section provides that only actual knowledge is sufficient with respect to a beneficiary). In these
types of special deposits, the beneficiary may be injured if the account agreement is amended.
Subsection (d) renders an amendment ineffective if it should adversely and materially affect the
beneficiary’s payment rights. This provision is consistent with case law interpreting the right of a
third-party beneficiary who had similar knowledge. In the case of a special deposit, the
fundamental expectation of a beneficiary who has knowledge of the terms of the account
agreement concerning the special deposit relates to the beneficiary’s expectation that, depending
on resolution of the contingency, it will receive a payment funded with proceeds from the special 21
deposit. Therefore, Section 4 (d) more precisely protects that expectation than would a general
reliance on third-party beneficiary law. Under Section 4 (d), the beneficiary’s consent to amend
the account agreement is not required (and, again, this assumes the beneficiary is not a party to
the original account agreement) unless the amendment would adversely and materially affect a
payment right of the beneficiary, and the bank and the depositor have knowledge that the
beneficiary knows the terms of the original agreement.
A bank may wish to make provision in the account agreement for a representation and
warranty to be made by the depositor at the time the original account agreement is executed, and
repeated whenever it is amended, as to whether any beneficiary has knowledge of the account
agreement’s existence or terms. Further, because a beneficiary with payment expectations might
sustain damages in the event of an amendment that adversely and materially affects its payment
rights, a bank might require that the depositor reaffirm its representation and warranty “as of” the
time of payment, such that the bank has documentary assurance of a condition material to the
bank’s decision to agree to an amendment – namely, that the beneficiary has no knowledge of
the original account agreement or any amendment. If a beneficiary sustains damages from an
amendment that adversely and materially affects a beneficiary’s payment rights, and the bank has
relied on documentary assurance from the depositor that the beneficiary did not have the required
knowledge, the bank making payment would have a defense provided in Section 12 (f) of the
Act, which exculpates a bank for its reliance on the genuineness of a record when it makes a
payment. In this circumstance, the bank would have relied on the written assurance from the
depositor that no beneficiary had knowledge of the original account agreement or its amendment,
and this record would provide the bank with a liability defense, which is the intention underlying
Section 12 (f) of the Act. Of course, if the depositor cannot make the representation and
warranty, then the bank might appropriately decline to amend the original account agreement,
because of the risk that a beneficiary could sustain damages if the amendment adversely and
materially affects a payment right.
Subsection (e) covers the account agreements where the beneficiary is not a party and the
bank and depositor do not know if the beneficiary has knowledge of the material terms of the
agreement that is being amended, and renders the amendment ineffective if it is not made in
good faith by both the bank and depositor. This provision would also cover the scenario where
the bank and depositor know that the beneficiary does not have knowledge of the material terms
of the agreement that is being amended. This provision is consistent with case law interpreting
the right of a third-party beneficiary without the requisite knowledge, but the Uniform Special
Deposits Act contains what is regarded as a modern definition of “good faith”. The definition
includes the “observance of reasonable commercial standards of fair dealing”, a component that
may not be seen in some of the earlier cases. This component may provide additional protection
to a beneficiary as defined in the Uniform Special Deposits Act.
If the depositor does not know whether a beneficiary that is not a party to the account
agreement has knowledge of its terms, a bank may wish to make provision in the account
agreement for a representation and warranty to be made by the depositor at the time the original
account agreement is executed, and repeated whenever it is amended, stating that the depositor
does not know whether the beneficiary has knowledge of the account agreement’s terms and the
depositor is acting in good faith. Similarly as described above, if such a beneficiary is harmed 22
by an amendment to the account agreement and seeks recovery from the bank, the bank would be
protected by Section 12 (f) and may rely on the written assurance from the depositor that the
depositor did not know such beneficiary had knowledge of the account agreement’s terms and
was acting in good faith, and therefore the consent of such beneficiary was not required.
Section 5. Requirements for Special Deposit
A deposit is a special deposit if it is:
(1) a deposit of funds in a bank under an account agreement;
(2) for the benefit of at least two beneficiaries, one or more of which may be a
depositor;
(3) denominated in a medium of exchange that is currently authorized or adopted
by a domestic or foreign government;
(4) for a permissible purpose stated in the account agreement; and
(5) subject to a contingency.
Comment
Features of Special Deposits. This provision sets forth the required elements for a
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.
Subsection (2) provides that the account agreement must be for the benefit of at least two
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,
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
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.
Subsection (3) requires that the special deposit be denominated in “a medium of 23
exchange that is currently authorized or adopted by a domestic or foreign government”; this
language is based on the Uniform Commercial Code’s definition of “money”. This element is
intended to include currencies adopted by governments, such as the U.S. dollar or the Euro. It is
also an important scope limitation and excludes deposits of securities, digital tokens,
cryptocurrency (unless it has been recognized as currency by a domestic or foreign government),
commodities and other non-monetary items that may be deposited in a bank. For example, El
Salvador has adopted Bitcoin as a legally recognized national currency, so it follows that it
would be possible for a special deposit account to be denominated in Bitcoin if the parties to the
account agreement, including the bank, all agreed.
Subsection (4) contains another important required element that the deposit be for a
permissible purpose, which is defined in Section 2 and further addressed in Section 6. Thi s
requirement is intended to provide some constraint to the kinds of general deposits that may be
designated as special. Because the Uniform Special Deposits Act affords special protection to the
special deposit, it is a required element that the protections apply to a limited subcategory of
general deposits, and deposits that are considered fraudulent or voidable under other law would
not qualify.
Subsection (5) requires that there be a contingency, another term defined in Section 2,
that will trigger the bank’s obligation to pay a beneficiary. While this payment obligation is
independent of the special deposit itself, the bank holding the special deposit will customarily
fund the “due to” beneficiary by debiting the special deposit. The contingency may concern the
resolution of conditions, occurrence of events, passage of time (with the occurrence of another
contingency), or combinations thereof. The requirement that the special deposit is subject to a
contingency is an important feature that distinguishes a special deposit from a general deposit
because it prevents each beneficiary from an entitlement to the special deposit until such time as
the contingency has occurred.
Section 6. Permissible Purpose
(a) A special deposit must serve at least one permissible purpose stated in the account
agreement from the time the special deposit is created in the account agreement until termination
of the special deposit.
(b) If, before termination of the special deposit, the bank or a court determines the special
deposit no longer satisfies subsection (a), Sections 8 through 11 cease to apply to any funds
deposited in the special deposit after the special deposit ceases to satisfy subsection (a).
(c) If, before termination of a special deposit, the bank determines the special deposit no
longer satisfies subsection (a), the bank may take action it believes is necessary under the 24
circumstances, including terminating the special deposit.
Comment
1. Permissible Purpose Requirement. Subsection (a) sets forth a fundamental feature of
a special deposit. A criterion making a deposit “special” is if the deposit is for one or more
permissible purposes designated in the account agreement. A special deposit must be for one or
more of these permissible purposes. A permissible purpose stated in the account agreement must
exist at the outset and continue for the duration of the special deposit. This is true whether
termination is determined under the account agreement or under Section 13 in the absence of a
termination provision in the agreement.
2. Permissible Purposes Over Time. Subsections (b) and (c) address the consequences
to the special deposit if the purpose of the special deposit changes over time. If, during the
pendency of a special deposit, no purpose stated in the account agreement remains a permissible
purpose, or if the parties use the special deposit for a different purpose than a purpose stated in
the account agreement, the protections of the Uniform Special Deposits Act are no longer
applicable with respect to any balance of the special deposit that is credited on or after that time.
A bank or a court of competent jurisdiction will make the necessary determination, and the date
the protections of the Uniform Special Deposits Act fall away will relate back to the time that the
purpose ceased to be a permissible purpose. This protects the existing balance of funds deposited
in the special deposit prior to such determination but does not extend the Uniform Special
Deposits Act’s protections when there is no longer a stated permissible purpose. The part of the
balance of the special deposit that is no longer protected will be treated as a general deposit, and
will be without the protections that Sections 8-11 provide in the event of depositor bankruptcy,
creditor process, and/or recoupment and set off. If a permissible purpose becomes impermissible
under other law, there may be additional consequences to the existing balance of the funds
deposited in the special deposit, which would be governed by other law.
In exercising its discretion, the bank holding the special deposit might decide that it must
terminate the entire relationship with the depositor (e.g., because it is exposed to material
liability under federal or state anti-money laundering laws). If the parties to an account
agreement are concerned about this possibility, they may include more detailed provisions in the
account agreement (perhaps referencing an “as of” debit to the special deposit and an offsetting
“as of” credit to a new general deposit). Similarly, if the parties to an account agreement
anticipate that the permissible purpose may need to change in the future, that can be addressed in
the account agreement to avoid inadvertently losing protection of the Uniform Special Deposits
Act. These provisions are intended to clarify the application of the protections of the Uniform
Special Deposits Act, and are not meant to disturb the general right afforded to banks under other
law to decide to close any account.
Section 7. Payment to Beneficiary by Bank
(a) Unless the account agreement provides otherwise, the bank is obligated to pay a
beneficiary if there are sufficient actually and finally collected funds in the balance of the special 25
deposit.
(b) Except as provided in subsection (c), the obligation to pay the beneficiary is excused
if the funds available in the special deposit are insufficient to cover such payment.
(c) Unless the account agreement provides otherwise, if the funds available in the special
deposit are insufficient to cover an obligation to pay a beneficiary, a beneficiary may elect to be
paid the funds that are available or, if there is more than one beneficiary, a pro rata share of the
funds available. Payment to the beneficiary making the election under this subsection discharges
the bank’s obligation to pay a beneficiary and does not constitute an accord and satisfaction with
respect to another person obligated to the beneficiary.
(d) Unless the account agreement provides otherwise, the obligation of the bank obligated
to pay a beneficiary is immediately due and payable.
(e) The bank may discharge its obligation under this section by:
(1) crediting another transaction account of the beneficiary; or
(2) taking other action that:
(A) is permitted under the account agreement for the bank to obtain a
discharge; or
(B) otherwise would constitute a discharge under law.
(f) If the bank obligated to pay a beneficiary has incurred an obligation to discharge the
obligation of another person, the obligation of the other person is discharged if action by the
bank under subsection (e) would constitute a discharge of the obligation of the other person
under law that determines whether an obligation is satisfied.
Comment
“Due to” Obligations. Section 7 implements one of the key features of a special deposit
governed by the Uniform Special Deposits Act. The special deposit receives protections in the 26
Uniform Special Deposits Act but the bank’s obligation to pay a beneficiary, and the bank’s
action to discharge that payable, do not receive such protections. Subsection (a) reflects that the
bank’s debt to the beneficiary accrues when a bank is obligated to pay a beneficiary. “Obligated
to pay a beneficiary” is defined in Section 2 with respect to the contingency being determined
and the bank having knowledge of the determination. Subsection (a) also provides for the
obvious – the bank holding the special deposit will fund the “due to” to the beneficiary by
debiting the special deposit. The “actually and finally collected funds” element of this subsection
clarifies that a bank is not obligated to pay a beneficiary if there are not sufficient funds in the
special deposit account. Similarly, subsection (b) acknowledges that a bank has no obligation to
satisfy a “due to” obligation to a beneficiary if the funds in the special deposit are not sufficient
to cover the entitlement to such beneficiary. This statutory language is meant to be consistent
with other areas of law, such as Section 4-401(a) of the Uniform Commercial Code and Section
10B(b)(4) of the Federal Reserve Act (12 U.S.C. § 347b), which make clear that a bank is not
tacitly committed to provide needed credit. Thus, a bank is not obligated to provide funds in
addition to those on deposit in the special deposit to satisfy a “due to” obligation to a beneficiary
if the funds in the special deposit are not sufficient. The parties may agree, however, to a
different arrangement if they wish. For example, the bank can agree to pay by overdraft or to
make a partial payment by including such terms in the account agreement or another agreement
between the parties.
Section 7(c) provides a default rule that when funds in a special deposit are insufficient to
pay fully a beneficiary entitled to payment, the beneficiary may elect to receive the available
funds and that payment of those funds discharges the bank’s obligation to pay the beneficiary.
The default rule in Section 7(c) may, under Section 4(a) and the express terms of Section 7(c), be
varied by agreement. Any person with an interest in a special deposit should be mindful that, if
Section 7(c) is not varied by agreement, the underlying obligor (assuming there is one) will not
be discharged on any obligation to pay a beneficiary, even though funds that may have been
allocated for that purpose and collected in a special deposit, have been paid out in their entirety
to one or more beneficiaries. The default rule created by subsection (c) with respect to payments
to be made to beneficiaries even if the funds in the special deposit account are insufficient to
meet the entire payment amount contemplated is intended as a protection for certain beneficiaries
who may not have the necessary bargaining power with respect to the counterparties to an
account agreement. This could represent a trap for an unwary obligor, and exposes such an
obligor to a risk of additional liability if the provision is not altered by agreement because the
underlying obligation remains outstanding even after substantially all the funds in the special
deposit are paid out to an electing beneficiary. Other law determines what credit the obligor will
receive for the partial payment from the special deposit. In other contexts, the default rule may
result in outcomes inconsistent with the wishes of the parties. For example, in payment and
clearing system rules, there may be elaborate arrangements made to deal with account shortfalls
that would be wholly inconsistent with the default rule in subsection (c). Similarly, the default
rule in subsection (c) may not be workable where there are multiple beneficiaries or payments
need to be made through payment systems, which rely almost exclusively on straight-through
processing. Therefore, parties considering the use of the Uniform Special Deposits Act should
pay careful attention to whether it is necessary in the context of their transactions to draft an
alternate approach to the default rule in the account agreement. Section 4(a) and Section 7(c)
permit such a variation. 27
Subsection (d) addresses the remaining detail as to when the bank’s obligation to the
beneficiary is due and payable and provides that this “due to” is immediately due and payable
unless the account agreement provides differently. In some cases, a bank could have multiple
obligations that arise from an initial obligation to pay a beneficiary.
Subsection (e) addresses the next obvious issue, and that is how the bank discharges its
“due to” to the beneficiary. This section provides that a bank obligated to pay a beneficiary
might fulfill its payment obligation by crediting another deposit account of the beneficiary with
the obligated bank. This identical issue is addressed in Section 4A-405 of the Uniform
Commercial Code, which covers the obligation of the beneficiary’s bank to pay a beneficiary of
a funds transfer. In substance, subsection (e) is drafted to incorporate the substantially similar
concepts from Article 4A. The purpose of this subsection is to protect the special deposit itself
but not the obligation of the bank to pay the beneficiary or the actual payment to the beneficiary.
Subsection (f) addresses the situation where the bank’s obligation to pay a beneficiary
will discharge the obligation of another person or persons (for example, in a simple escrow
between a buyer and a seller, it would be typical for the bank holding the earnest money in a
special deposit to pay it to the seller on closing, thereby helping to discharge the buyer’s overall
obligation to pay the purchase price), and explains that payment of the bank’s obligation to a
beneficiary will discharge the other underlying obligation to another person or persons.
Subsection (f) is of special importance to financial market infrastructures where an infrastructure
payment may discharge the underlying obligations of many participants.
Section 8. Property Interest of Depositor or Beneficiary
(a) Neither a depositor nor a beneficiary has a property interest in a special deposit.
(b) Any property interest with respect to a special deposit is only in the right to receive
payment if the bank is obligated to pay a beneficiary and not in the special deposit itself. Any
property interest under this subsection is determined under other law.
Comment
1. No Property Interest in Special Deposit. Section 8 contains one of the key protective
provisions of the Uniform Special Deposits Act that makes the special deposit “bankruptcy
remote” from the depositor. Neither a depositor nor a beneficiary has a property interest in a
special deposit. Any interest that the depositor has with respect to a special deposit relates to its
capacity as a beneficiary and rights that are triggered by the determination of the occurrence of
the contingency. If the depositor is not a beneficiary, then it has no rights in the special deposit.
Note that a depositor may have rights as a beneficiary if there is a residual in a special deposit
after all other beneficiaries have been paid out because of Section 13(b). But in this narrow
instance, the depositor’s property right is contingent on the bank being obligated to pay the
residual balance to the depositor, who is considered a beneficiary for this purpose. 28
2. Property Interest in Right to Receive Payment. Although Section 8(a) makes it clear
that a beneficiary has no property interest in the special deposit, under other law a beneficiary
may presently have a property interest in the beneficiary’s contingent right to receive payment
after the bank has become obligated to pay the beneficiary. Under other law, a creditor of the
beneficiary may be able to create a lien on that contingent right of the beneficiary that may be
enforced against the beneficiary after the bank has become obligated to pay the beneficiary.
However, under Section 9 such a lien is not enforceable against the bank until it has actually
become obligated to pay the beneficiary and then only as provided in Section 9(b).
Section 9. When Creditor Process Enforceable Against Bank
(a) Subject to subsection (b), creditor process with respect to a special deposit is not
enforceable against the bank holding the special deposit.
(b) Creditor process is enforceable against the bank holding a special deposit with respect
to an amount the bank is obligated to pay a beneficiary or a depositor if the process:
(1) is served on the bank;
(2) provides sufficient information to permit the bank to identify the depositor or
the beneficiary from the bank’s books and records; and
(3) gives the bank a reasonable opportunity to act on the process.
(c) Creditor process served on a bank before it is enforceable against the bank under
subsection (b) does not create a right of the creditor against the bank or a duty of the bank to the
creditor. Other law determines whether creditor process creates a lien enforceable against the
beneficiary on a contingent interest of a beneficiary, including a depositor as a beneficiary, even
if not enforceable against the bank.
Comment
1. Protection from Creditor Process. Section 9 is another key protective provision of
the Uniform Special Deposits Act. This protects the special deposit from creditor process that
might cause the bank holding the special deposit to “freeze” all or part of the special deposit,
which would disable the special deposit from performing its permissible purpose. Creditor
process is only enforceable on a bank if the requirements in subsection (b) are met, and then the
process restrains only the bank’s obligation to pay a beneficiary. “Obligated to pay a
beneficiary” is defined in Section 2, and requires that a contingency has already occurred, and 29
that the bank has knowledge of that fact and as a result, a beneficiary is entitled to payment.
Creditor process cannot be effective against the special deposit itself, or any funds in the special
deposit that have not already been determined under the account agreement to be subject to an
obligation to pay a specific beneficiary. Again, the special deposit is protected from creditor
process so that the special deposit might foster the policy objectives of the special deposit.
Protecting the special deposit from premature creditor process is a fundamental protection of the
Uniform Special Deposits Act. The term depositor is included in 9(b) for the elimination of any
doubt, but it should be noted that the only time a depositor would have any rights would be in its
capacity as a beneficiary.
2. Examples. Example 1: Creditor obtains a judgment against beneficiary, which is a
beneficiary of a special deposit held by bank. After bank becomes obligated to pay beneficiary
(after a contingency has occurred and the bank has knowledge), creditor serves a writ of
garnishment on bank. The writ is enforceable if the writ provides sufficient information to permit
bank to identify, from bank’s books and records, beneficiary’s interest in the special deposit and
affords bank a reasonable amount of time to act on the process before paying.
Example 2: Creditor obtains a judgment against beneficiary, which is a beneficiary of a
special deposit held by bank. Creditor serves a writ of garnishment on bank before bank becomes
obligated to pay beneficiary (i.e., before determination of the contingency). The premature
garnishment is not enforceable against bank either at the time it is served or later, after
determination of the contingency, when the bank becomes obligated to pay beneficiary
(additional process would need to be served after determination of the contingency). Whether a
beneficiary has a property interest in bank’s contingent obligation to pay all or any portion of the
special deposit to beneficiary, and whether service of the writ of garnishment creates a present
lien on such a property interest enforceable against the beneficiary, rather than the bank holding
the special deposit, is determined by other law.
Where a special deposit is intended to serve a payment or clearing system account with
multiple beneficiaries, a creditor’s writ of garnishment on the bank can only be enforceable
against a determined payment right of a beneficiary, and not against the special deposit itself.
Section 10. Injunction or Similar Relief
A court may enjoin, or grant similar relief that would have the effect of enjoining, a bank
from paying a depositor or beneficiary only if payment would constitute a material fraud or
facilitate a material fraud with respect to a special deposit.
Comment
Protection from Injunctions. Section 9, above, protects the special deposit from creditor
process. Typically, creditor process is a remedy that is addressed to a property interest of some
kind. The same or a similar result can be obtained by seeking a temporary restraining order or
preliminary injunction against a bank holding a special deposit. This section avoids that result, 30
and creates a safeguard for situations of fraud that might occur that is modeled after Section 5-
109(b) of the Uniform Commercial Code, which addresses fraud with respect to the issuer of a
letter of credit.
Section 11. Recoupment or Set Off
(a) Except as provided in subsection (b) or (c), a bank may not exercise a right of
recoupment or set off against a special deposit.
(b) An account agreement may authorize the bank to debit the special deposit:
(1) when the bank becomes obligated to pay a beneficiary, in an amount that does
not exceed the amount necessary to discharge the obligation;
(2) for a fee assessed by the bank that relates to an overdraft in the special deposit
account;
(3) for costs incurred by the bank that relate directly to the special deposit; or
(4) to reverse an earlier credit posted by the bank to the balance of the special
deposit account, if the reversal occurs under an event or circumstance warranted under other law
of this state governing mistake and restitution.
(c) The bank holding a special deposit may exercise a right of recoupment or set off
against an obligation to pay a beneficiary, even if the bank funds payment from the special
deposit.
Comment
Limited Exceptions to No Set Off. The special deposit receives protections under the
Uniform Special Deposits Act, including protection from the bank’s right of recoupment or set
off. This general rule is codified in (a). There are some significant exceptions. First, it is
important to clarify that the prohibition of set off and recoupment would not prohibit a bank
funding its obligation to pay a beneficiary with a debit to the special deposit. This is
fundamental and it is inherent in the special deposit that it exists to fund future payments to
beneficiaries. Subsection (b)(1) makes this clear.
Note, too, that the funding of the “payable” to a beneficiary shows that there is now an
independent obligation of the bank to a beneficiary separate and distinct from the special deposit, 31
where, before the determination of the contingency, the payment recipient was not yet
determined. This obligation to pay a beneficiary is not protected by the Uniform Special
Deposits Act and is within the reach of either the bank creditor or a third-party creditor.
Subsections (b)(2)-(4) address other common operational issues with respect to a current
account. Subsection (b)(2) addresses the current account when the balance is negative, meaning
that the account owes the bank an amount sufficient to bring the balance to zero, together with
interest on the deficit balance. Typically, the bank will also assess some kind of fee for the
overdraft, and the fee will often be added to the deficit balance. The subsection permits this.
Subsection (b)(3) permits the bank to debit the special deposit for “costs” that “relate
directly to the special deposit”. One example would be costs associated with the bank’s defense
of a creditor attack on the special deposit, including the bank’s attorneys’ fees. The costs might
also be borne by a third party like a securities custodian, who might also need to hire counsel to
defend securities held in custody and might be indemnified by the bank for performing this
function on behalf of the bank as a custodian. It is also useful to consider a “cost” that would not
be recoverable here. Let us suppose that the Depositor has defaulted under a separate credit
agreement between the bank holding the special deposit and the Depositor, and that the bank has
declared a default and accelerated the amount due under the credit agreement. This amount
could not be set off against the balance of the special deposit, because the credit agreement is not
directly related to the special deposit. However, if there is an amount due to the depositor as a
beneficiary, it might be subject to a set off under Subsection (c). This result is consistent with
the application of setoff principles in the context of the structure of the Act. Under the Act, the
depositor has no ownership interest in the special deposit other than a possible payment right as a
beneficiary, in the event that a contingency is determined triggering such a payment right, at
which point the necessary mutuality of obligation could exist. Note that the scope of what is
considered a “cost” not only includes amounts paid to third parties by the bank related to the
special deposit, but also losses suffered by the bank as a result of its performance of the account
agreement governing the special deposit, such as unpaid fees under the account agreement.
Subsection (b)(4) enables the bank holding the special deposit to debit the special deposit
to reverse an earlier credit. There are occasions when mistakes are made in handling a funds
transfer. See, e.g., Citibank, N.A. v. Brigade Capital Management, 49 F.4
th
42 (2d Cir. 2022)
(involving a mistake that affected $900 million in funds transfers). This provision enables the
bank to correct a mistaken transfer that increases the balance of a special deposit. Subsection
(b)(4) could address both an event or circumstance prescribed under the state’s laws governing
mistake or restitution, or may simply be a mistaken credit by the bank due to a clerical or other
error.
Subsection (c) exists for a different purpose and that is to make clear that, upon accrual of
the bank’s obligation to pay the beneficiary, that independent obligation is subject to the bank’s
right of recoupment or set off (if the beneficiary has a mature undischarged debt to the bank, that
debt can be set off against the obligation of the bank to pay the beneficiary, again assuming that
it is immediately due and payable, which is the default rule). This is not an obligation that arises
from the special deposit itself, but rather from the contingency being determined, which triggers
the independent obligation of the bank to pay the beneficiary. 32
Section 12. Duties and Liability of Bank
(a) A bank does not have a fiduciary duty to any person with respect to a special deposit.
(b) When the bank holding a special deposit becomes obligated to pay a beneficiary, a
debtor-creditor relationship arises between the bank and beneficiary.
(c) The bank holding a special deposit has a duty to a beneficiary to comply with the
account agreement and this [act].
(d) If the bank holding a special deposit does not comply with the account agreement or
this [act], the bank is liable to a depositor or beneficiary only for damages proximately caused by
the noncompliance. Except as provided by other law of this state, the bank is not liable for
consequential, special, or punitive damages.
(e) The bank holding a special deposit may rely on records presented in compliance with
the account agreement to determine whether the bank is obligated to pay a beneficiary.
(f) If the account agreement requires payment on presentation of a record, the bank shall
determine within a reasonable time whether the record is sufficient to require payment. If the
agreement requires action by the bank on presentation of a record, the bank is not liable for
relying in good faith on the genuineness of the record if the record appears on its face to be
genuine.
(g) Unless the account agreement provides otherwise, the bank is not required to
determine whether a permissible purpose stated in the agreement continues to exist.
Comment
1. Relationship between Bank and Beneficiary. A special deposit is a form of deposit
which, like all bank deposits, establishes a debtor-creditor relationship between the bank and its
customer. Some existing case law addressing “special deposits” suggesting that the bank holding
the funds deposited holds it in “custody” and the relationship is in the nature of a bailment is
rejected in the Uniform Special Deposits Act. In modern commercial practice, no financial
institution takes funds from a customer and holds funds in custody. This bailment concept is 33
anachronistic and not feasible in modern banking practice. It is also sometimes observed that a
special deposit is a “poor man’s trust”, where the special deposit creates a trust relationship
between the bank, as trustee, and the persons entitled to be paid, the trust “beneficiaries”. This
conception is rejected by the Uniform Special Deposits Act as well. If the parties want to create a
trust, they should create a trust and not use a special deposit. The Uniform Special Deposits Act
also makes clear that it does not create a fiduciary relationship between the bank and any person.
Any argument that a bank is acting as a fiduciary would likely come from a beneficiary, but there
could be other scenarios.
2. Duties and Breach. Importantly, the Uniform Special Deposits Act makes clear that
the ultimate obligation of a bank holding a covered special deposit will be due to a beneficiary
once the occurrence of a contingency is determined. If a duty expressed in either the account
agreement or the Uniform Special Deposits Act is breached by the bank, the bank may be liable
to the beneficiary for damages (not including consequential, special, or punitive damages), and is
not liable to any other person, including a depositor. The duty runs only to a beneficiary (which
could include a depositor) as a person that the bank is obligated to pay from the special deposit.
However, the depositor or beneficiary may enforce the account agreement against the bank
holding the special deposit. The depositor could be the person who established the special
deposit and might be the best-positioned person to enforce the account agreement. In the
landlord-tenant example, the landlord that establishes the special deposit may be better
positioned to enforce the account agreement against the bank than the individual tenants that
have deposited funds.
3. Reliance on Documents. The Uniform Special Deposits Act embraces current
commercial practice where the bank holding the special deposit will rely upon a record, if it,
rather than a third party, is to determine the contingency. This determination function, because it
is so consequential, will usually be memorialized in careful detail in the account agreement.
Although the parties may rely on the presentation of records, a special deposit is not a letter of
credit under Article 5 of the Uniform Commercial Code, and it would be prudent for the account
agreement to so state. On other occasions, a bank might rely upon an authenticated payment
order, perhaps as specified in Section 4A-202 of the Uniform Commercial Code. If so, the
payment order and its acceptance or rejection will be governed by Article 4A, which is
incorporated through Section 14, infr a.
4. Permissible Purpose. Notwithstanding the requirement in Section 6 that a permissible
purpose exist for the duration of the special deposit, a bank does not have a duty under the
Uniform Special Deposits Act to make such a determination, but it may be required under other
law to make such a determination (for example, to determine under federal or state anti-money
laundering law if a special deposit violates prohibitions against money laundering), or it may be
required to act because another person has made such a determination under other law, including
a court of competent jurisdiction.
Section 13. Term and Termination
(a) Unless otherwise provided in the account agreement, a special deposit terminates five 34
years after the date the special deposit was first funded.
(b) Unless otherwise provided in the account agreement, if the bank cannot identify or
locate a beneficiary entitled to payment when the special deposit is terminated, and a balance
remains in the special deposit, the bank shall pay the balance to the depositor or depositors as a
beneficiary or beneficiaries.
(c) A bank that pays the remaining balance as provided under subsection (b) has no
further obligation with respect to the special deposit.
Comment
1. Applicability of Termination Provision. The account agreement would normally be
expected to provide, and should provide, a termination provision. The terms of Section 13(a)
provide a default rule if the account agreement is silent about termination. The default rule would
end the special deposit five years after the special deposit was first funded. A special deposit is
first funded when a transfer of funds into the special deposit produces its first positive balance.
2. Right of Remission. Subsection (b) deals with the situation where, notwithstanding a
diligent effort to locate all of the beneficiaries, the bank holding the special deposit is unable to
do so. In this situation, whoever deposited funds into the special deposit will be considered a
beneficiary and the funds will be repaid to such depositor as a beneficiary. The provision avoids
a forfeiture of the remaining balance to the state, which is the probable result of the escheatment
law of most states. The drafters assume that the deposited funds will be apportioned among
depositors, appropriately taking into account the amount of their deposits into the account, prior
payments from the account, and earnings on the account.
Section 14. Principles of Law and Equity
[Cite to state’s Uniform Commercial Code], consumer protection law, law governing
deposits generally, law related to escheat and abandoned or unclaimed property, and the
principles of law and equity, including law related to capacity to contract, principal and agent,
estoppel, fraud, misrepresentation, duress, coercion, mistake, and bankruptcy, supplement this
[act] except to the extent inconsistent with this [act].
Comment
1. Applicability of Supplemental Principles of Law. This Section 14 is based on the 35
language from Section 1-103 of the Uniform Commercial Code, with the express addition of the
Uniform Commercial Code, consumer protection law, law governing deposits generally, and law
related to escheat and abandoned property. Certain provisions from the Uniform Commercial
Code, specifically Articles 1, 3, 4, 4A, 5, and 9, are likely to supplement this Uniform Special
Deposits Act for certain special deposits. As noted in the official comment to Section 1-103, this
language “states the basic relationship of the Uniform Commercial Code to supplemental bodies
of law”. Further, as noted in earlier comments, the special deposit is a subcategory of the general
deposit, and it is appropriate to supplement provisions of the Uniform Special Deposits Act with
general deposit law if that law does not conflict with any provision of the Act. When consumers
are affected, as in residential leases, it may be important to consider consumer protection
measures implemented by a state to protect consumers. It is not the intent of the drafters to
displace any applicable consumer protection law. The Uniform Special Deposits Act was drafted
in accordance with a minimalist philosophy, meaning that the drafters understood it would be
supplemented by other law, and the principal sources of such law are listed in Section 14.
Implicit in this drafting approach is the importance of contract law, as many features of the
special deposit arrangement will be determined by the parties in the account agreement.
Questions including when a deposit is received by a bank, who can make a deposit into a bank
account, and how adverse claims are treated will all be governed by the general law of deposits
in a state. It is understood that Section 14 will import that law to fill in coverage gaps.
2. Other Deposits. Section 3(c), supra, limits the effect of the Uniform Special Deposits
Act on other deposits taken by the bank.
Section 15. Uniformity of Application and Construction
In applying and construing this uniform act, a court shall consider the promotion of
uniformity of the law among jurisdictions that enact it.
Section 16. Transitional Provision
This [act] applies to:
(1) a special deposit made under an account agreement executed on or after [the
effective date of this [act]]; and
(2) a deposit made under an agreement executed before [the effective date of this
[act]], if:
(A) all parties entitled to amend the agreement agree to make the deposit a
special deposit governed by this [act]; and
(B) the special deposit referenced in the amended agreement satisfies 36
Section 5.
Comment
Existing Special Deposits. A number of commentators observed that parties to existing
special deposits might wish to be covered by the Uniform Special Deposits Act when it is
enacted. Section 16 provides that this can be accommodated through a simple amendment to the
account agreement. However, it is also important that the special deposit meet all the criteria set
out for special deposits in Section 5. Further, the amended agreement must set forth its
permissible purpose, which is another requirement of Section 5. While it is easy to apply the
Uniform Special Deposits Act to what might be called a “legacy special deposit”, some analysis
will nevertheless be necessary.
[Section 17. Severability]
[If a provision of this [act] or its application to a person or circumstance is held invalid,
the invalidity does not affect another provision or application that can be given effect without the
invalid provision.]
Legislative Note: Include this section only if the state lacks a general severability statute or a
decision by the highest court of the state stating a general rule of severability.
Section 18. Effective Date
This [act] takes effect . . . The ULC is a nonprofit formed in 1892 to create nonpartisan state legislation. Over 350 volunteer commissioners—lawyers,
judges, law professors, legislative staff, and others—work together to draft laws ranging from the Uniform Commercial Code to
acts on property, trusts and estates, family law, criminal law and other areas where uniformity of state law is desirable.
NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
Uniform Law Commission
111 N. Wabash Ave.
Suite 1010
Chicago, IL 60602
(312) 450- 6600 tel
www.uniformlaws.org
UNIFORM SPECIAL DEPOSITS ACT (2023)
Summary
The Uniform Law Commission drafted the Uniform Special Deposits Act (the “Act”) to provide
clarity on an area of law that has been subject to uncertainty for many years. A special deposit is
a deposit of money at a bank created for a particular purpose where the person entitled to the
money is only determined after a specified event or contingency occurs.
Special deposits play an important role in commerce and industry, but their use has been
diminished because of legal uncertainties. Various state laws improperly characterize special
deposits as something akin to a trust, bailment, or agency – which do not accurately describe how
special deposits are used in practice. Existing case law creates even more confusion because it
refers to bank practices that are no longer followed.
The Act establishes a framework for banks and their customers to utilize special deposits with
greater certainty of how such deposits will be treated under various circumstances. Importantly,
the Act is an “opt in” statute. Banks and their customers must specify in their account agreement
that they intend to be covered by the Uniform Special Deposits Act as enacted in a particular state.
This feature permits existing relationships to continue undisturbed, and lets parties choose to
utilize the protections provided by the Act when they wish. Matters not addressed by the Act are
controlled by general laws already governing deposits or contractual arrangements.
The Act remedies four key legal uncertainties. First, the Act clarifies what a “special deposit” is.
It establishes clear criteria for a deposit to be considered “special” under the Act. A special deposit
must be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii)
for the benefit of at least two beneficiaries (one or more of which may be a depositor), (iii)
denominated in money, (iv) for a permissible purpose identified in the account agreement, and (v)
subject to a contingency specified in the account agreement that is not certain to occur, but if it
does occur, creates the bank’s obligation to pay a beneficiary. If all those criteria are satisfied, the
deposit is a special deposit.
Second, the Act clarifies the treatment of a special deposit in the event of the bankruptcy of a
depositor. Under the current law of many states, it is unclear whether funds deposited into a special
deposit could be swept into the bankruptcy estate of the person who deposited them. A special
deposit under the Act is “bankruptcy remote” because Section 8 provides that neither a depositor
nor a beneficiary has a property interest in a special deposit. No person is entitled to funds in a
special deposit until the bank becomes obligated to pay a beneficiary. The only property interest
that may arise with respect to a special deposit is in the right to receive payment from the bank
after the occurrence of a contingency. 2
Third, the Act clarifies the applicability of creditor process on a special deposit. Under the current
law, a creditor can freeze a special deposit and interfere with the purpose that the deposit is
designed to achieve.
Section 9 of the Act provides that creditor process is not enforceable against the bank holding the
special deposit, except in limited circumstances. Instead, creditor process may be enforceable
against the bank holding a special deposit with respect to any amount that it must pay after the
determination of a contingency, but not on the special deposit itself. Section 10 provides a similar
limitation on using an injunction or temporary restraining order to achieve the same outcome.
Fourth, the Act provides clarity on the legality of the bank exercising a set off or right of
recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special
deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances.
Once a special deposit has been established under the Act, it creates an assignable and pledgeable
interest for a beneficiary – a definite and clear right to payment upon the occurrence of a
contingency and notice to the bank, where one may not otherwise exist. The Uniform Special
Deposits Act creates a mechanism for parties to a commercial transaction to obtain a low cost and
safe return on earnest money. The Uniform Special Deposits Act is narrowly tailored to cure these
four legal uncertainties and eliminate doubts so that parties can utilize special deposits with greater
confidence.
For more information about the Uniform Special Deposits Act, please contact Legislative Counsel
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,
judges, law professors, legislative staff, and others—work together to draft laws ranging from the Uniform Commercial Code to
acts on property, trusts and estates, family law, criminal law and other areas where uniformity of state law is desirable.
NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
Uniform Law Commission
111 N. Wabash Ave.
Suite 1010
Chicago, IL 60602
(312) 450- 6600 tel
www.uniformlaws.org
WHY STATES SHOULD ADOPT THE UNIFORM SPECIAL DEPOSITS ACT
A special deposit is a deposit of money at a bank where the person entitled to the money is only
determined after a contingency occurs. Special deposits perform important work in commerce and
industry throughout the United States. For example, consider a security deposit paid by a tenant to
a landlord, or the deposit to an account that will fund the payment to members of a court-approved
class action settlement. Special deposits could serve a variety of parties in business, commerce,
and other various contexts, but legal uncertainties have led many to avoid using them.
The Uniform Special Deposits Act (the “Act”) cures the legal uncertainties that prevent businesses
and commercial actors from making full use of the special deposit. Under the Act, parties will be
able to utilize special deposits with greater confidence that their expectations will be met. Below
are some of the reasons why stat es should adopt the Uniform Special Deposits Act.
• The Act is an “opt in” statute. The parties must specifically elect to be covered by the Act in
their account agreement. This means parties can elect to utilize the protections for certain
deposit products and not others. Th e optional nature of the Act allows banks to add special
deposits to the suite of products they offer without impacting existing arrangements. A bank
can choose when and to what extent it will offer a special deposit to customers.
• The Act was drafted with a minimalist philosophy. The Act does not duplicate provisions
of law governing deposits generally. Instead, it remedies uncertainties in the law surrounding
the special deposit. Existing commercial and consumer protection laws supplement the Act,
except where inconsistent.
• The Act prevents parties from using a special deposit to defraud or hinder creditors. A
special deposit must serve a specified permissible purpose from the time the deposit is created
until termination. If the deposit ceases to serve a permissible purpose before termination, the
protections of the Act fall away, and the funds are subject to the payee’s creditors. For example,
a deposit or transfer that is fraudulent or voidable under other law is not protected.
• Under the Act, a special deposit cannot be swept into the bankruptcy estate of the
depositor if there is a bankruptcy filing. Under the current law of many states, a depositor
will have rights to the special deposit before the determination of a contingency that resolves
ownership of all or part of the balance of a special deposit. The Act makes it clear that any
property interest with respect to a special deposit is the right to receive payment after the
occurrence of the contingency—there is no property interest in the special deposit itself .
• The Act protects special deposits from premature creditor process. Under current law,
creditor process can “freeze” a special deposit and interfere with the purpose that the deposit
is designed to achieve. When the special deposit is established, the identity of the bank’s
ultimate creditor has not been determined. Under the Act, creditor process is only enforceable
against the bank holding the special deposit after the determination of a contingency. 2
• The Act protects the special deposit from the bank’s set off right. Under current law of
certain states, a bank might exercise a right of set off or recoupment that is unrelated to a
payment to a beneficiary (or to the special deposit itself). This has discouraged some from
using special deposits. The Act prevents the bank from exercising a right of set off or
recoupment to its own advantage with respect to unrelated debtor -creditor relationships.
The Act also clarifies other aspects of a special deposit relationship that have been muddled in the
case law. For example, it expressly provides that the relationship between the bank and a
beneficiary is a debtor-creditor relationship and that bank does not have a fiduciary duty to any
person in connection with a special deposit.
For more information about the Uniform Special Deposits Act, please contact Legislative Counsel
Kari Bearman at (312) 450-6617 or kbearman@uniformlaws.org.