4000 - Advisory Opinions
Deposit Insurance Coverage of Time Deposits of a Condominium Owners' Association Pursuant to the Old FSLIC Regulations
November 9, 1990
Thomas W. Lawless, Jr., Regional Counsel
I am writing in reply to your letter of June 26, 1990 in which you inquire as to the extent of insurance coverage provided by FDIC for deposits made by the *** Condominium Trust (the "Trust") in *** Savings Bank ("*** Savings Bank"). The Trust is the "organization of unit owners" established under Chapter 183A of the Massachusetts General Laws, the Massachusetts statute governing condominiums, for the *** Condominium (the "Condominium"), a residential building in ***, Massachusetts. You have also included a copy of your letter of June 5, 1990 addressed to the Trustees of the Trust, which provides additional information.
I must apologize for the tardiness of this reply. Some of this has been due to the fact that your question has required an analysis of regulations promulgated by the now-defunct Federal Savings and Loan Insurance Corporation ("FSLIC"), and related interpretations, in addition to both "old" and "new" FDIC regulations and interpretations. In addition, you set forth some challenging arguments in support of your view that the instant situation should be distinguished from the situations involving funds of condominium unit owners' associations which have been discussed in earlier FDIC staff attorney letters. However, for the reasons which I will discuss, I am unable to conclude that "pass-through" coverage (recognition of each unit owner as a separately insurable person or entity in funds held by the Trust), is available in your situation.
As I recently advised you by telephone, I have discussed your question with two FDIC attorneys in our Washington office, one of whom has many years of experience in interpreting FDIC insurance regulations, and the other of whom is a former FSLIC attorney with experience in interpreting FSLIC's comparable regulations. Both were tentatively inclined to agree with my analysis. I am sending a copy of this letter to each of them, and asking that they advise me of any exceptions which they may take to any of the advice which I am providing to you. I will "follow-up" on these referrals, and keep you advised regarding their views on the matter.
You refer to my earlier letter to Mr. ***, one of the unit owners in the Condominium, and state that I was "unable . . . to specifically address this matter" in that letter. My letter to Mr. ***, with which I enclosed copies of one or two earlier letters written by FDIC attorneys discussing coverage of condominium unit owners' associations' funds, was written in response to a general inquiry, which did not set forth the specific provisions of Massachusetts statute which you have cited, and did not include a copy of the Declaration of Trust establishing the Trust, as you have done.
The advice which I gave to Mr. *** was, essentially, that condominium unit owners do not typically have the requisite ownership interest in funds held by a unit owners' association to qualify for "pass-through" coverage. Underlying this conclusion was my stated understanding that, when unit owners pay required fees to a unit owners' association, the funds typically become the property of the association to be expended for association purposes, and a unit owner has no right to have the payment returned (short of a termination of the condominium arrangement) and no right to control how or for what purposes his or her payment is spent.
The Trust has two $100,000 certificates of deposit at *** Savings Bank, as well as a "money market" account in a modest amount. You have advised by telephone that one certificate was most recently renewed in June of 1990 ("First Certificate"). The other was most recently renewed in September of 1990 ("Second Certificate"). The money market account was established prior to August, 1989. You ask that we distinguish the instant case from the situations which prompted earlier FDIC attorney letters regarding this general subject.
You state your understanding that, as of the date of your letter, the applicable regulation was 12 C.F.R. 386.10. Part 386 of Title 12, C.F.R. was, as you are apparently aware, an FDIC regulation which was put into place as a successor to the comparable regulation of FSLIC, which agency, as you have noted, was abolished by FIRREA. See former Part 564 of Title 12 C.F.R. Part 386 governed FDIC insurance coverage of deposits in savings associations formerly insured by FSLIC. However, on April 30, 1990, FDIC's Board of Directors adopted a revised Part 330 of FDIC's regulations, 12 C.F.R. Part 330, which sets forth the rules governing insurance coverage in all FDIC-insured institutions, including those formerly insured by FSLIC. At the same time, the Board of Directors repealed all of the portions of Part 386 which would have been relevant in determining the insurance coverage of the Trust's accounts (except insofar as they might be entitled to "grandfather" treatment as discussed below). The revised Part 330 became effective generally July 29, 1990. However, section 330.16(b) provided that the provisions of Part 330 would not become effective as to then-existing time deposits, until their first maturity date after July 29, 1990. The revised regulation is clearly applicable to the money market account (which is not a "time deposit") and the Second Certificate. The First Certificate is subject to Part 386.
You state that there are no "required fees" that must be paid by unit owners in the instant case. However, I do not believe that this proposition is supported by either Chapter 183A or the Declaration of Trust. Section 6(a) of Chapter 183A provides that ". . .the common expenses shall be charged to. . . the unit owners according to their respective percentages of the undivided interest in the common areas and facilities," and section 6(c) provides that a ". . .unit owner's share of the common expenses shall constitute a lien upon his unit...." Section 11(b) requires the by-laws of the organization of unit owners to provide for "[t]he manner of collecting from the unit owners their share of the common expenses.. Section 5.4 of the Declaration of Trust sets forth the procedures under which the Trustees collect funds which the unit owners are required to contribute for the purpose of enabling the Trustees to pay "common expenses." Thus, while neither the statute nor the Declaration of Trust uses the precise term ("required fees") used in earlier FDIC attorney letters, it is clear to me that the payments which *** unit owners are required to make to the Trustees in accordance with the above-referenced provisions are of the kind contemplated in those letters.
You state that the unit owners ". . .have the right to have the Trusts' funds returned to them to the extent that there is any profit after common expenses are paid." This seems to be confirmed by section 6(a) of the statute, insofar as "common profits" are concerned. Section 5.4.1 of the Declaration of Trust, however, is a bit less clear on the point. It states that unit owners are ". . .entitled to common profits. . . ," but seems to leave to the Trustees the discretion to determine whether or not such "common profits" should be distributed. Assuming that there may be "common profits" in ascertainable amounts for certain unit owners at any given time, which those owners are entitled to receive from the Trustees upon demand, these would continue to be viewed as assets of the Trust, at least until such time as a demand was made. I note that not all "common funds" held by the Trustees are "common profits". See separate definitions of the two terms in section 1 of Chapter 183A.
Section 2.4 of the Declaration of Trust provides that funds are held by the Trustees ". . .in trust, to manage, administer and dispose of the same and to receive and/or distribute the income and/or principal for the benefit of the unit owners...." Under Section 1 of Chapter 183A, the "organization of units owners" in a Massachusetts condominium may take the form of "corporation, trust or association owned by the unit owners...."
You do not specifically state that the choice of the trust form by the *** Condominium would call for more liberal insurance coverage than would apply if a corporate or association form had been chosen. However, it is clear that, had the organization of unit owners taken the form of a corporation or association, its funds would have been insured only to $100,000 under 12 C.F.R. Part 386. See sections 386.6 as to corporations and partnerships and 386.7 as to unincorporated associations. See also, in the current regulations, sections 330.9(a) (corporations), 330.9(b) (partnerships), and 330.9(c) (unincorporated associations). We are thus faced with the question whether the choice of the trust form calls for a departure from the general position previously taken by FDIC's legal staff with respect to organizations formed for the same purposes as those of the trust.
Section 330.11 of the present FDIC insurance regulations, like earlier language in FDIC and FSLIC regulations, contains special rules designed to provide expanded coverage for deposits made by certain kinds of trusts. One of the requirements is that the trust be irrevocable. Section 7.4 of the Declaration of Trust provides for dissolution of the Trust upon removal of the condominium from the condominium law, which may be accomplished by a vote of the specified percentage of the unit owners. Upon such dissolution, and after payment of or provision for liabilities, the property of the trust would be distributed to unit owners. For this reason alone, I believe that the trust fails to qualify for the special coverage rules in section 330.11 (and would have failed so to qualify under earlier FSLIC/FDIC sections in pari materia). Also, section 330.11(c) excludes from the definition of "trust interest" ". . . any interest retained by the settlor." While ***, the Massachusetts limited partnership which created the condominium in 1980, was the entity which caused the trust to come into existence, each unit owner is a settlor to the extent of his/her interest for purposes of section 330.11, and earlier related regulations. Therefore, I am unable to agree that section 330.11 or earlier related sections govern coverage in the instant case.
For many years, FDIC has recognized that "pass-through" coverage may be available in some situations not involving irrevocable trusts of the kind described in section 330.11 of the current regulations. See, e.g., the interpretation designated as 12 C.F.R. §330.101, appearing in the publication of Title 12 as of January 1, 1990. I am advised that the FSLIC interpreted its regulations in a similar manner. Under these interpretations pass-through coverage would be available for funds held for individuals or entities by a custodian under a bona fide business custodial arrangement, assuming that proper records were kept by the custodial depositor and the depository institution. In such instances, the interest of any beneficiary in the commingled deposit would be added to other funds owned individually by that person in the same bank, before the $100,000 insurance limitation was applied. A prerequisite for such coverage was that the funds in fact remained the property of the beneficial owners. As is apparent from earlier FDIC attorney letters, pass-through coverage under the "bona fide business custodial arrangement" theory was not afforded to condominium unit owners' associations, because the funds were deemed to be the property of the associations, rather than the property of the separate unit owners.
Section 330.9(c) of the current FDIC insurance regulations, which provides coverage of up to $100,000 for deposits of any "unincorporated association" (other than one whose primary purpose is to increase deposit insurance coverage), states that
[a]n unincorporated association shall be deemed to exist for purposes of this paragraph, whenever there is an association of two or more persons formed for some religious, educational, charitable, social or other noncommercial purpose.
In my opinion this language clearly restricts the Trust's coverage to $100,000 to the extent that the new rules are applicable. I believe that the language is consistent with earlier FDIC and FSLIC opinions, and that it gives further support to the view that funds of the kind here in question are not, and would never have been, entitled to "pass-through" coverage.
As a general proposition, coverage under the regulations governing federal deposit insurance has always been based on the "rights and capacities" in which funds are owned. See section 330.3(a) of the current FDIC regulations. Special coverage was afforded to irrevocable trusts on the theory that, once a settlor had parted with his/her funds without right to revoke or rescind the transaction, the funds were effectively owned by the beneficiaries. Similarly, interpretations allowing "pass-through" coverage in arrangements falling short of irrevocable trusts were based on the theory that, although funds of several owners were brought to the bank by a single depositor, the funds continued to be the property of the owners, who were simply acting through a common agent. Your situation, however, looks much more like a pooling of funds for the achievement of a common purpose, much as would occur in the case of a typical business trust. As you are probably aware, some large, publicly traded companies are structured as business trusts. Presumably, the underlying documents creating such trusts specify that the beneficiaries (typically, holders of "shares of beneficial interest") are the beneficiaries of the trust. I have no doubt that FDIC would decline to provide "pass-through" coverage under such circumstances, and I am confident that FSLIC would have followed a similar rule.
For the foregoing reasons, I conclude that funds held by the Trustees of the *** Condominium Trust and deposited in any FDIC insured financial institution will not be insured beyond $100,000.
I appreciate your patience in awaiting this reply. Please feel free to call or write with any further questions. Again, I will be in touch when I have heard from the two Washington office attorneys to whom I have referred above.