FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Question regarding deposit insurance coverage of escrow accounts maintained by a title insurance company.
July 6, 2005
Christopher L. Hencke
You have requested an opinion about the insurance coverage of escrow accounts maintained by a title insurance company ("Title Insurance Company") at an FDIC-insured depository institution. You have argued that the funds in these accounts should be insured to the purchasers of condominium units ("Purchasers"). The alternative is to insure the funds to the seller (i.e., the developer of the condominium project) ("Developer").
As explained in your letter, funds are collected from a Purchaser by Developer. These funds represent partial payment for a condominium unit and are placed by Developer into one of the escrow accounts controlled by Title Insurance Company. The account is titled in the following manner: "XYZ Developer, by Title Insurance Co., as Escrow Agent under Escrow File No. XXXX."
An account held by a custodian (such as Title Insurance Company) is governed by 12 C.F.R. § 330.7. Under that section of the FDIC's regulations, "Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal[s]." 12 C.F.R. § 330.7(a). In other words, the insurance coverage "passes through" the agent or custodian to the actual owner(s). This means that the funds belonging to each owner are aggregated with any other funds held by the same owner at the same insured depository institution and insured up to the $100,000 limit.
"Pass-through" coverage as described above is not available unless certain requirements are satisfied. First, the fiduciary status of the nominal accountholder must be disclosed in the deposit account records of the insured depository institution. 12 C.F.R. § 330.5(b)(1). In this case, the given account title would satisfy this requirement. Second, the interests of the actual owners must be ascertainable either from the account records of the insured depository institution or records maintained in the regular course of business by the agent or other party. 12 C.F.R. § 330.5(b)(2). Presumably, such records are maintained in this case by the escrow agent. Third, the agency or custodial relationship must be genuine, that is, the deposits at the FDIC-insured depository institution actually must belong to the alleged actual owners. 12 C.F.R. § 330.3(h); 12 C.F.R. § 330.5(a)(1).
Under the third requirement above, deposits held by Title Insurance Company cannot be insured on a "pass-through" basis to Purchasers unless the deposits actually belong to Purchasers (and do not belong to Developer or Title Insurance Company). The issue of ownership is discussed in detail below.
In the typical escrow arrangement to facilitate transfer of title to real property, the seller and buyer "employ a third party to accept their respective tenders of performance under the contract." Ferguson v. Casper, 359 A.2d 17, 20-21 (D.C. 1976). Thus, the seller's deed and the buyer's purchase money (and other pertinent instruments) are deposited with the escrow agent pending each party's performance of his or her respective duties required for settlement. Until each party has satisfied the respective conditions precedent, legal title to the property does not pass to the buyer and legal title to the purchase money does not pass to the seller. Stuart v. Clarke, 619 A.2d 1199, 1200 (D.C. 1993). See also 30A C.J.S. Escrows § 6(b).
The general principles outlined above have been recognized in Florida. See, e.g., Edelberg v. Monogram Building & Design, 630 So. 2d 1227 (Fla. Dist. Ct. App. 1994); Peters v. Spielvogel, 163 So. 2d 59 (Fla. Dist. Ct. App. 1964); Cradock v. Cooper. 123 So. 2d 256 (Fla. Dist. Ct. App. 1960). See also In re Hallmark Builders, Inc., 205 B.R. 971, 973-74 (Bankr. M.D. Fla. 1996) ("Legal title to property placed in escrow remains with the grantor until the occurrence of the condition specified in the escrow agreement"). Under these general principles, the purchase funds held by escrow agent in a traditional real estate transaction would belong to the buyer and not the seller prior to closing. At closing, the ownership of the funds would pass to the seller.
Whether these principles apply to the "escrowed" funds in this case depends upon whether the arrangement between Developer and each Purchaser is a traditional escrow arrangement. This question is addressed below.
The Florida Condominium Act
Under the Florida Condominium Act, a distinction exists between (1) payments made by purchasers up to 10 percent of the sale price; and (2) payments made by purchasers in excess of 10 percent of the sale price.
Up to 10 percent. The Florida Condominium Act provides that "the developer shall pay into an escrow account all payments up to 10 percent of the sale price received by the developer from the buyer towards the sale price." Fla. Stat. § 718.202(1). Prior to closing, the buyer may recover this money (plus interest) if the buyer "properly terminates the contract pursuant to its terms or pursuant to this chapter." Fla. Stat. § 718.202(1)(a). On the other hand, the developer may take the money if the buyer defaults. Fla. Stat. § 718.202(1)(b). In addition, the developer takes the money at closing if neither party defaults. Fla. Stat. § 718.202(d).
The Florida Condominium Act also provides that a developer may choose not to enter into the traditional escrow arrangement described above: "In lieu of the foregoing [i.e., in lieu of the creation of a traditional escrow], the division director has the discretion to accept other assurances, including, but not limited to, a surety bond or an irrevocable letter of credit in an amount equal to the escrow requirements of this section." Fla. Stat. § 718.202(1).
In excess of 10 percent. With respect to funds in excess
of 10 percent of the sale price, the Florida Condominium Act provides:(2) All payments which are in excess of the 10 percent of the
sale price described in subsection (1) [i.e., the
provisions discussed above] and which have been received prior to
completion of construction by the developer from the buyer on a
contract for purchase of a condominium parcel shall be held in a
special escrow account established as provided in subsection (1) and
controlled by an escrow agent and may not be used by the developer
prior to closing the transaction, except as provided in
subsection (3) [i.e., the paragraph quoted below] or
except for refund to the buyer. If the money remains in this special
account for more than 3 months and earns interest, the interest shall
be paid as provided in subsection (1).(3) If the contract for sale of the condominium unit so
provides, the developer may withdraw escrow funds in excess of 10
percent of the purchase price from the special account required by
subsection 2 [i.e., the paragraph quoted above] when the construction
of improvements has begun. He or she may use the funds in the actual
construction and development of the condominium property in which the
unit to be sold is located. However, no part of these funds may be
used for salaries, commissions, or expenses of salespersons or for
advertising purposes. A contract which permits use of the advance
payments for these purposes shall include the following legend
conspicuously printed or stamped in boldfaced type on the first page of
the contract and immediately above the place for the signature of the
buyer: ANY PAYMENT IN EXCESS OF 10 PERCENT OF THE PURCHASE PRICE
MADE TO DEVELOPER PRIOR TO CLOSING PURSUANT TO THIS CONTRACT MAY BE
USED FOR CONSTRUCTION PURPOSES BY THE DEVELOPER.
Fla. Stat. §§ 718.202(2)--(3) (emphasis added; capitalization in original).
As quoted above, the Florida Condominium Act provides for the creation of a "special escrow account" that generally "may not be used by the developer prior to closing." The purpose of the escrow account is to protect the purchaser against the possibility of default by the developer. Assuming that the funds in the escrow account cannot be used by the developer prior to closing, the purchaser will be able to recover his/her funds in the event of the developer's default. See First Sarasota Service Corporation v. Miller, 450 So. 2d 875, 878 (Fla. Dist. Ct. App. 1984) ("The obvious purpose of section 718.202 [i.e., the escrow provisions of the Florida Condominium Act] is to protect purchasers under preconstruction condominium contracts from loss of their deposits should the developer fail to perform its contractual obligations").
The Florida Condominium Act also provides, however, that the developer may use the "escrowed" funds prior to closing if the contract allows the developer to use the funds prior to closing. Accordingly, the funds in the "special escrow account" may or may not represent a traditional escrow. The issue depends upon the terms of the sale agreement.
The Sale Agreement
At paragraph 4.2, the model sale agreement (the "Agreement")
provides as follows:Buyer agrees that all of Buyer's deposits in excess of ten
percent (10%) of the Purchase Price may be used by Seller for
construction and development purposes as permitted by law. In addition
to the foregoing, if Seller has obtained or obtains the approval of the
Director of the Division of Florida Land Sales, Condominiums and Mobile
Homes to provide "Alternative Assurances," as permitted by law,
in lieu of holding deposits up to ten percent (10%) of the Purchase
Price in escrow, Seller may cause the Escrow Agent to
disburse such deposits to it for all
uses permitted by law. If Seller has obtained such approval as of the
date of this Agreement, a copy of the Escrow Agreement, providing the
mechanism for such disbursement has been delivered to Buyer. If
approval is obtained after the date of this Agreement, Buyer will be
provided with a copy of the Escrow Agreement, but Buyer agrees that it
shall not be deemed a material or adverse change in the offering of the
Condominium by reason of the fact that Buyer has already agreed to the
use of Buyer's deposits up to ten percent (10%) of the Purchase Price
in the manner stated above.
As quoted above, the Agreement authorizes Developer to use the "escrowed" funds in excess of 10 percent prior to closing. In addition, the Agreement authorizes Developer to use the "escrowed" funds up to 10 percent if Developer has provided Purchaser with "alternative assurances." If any "escrowed" funds are used by Developer prior to closing, of course, the funds will be unrecoverable by Purchaser in the event of Developer's default. Thus, the "escrowed" purchase funds under the Agreement do not serve the traditional purpose of protecting Purchaser against the possibility of Developer's default. Rather, the "escrowed" funds may serve as a construction fund for Developer.
You have cited several cases that support your position that escrowed purchase money in a traditional real estate transaction belongs to the purchaser and not the seller prior to closing.1 See In re Hallmark Builders, Inc., 205 B.R. 971 (Bankr. M.D. Fla. 1996); In re Viking I, Inc., 95 B.R. 225 (Bankr. M.D. Fla. 1989); Peters v. Spielvogel, 163 So. 2d 59 (Fla. Dist. Ct. App. 1964). None of these cases, however, supports the proposition that "escrowed" money belongs to the purchaser even when the seller enjoys access to the funds prior to closing. On the contrary, the case laws supports the conclusion that the seller is the owner under such circumstances. One court explained the rule as follows: "Under the normal escrow situation where the escrow agent defaults prior to performance of the escrow condition, the loss falls upon the depositor [i.e., the purchaser], for he is deemed to have retained legal title to the subject matter of the escrow [i.e., the escrowed portion of the purchase money], and is deemed to be entitled to the return of such subject matter, should the other parties fail to perform. There is a clear exception to this rule where under the circumstances of the escrow agreement the depositor would not be entitled to the return of the subject matter under any circumstances, irrespective of performance of the terms of the agreement." Cradock v. W.R. Cooper, 123 So. 2d 256, 258 (Fla. Dist. Ct. App. 1960).2
In this case, Purchaser might fulfill all of his/her obligations under the Agreement while Developer might default. Notwithstanding these circumstances, the recovery of the "escrowed" money by Purchaser would be impossible if Developer has used the money for construction (as permitted by the Agreement). Thus, as mentioned above, the "escrowed" money does not serve as protection for Purchaser but instead may serve as a construction fund for Developer. For this reason, Purchaser cannot be deemed the owner of the "escrowed" money. To the extent that Developer enjoys access to the funds prior to closing (and without default by Purchaser), Developer must be deemed the owner. As a result, the "escrowed" money must be insured as follows:* Up to 10 percent with no "alternative assurances." The funds are insurable on a "pass-through" basis to Purchasers because the funds cannot be used by Developer prior to closing (unless the Purchaser defaults). * Up to 10 percent with "alternative assurances." The funds are insurable on a "pass-through" basis to Developer because the funds may be used by Developer prior to closing (even if the Purchaser does not default).* In excess of 10 percent. The funds are insurable on a "pass-through" basis to Developer because the funds may be used by Developer prior to closing (even if the Purchaser does not default).
This opinion is based upon the terms of the model sale agreement. A change in these terms could lead to different conclusions. If you have any questions about this opinion, please contact us.
1This general rule was not discussed in FDIC Advisory Opinion No. 88--48 (July 21, 1988). For this reason, we have not relied on Advisory Opinion No. 88--48 though we have reached a similar conclusion (i.e., that certain "escrowed" funds are insurable to the developer of a condominium project and not the purchasers). Go back to Text
2In this case, the relevant terms of the Agreement may be summarized as follows: (1) Purchaser cannot recover the money unless Developer defaults; and (2) Developer may use the money prior to closing even if Purchaser does not default. If you can identify cases in which the court determined that the purchaser is the owner of "escrowed" funds under such an agreement, we may be willing to reconsider this opinion. Go back to Text