Bankruptcy and the New Uniform Special Deposits Act: Insulating Depositor Funds From the Reach of Most Creditors

Description

Special deposits are accounts established and funded by a depositor with a depository bank for a “permissible purpose” and only payable to one or another of at least two (2) potential beneficiaries upon the occurrence of a stated contingency set forth in a written special deposit account agreement. Special deposits are highly beneficial to protect funds in a variety of transactions including real estate sales, business mergers and acquisitions, litigation and arbitration settlements, distribution of tenant security deposits, distributions of funds in class action settlements, settlement of payment systems and more. These special deposits are not used more frequently today because of so many uncertainties about everything from how to establish them to what protections they have.

Under the uniform SDA law, which the American Bar Association, the American College of Commercial Finance Lawyers and the New York City Bar Association Committee on Commercial Law and Uniform State Laws have all endorsed, a special deposit meeting the SDA's requirements would be protected against claims asserted against the deposit in a bankruptcy proceeding, creditor process and even the depository bank’s right of setoff and recoupment, in each case pending the determination of the contingency and hence the beneficiary or beneficiaries entitled to payment.

The SDA also carefully protects the special deposit from being used for a fraudulent purpose.

It will be important for bankruptcy attorneys and attorneys for lenders with Article 9 security interests in deposit accounts to understand enforcement limitations with respect to special deposit accounts and the limits on set-off and recoupment rights.

Listen as the panel of expert banking, bankruptcy and lender attorneys reviews the SDA and gives attendees a head start on understanding this new law.