BILL NUMBER: S4323
SPONSOR: KRUEGER
 
TITLE OF BILL:
An act to amend the banking law, in relation to enacting the uniform
special deposits act
 
PURPOSE:
The Uniform Law Commission's Uniform Special Deposits Act (the "Act") is
intended to provide clarity and safety in an area of law- a common bank-
ing transaction known as a "special deposit" that has been subject to
uncertainty for many years. Under the Act, a special deposit is defined
as a deposit of money at a bank which is to be disbursed for a permissi-
ble purpose to a designated person ("beneficiary") only after a speci-
fied event or contingency has occurred. Examples of the uses of a
special deposit range from the deposit of funds by a tenant as security
under a real estate lease, to deposit of funds by a bank with a clearing
house to be paid to the bank or disbursed to other banks in the clearing
system at the end of inter-bank settlements.
Special deposits play an important rote in commerce and industry, but
their use has been diminished because they are subject to an antiquated
and unclear body of common law that creates unnecessary risks to the
parties. Under the common law governing special deposits currently, the
bankruptcy of the depositor or an attachment by a creditor of assets of
the depositor or a beneficiary may effectively prevent the bank from
making payment of the deposit to the appropriate party when the contin-
gency occurs. This impairs the rights of and adversely affects all the
parties to the deposit. The Act establishes a framework for banks and
their customers to utilize special deposits with greater certainty of
how such deposits wilt be treated when such events occur.
Importantly, the Act is an "opt in" statute. The Act applies only if a
bank and its customer specify in the account agreement that they intend
to be covered by the Uniform Special Deposits Act. Neither banks nor
their customers are required to use this Act. 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 govern-
ing deposits or contractual arrangements.
 
SUMMARY OF PROVISIONS:
Section 1-680-a. Title
States the short title of the legislation: "Uniform Special Deposits
Act" and defines key terms used throughout the Act.
Section 1-680-b. Scope; Choice of Law; Forum
Defines the scope of the Act. It clarifies that the law applies to
special deposits where the account agreement indicates a desire to be
governed by the Act. It also allows the parties to the agreement to
select a forum to resolve disputes (which may be New York) and specifies
that the Act does not interfere with rights relating to other types of
transactions.
Section 1-680-c. Variation by Agreement or Amendment
Outlines the degree to which the provisions of the Act can be modified
by the account agreement. Some core protections cannot be altered, while
others, like payment procedures, can be varied. Provisions excusing
liability or limiting remedies are ineffective.
Section 1-680-d. Requirements for Special Deposit
Details the requirements for a deposit to be considered a special depos-
it under the Act. These include: a deposit of funds in a bank under an
account agreement; a deposit made for at least two beneficiaries; the
deposit must be denominated in an authorized currency; a permissible
purpose must be stated in the account agreement; and the deposit must be
subject to a contingency.
Section 1-680-e. Permissible Purpose
Mandates that a special deposit must serve at least one permissible
purpose stated in the account agreement, from the time of the deposit's
creation until termination. It also states the impact if a special
deposit ceases to serve a permissible purpose. Thus, the Act cannot be
used for a fraudulent purpose.
Section 1-680-f. Payment to Beneficiary by Bank
Outlines the bank's obligations regarding payments to a beneficiary. It
specifies that banks must pay a beneficiary only to the extent of the
available funds held in the special deposit. If not otherwise specified,
payments are due to a beneficiary upon the bank's obtaining knowledge of
the occurrence of a payment contingency. The bank can discharge its
obligations in several ways, including by crediting the beneficiary's
account.
Section 1-680-g. Property Interest of Depositor or Beneficiary
Clarifies that neither a depositor nor a beneficiary has a property
interest in the special deposit itself. Their interest is limited to the
right to receive payment after the occurrence of a contingency. The
potential beneficiaries never become "owners" of the deposit; rather the
bank, upon occurrence of the contingency, becomes obligated to pay the
beneficiary entitled to payment.
Section 1-680-h. When Creditor Process Enforceable Against Bank
Sometimes a creditor who is owed a debt by either the depositor or a
potential beneficiary of a special deposit may seek to enforce that debt
against a special deposit. This section specifies that such creditor
process cannot be enforced against a special deposit. It is only
enforceable with respect to an amount the bank has become obligated to
pay a beneficiary (and only after the process is served on the bank and
the bank is given time to act). Protection of the deposit for its
intended purpose against interference by the creditors of one of the
parties is one of the major objectives of this Act.
Section 1-680-i. Injunction or Similar Relief
Limits the circumstances under which a court can enjoin a bank from
paying a depositor or beneficiary. Such action is only allowed if the
payment would involve or facilitate fraud.
Section 1-680-j. Recoupment or set off
A bank may be a creditor of the depositor or of a potential beneficiary
of a special deposit with respect to some unrelated transactions. In
that event, the Act provides that the bank may not exercise any reme-
dies, such as setoff, against the special deposit. However, certain
exceptions are carved out including debiting the special deposit to pay
a beneficiary, to cover bank fees, and for the reversal of a mistake.
Section 1-680-k. Duties and Liability of Bank
Protects banks as welt as persons entering into a special deposit. The
Act clarifies that a bank does not have the obligations of a fiduciary
with respect to a special deposit. It establishes that a debtor-creditor
relationship arises only when a bank becomes obligated to pay a benefi-
ciary. Banks are liable for noncompliance with the account agreement,
but liability is limited to actual damages, not consequential, special
or punitive damages. Banks may rely on presented records if there are no
signs of fraud. Banks are not required to determine whether a permissi-
ble purpose continues to exist.
Section 1-680-1. Term and Termination
Specifies that a special deposit terminates five years after it was
first funded unless otherwise specified in the account agreement. It
also outlines that any remaining funds at termination are paid to the
original depositor if a beneficiary cannot be located. Once a remaining
balance has been paid, the bank has no further obligation with respect
to the special deposit.
Section 1-680-m. Principles of Law and Equity
Indicates that the Uniform Commercial Code, consumer protection laws,
deposit taws, and laws related to escheat and abandoned property supple-
ment the Act to the extent they are not inconsistent. Principles of law
and equity apply except where inconsistent with the Act.
Section 1-680-n. Uniformity of Application and Construction
Instructs courts to consider the promotion of uniformity across juris-
dictions when interpreting the Act.
Section 1-680-o. Transitional Provision
Specifies that the Act applies to special deposits under an account
agreement executed after the effective date. It also includes a process
for existing special deposits to be brought under the Act through a
simple amendment.
Section 1-680-p. Severability
States if any portion of the Act is deemed invalid, it does not invali-
date other portions if they can still be given effect.
Section 2. Effective Date
Sets effective date
 
JUSTIFICATION:
Enactment of the Act in New York will create a versatile new type of
bank account - defined in the Act as a "special deposit" -to ensure the
safety and certainty of trillions of dollars of common transactions
engaged in by New York consumers and businesses every day. The Act will
be particularly useful for capital markets centered in New York, provid-
ing payment clearing houses and other market participants with a reli-
able method to make and settle payments, while minimizing risk from
insolvency or improper interference by creditors with the disbursement
of the deposit to a beneficiary.
Upon expressly "opting in", depositors and their banks could obtain the
benefits of clear statutory rules that will protect a special deposit
from premature creditor interference or the bankruptcy of the depositor.
By eliminating unnecessary litigation risks that exist under current
taw, the Act will make special deposits much more useful and certain for
transfers where final disbursement of the funds is contingent on some
future event. In particular, the Act will give banks and their customers
a flexible payment mechanism to ensure safe, secure and efficient
payments to account beneficiaries and protect all parties from uncer-
tainties under existing law, including depositor bankruptcy risks and
premature assertion of creditor claims. The Act will enhance New York's
status as a preeminent commercial jurisdiction by enabling its banks to
offer a valuable service to capital markets, clearinghouses and other
commercial and individual clients and by avoiding the loss of business
to other states that may adopt the Act.
 
LEGISLATIVE HISTORY:
None.
 
FISCAL IMPLICATIONS:
None. It is expected that enactment will attract special deposits to
banks located in New York.
 
EFFECTIVE DATE:
The act shall take effect immediately after it has become a law.