4000 - Advisory Opinions
Insurance Coverage of Deposits Held by Trustee
October 30, 1987
Jules Bernard, Senior Attorney
I understand that *** is currently a FSLIC-insured savings-and-loan association, but that it expects to convert to an FDIC-insured commercial bank. I further understand that in each case the deposit represents funds raised pursuant to the sale of bonds ("Bonds") by a public unit ("the Authority"), that an insured bank is the trustee for the funds, and that the beneficiaries of the funds are the holders of the Bonds. Finally, I understand that *** deposit records disclose the fact that the depositor holds the deposit in the capacity of a trustee, and that the depositor maintains records that are sufficient to ascertain the details of the trust arrangement and the interests of the beneficiaries and other parties in the deposit.
You ask the FDIC to confirm the following conclusions regarding the insurance of the deposit once *** has become insured by the FDIC:
1. Each individual owner of the Bonds will be treated as having an interest in the Certificate of Deposit equal to the proportion that such owner's Bonds bears to the aggregate principal amount of all Bonds then outstanding, and such interest will not be aggregated, for FDIC insurance coverage purposes, with a deposit made in *** by such owner of Bonds in any other distinct legal capacity. 12 U.S.C. § 1817(i).
2. In the event of the failure of *** each owner of Bonds will be entitled to insurance coverage by FDIC of up to $100,000 (including principal due and interest accrued to the date of default); provided that the amount of any claim for insurance coverage made in connection with the ownership of the Bonds will be aggregated with any other insured deposit made at *** held in the same legal capacity as the Bonds, including any deposit related to other bonds issued by the Authority, and the total of such aggregated interest will be entitled to up to $100,000 of FDIC insurance, allocated on a proportionate basis among all such insurable interests. 12 C.F.R. § 331.1(b).
I believe that, in substance, these conclusions are correct. I have one or two reservations about the way in which the conclusions are expressed, but the points in question are not major, and have to do more with the phrasing of the conclusions than with their substantive import.
I agree that the first paragraph accurately presents the method used to compute each depositor's insurable interest in the trust's deposit. I take it that when the paragraph speaks of "a deposit made in *** by such owner of Bonds in any other distinct legal capacity," it refers to a deposit made in any capacity other than that of beneficiary of a trust having the same settlor (i.e., the Authority in each case) and the same insured bank as trustee.
The second paragraph is essentially correct, but its phrasing is a bit off the mark. It is the trustee as depositor--not "each owner of Bonds"--that is entitled to insurance coverage; the amount of the coverage is equal to the aggregate of the insurable interests of the holders of the Bonds.
I must also point out that the FDIC would not necessarily distribute the insurance proceeds "allocated on a proportionate basis among all such insurable interests." The FDIC does not have any hard-and-fast rule for allocating insurance proceeds among trusts having beneficiaries in common. Instead, the FDIC would ask the trusts to determine for themselves how the insurance proceeds should be allocated; and if the trusts could not agree, the FDIC would ask a court to determine the issue.
The aggregation rule set forth in the second paragraph is generally correct, with the minor caveat that the phrase "including any deposit related to other bonds issued by the Authority" should not be read restrictively: i.e., it should not be taken to mean that a deposit derived from a bond issue may only be aggregated with other deposits derived from bond issues. The aggregation rule applicable under section 7(i) of the Federal Deposit Insurance Act, 12 U.S.C. § 1817(i), comes into play whenever a person is a beneficiary of two trusts having the same settlor and the same trustee, without regard for whether either deposit derives from the sale of bonds.