Last June this column discussed two federal court cases showing the challenges faced by lawyers in structuring bank deposit arrangements, such as trusts and escrows, free of bankruptcy risk of the depositor. (“Trusts, Escrows and Property of the Estate (or Not),” 269 N.Y.L.J. 109 (June 8, 2023)). These two decisions, one by a bankruptcy court in the Southern District of New York involving an attorney escrow account, and the other by a federal district court in the Northern District of Texas involving a trust arrangement, reached the same conclusion—namely that the cash at issue was subject to claims of the depositor’s creditors. These cases emphasize the continuing uncertainty across states of treatment of different structures intended to insulate cash from the risk of bankruptcy of its depositor. Fortunately, this uncertainty may soon be resolved by a uniform state statute proposed by the Uniform Law Commission.

Who Is the Uniform Law Commission and What Is a Special Deposit?

The Uniform Law Commission (the ULC) (aka the National Conference of Commissioners on Uniform State Laws) consists of a group of lawyers appointed by state governments whose mission is to address uncertainties and promote uniformity among state laws. In July 2023, the ULC approved the Uniform Special Deposits Act (the USDA or the act). The act aims to create a set of “clear and executable” rules to govern bank deposits that involve at least two beneficiaries (one of whom may be the depositor) where “the identity of the person entitled to payment is not determined until the occurrence of a contingency identified at the time the deposit is created.” The act uses the term “special deposits” to describe these arrangements. According to the ULC, special deposits are deposits that may seem to operate like a trust, bailment or other custody arrangement, but are expressly not those types of structures. In its Prefatory Note, the ULC points to what it calls “old case law” providing that banks hold special deposits “in custody.” Instead, the ULS flatly states that this practice is not followed, and to the contrary describes bailments as “anachronistic” and “not feasible in modern banking practice.”