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4000 - Advisory Opinions

Determining Ownership of Escrow Accounts for Purposes of Insurance Coverage


November 7, 1988

Claude A. Rollin, Attorney

I have reviewed your letter of September 12, 1988 along with the sales contract and I adhere to the position expressed in my letters to *** of July 21, 1988 and June 3, 1988, which concluded that the FDIC would treat the funds in the escrow account as belonging to the developer for the purpose of determining insurance coverage.

You state in your September 12, 1988 letter that in a normal escrow situation, the risk of loss falls on the purchaser because legal title remains in the purchaser until the other party performs. While this is a correct statement of the law, it is inapplicable in this case because we do not have a true escrow arrangement for FDIC insurance purposes. Not only is the purchaser not a party to your "escrow agreement", but the developer is the true owner of the funds. In effect, the developer is requiring the deposit as partial payment in consideration for the performance of a contract.

Deposit insurance is based on the fundamental principle that the true owner of the funds, that is, the party who bears the risk of loss, is entitled to insurance coverage. In the situation described in your letter, the developer is the true owner. Once the purchaser pays the deposit to the developer, the purchaser has completed his obligation under the contract and the developer bears the risk of loss and becomes the true owner of the funds. See Paul v. Kennedy, 376 Pa. 312, 102 A.2d 158, 160 (1954), cited in Cradock v. Cooper, 123 So. 2d 256 (Fla. Dist. Ct. App. 1960) (holding that seller should bear risk of loss because purchaser had fulfilled conditions in agreement). The payment is refundable to the buyer as a matter of right only on the contingency of a default by the seller (or on the contingency of the failure of a condition that is not the fault of the buyer). If the developer should default, the buyer has a cause of action for the repayment of the earnest money or for specific performance. This potential cause of action does not create an ascertainable and vested ownership interest for the buyer in any specific funds held by *** and does not provide a basis for providing deposit insurance to the buyer.

Finally, because the bank is acting primarily as an agent for the developer, the relationship would be characterized as a principal/agent relationship and the provisions of 12 C.F.R. 330.5 would apply assuming the developer is a corporation. The trust account provisions of 12 C.F.R. 330.10 simply do not apply in this case since there is no irrevocable trust.

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