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A Uniform Law Project of Note: Special Deposits Act

posted by Melissa Jacoby

Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too - especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.


Special deposit act










A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.


Interesting--you say fraudulent transfer law still applies, so I'm wondering how, in the event of a dispute, the deposit into such an account would ever NOT be a fraudulent transfer. Does the bank's promise to pay the beneficiary constitute reasonably equivalent value TO THE DEPOSITOR? Or is the trick here the 4-year SoL, with the depositor assuming that no one will try to unwind the deposit until it's too late. This seems like a targeted spendthrift trust law--and I wonder if the drafters have avoided that terminology only because of the controversy some of those laws have created in places like Michigan.

Sent this question to Ed Smith, who worked on the Uniform Law Commission project on this Act. Here is Ed Smith's response:

"I don’t think that a special deposit would always be a fraudulent transfer, and it may seldom be one. It might be a preference, of course, if the deposit was made towards satisfying a pre-existing debt of the depositor. But the deposit would not even be a preference if the deposit was made in connection with a new transaction that did not involve pre-existing debt.
"As to the elements of a fraudulent transfer, and assuming no intent by the depositor to hinder, delay or defraud the depositor’s creditors, the depositor would have to be insolvent after the transfer was made. But even if that were the case, the reasonably equivalent value coming back to the depositor would have to be determined by what the depositor receives in the underlying transaction for which the deposit was made. For example, if the special deposit consisted of tenants’ security deposits, the reasonably equivalent value coming back to the landlord would be the rent that the tenants agreed to pay during the term of their leases."

Thanks, Melissa! I just took a quick look at the Act. It states that it will only apply if the parties "select the law of a state that has adopted the Uniform Special Deposits Act." It also states that the parties can choose the law of a state that has adopted it even if neither they nor the transaction have any connection to the state.

If all this is true, then there's no pressing need to get every state to adopt it. As you point out, once one state adopts it, then parties across the country can opt in by choosing that state's law.

Viewed through the lens of jurisdictional competition, the *first* state to adopt the Act stands to reap outsized benefits in the form of extra business for that state's lawyers and bankers. This raises an important question. Which state wants to become the Delaware of special deposits?

Thanks, John - appreciate the take of a choice of law expert!

You might want to view the thing as a mutant prefunded (i.e., cash-collateralized) letter of credit, with the prefunding a final payment from the funder to the bank. (Unlike an L/C, a special deposit does not necessarily require presentment.) Such things would not be a fraudulent conveyance if it ultimately discharged a bona fide obligation of the funder.

Or you might want to view it as a UCC Article 4A wire transfer, with contingency built in. All payments (except currency) involve time delays. The special deposit, in this view, is another statutory payment system.

You could also view it as an escrow. (Legally, nobody knows what an escrow really is.) It could also be viewed as a kind of spendthrift trust, albeit somewhat less friendly to asset protection schemes. (The classic law of trust boggles when the trustee is also the depository, because the legal interest in the trust res is the trustee's debt to, uh, itself. This boggling pervades the old case law--something that makes a statute more desirable.)

At the risk of self-promotion, I would recommend 76 The Business Lawyer 841 (2021). AFAIK, it is the only complete treatment of the old law, and I'd like to think a fairly decent guide to the statute. The Special Deposit Act makes a few choices that I did not make, and most of its choices IMO are better ones. But I think my piece does a pretty good job of history, context, and possible applications.

Highlighting for all readers the cite at the end of Mr. Sommer's comment: Joseph H. Sommer, Special Deposits, 76 Business Lawyer 841 (2021). Great resource for history and context to supplement the ULC reform materials!

SDA § 8 says that the depositor has no property interest in the special deposit, but I'm less than 100% certain that would hold up in bankruptcy. The SDA attempts to end run 541(c) by saying "no interest in property" so 541(c) never gets triggered, but what we've learned from the cryptocurrency bankruptcies is that is if there is any uncertainty about whether an asset is property of the estate, the bankruptcy court will exercise jurisdiction over the asset until the issue is resolved, which can take some time, and while the issue is pending there's time to cut a deal, etc.

Adam is right, but …

There is no way to prevent a bankruptcy court from doing something stupid in a novel context. The key word is "novel." Us L/C aficionados fondly remember the Twist Cap case. The bankruptcy court tried to enjoin honor of an L/C when the applicant was the bankrupt. The bar came down hard and unanimously on the Twist Cap court. No court has ever repeated Twist Cap's mistake.

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