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4000 - Advisory Opinions


Pass-Through Deposit Insurance for Company Managing Resort Rental Units for Owners

FDIC-88-18

March 4, 1988

J. William Via, Jr., Counsel

This is in response to your letter inquiring, in effect, if certain deposits held by a company that manages resort rental units for their owners qualify for pro rata or "pass-through" deposit insurance.

The first requisite for "pass-through" deposit insurance is that the deposit account records of the bank disclose that the funds are held by the company in a representative capacity, such as agent or custodian, for the owners of the funds. You state that the deposit account records in each instance in this case reveal that the deposit is held by the company in escrow for a certain named resort. This is adequate compliance with the threshold requirement for "pass-through" deposit insurance for the benefit of the resort, but not for the benefit of others. Assuming that an account qualifies for "pass-through" deposit insurance for the benefit of the resort, but sometimes also contains money the ownership of which has passed to the company, then the records should reveal that the account is held for the company and in escrow for the named resort; similarly, if, as you may believe, renters sometimes own money in the account, then the records should show that it is held for the company and in escrow for the named resort and for its renters (who need not be named individually on the bank's records). In addition to the foregoing requirement, records of either the bank or the depositor maintained in good faith and in the regular course of business must reveal the (ascertainable and vested) ownership interest in the funds of each beneficial owner. Generally, if these requirements are met, then each beneficial owner will be recognized for deposit insurance purposes in the same manner as if each had made a deposit directly in his or her (or its) own name. As discussed below, however, the renters here lack the requisite ownership interest.

It is understood that the company (as agent for a resort) receives from a renter a deposit which by the terms of the rental agreement is required to be credited against the rent, or, if the renter defaults, the deposit (or a contingent portion of it in some cases) is forfeited as, in essence, liquidated damages; it is surmised that an amount equal to the deposit is refundable to the renter as a matter of right only on the contingency of a default by the resort (or, perhaps, on the failure of a contract condition that is not the fault of the renter). The deposit payment is, in short, not a transfer for custodial purposes but partial consideration for the performance of a rental contract; the renter relinquishes ownership of the deposit (to the resort) when it is made and retains a potential cause of action on the contract if the resort does not fulfill its part of the bargain; this potential cause of action does not give rise to an ownership interest for the buyer in the deposit or in any other specific funds held by (or for) the resort and does not provide a basis for "pass-through" deposit insurance for the benefit of the renter. In contrast, a tenant may be required to make with the landlord what is commonly known as a security deposit, the ownership of which remains under the terms of the agreement with the tenant, and which deposit is required to be returned (typically, with interest) to the tenant at the conclusion of the lease, subject to the right of the landlord to make deductions in the event of certain contingencies (e.g., damage to the premises by the tenant, rent in arrears); such security deposits generally qualify (assuming compliance with applicable records requirements) for "pass-through" deposit insurance for the benefit of the tenants (excluding, of course, amounts deducted under the agreement as belonging to the landlord).

Turning now to the question of the company's ownership interest in the deposit accounts, it is understood that the company, under its agreements with the resorts, is entitled to deduct from such accounts for itself certain fees in the event of a renter's default. For deposit insurance purposes, the company has no ownership interest in one of these deposit accounts by virtue of this contingent entitlement until a renter's default actually occurs, and then such ownership interest consist of the amount of the fee(s).


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