FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Insurance Coverage of Attorney Escrow Account Containing Clients' Down Payments on Real Property
November 9, 1990
J. William Via, Jr., Counsel
This is in response to your inquiry regarding insurance coverage for a deposit account held by your firm which consists of funds owned by clients.
In order for such an account to qualify for "pass-through" (or pro-rata) deposit insurance, the deposit account records of the bank must disclose that it is held in a representative capacity (e.g., by an agent, custodian, trustee or nominee) and the records of either the nominal depositor or the bank maintained in good faith and in the regular course of business must reveal the ownership interest in the account of each beneficial owner. See 12 CFR §330.4. A deposit account identified by your firm's name followed by "Special Account" or "Attorney Investment Account" does not in either case disclose that the account is held in a representative, or fiduciary, capacity.
When the applicable requirements for "pass-through" deposit insurance are met, then each beneficial owner of an interest in the qualifying account will be recognized for deposit insurance purposes in the same manner as if he or she had made a deposit in his or her own name. See 12 CFR §330.6(a). Thus, assuming that the ownership interest in such an account is the only "single ownership account" (see 12 CFR §330.5) that each beneficiary owns in the institution, the deposit would be insured up to $100,000 per beneficial owner.
In the case of funds held by your firm that consist of down payments in real property purchase and sale transactions, the question of whether the funds are owned by the buyer or seller pending closing ought to be ascertainable from the applicable contract provisions and state law. Typically, the down payment is required by the contract to be applied by the seller to the purchase price. The right of the buyer (and the concomitant obligation of the seller) in this respect exists independently of what actually happens to the funds once payment is duly made to the seller, or the seller's agent (i.e., it is the seller who bears the risk of loss if, for example, the funds comprising the payment are thereafter lost). An amount equivalent to the down payment is repayable 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 contractual condition that is not the fault of the buyer); further, in the case of the seller's default, the buyer may elect to seek specific performance of the contract. In short, under the typical contract, the buyer relinquishes ownership of (and thus risk of loss in) the down payment when it is paid to the seller or its agent and retains a potential cause of action for the amount paid, or for specific performance of the contract, together with damages in either case, if the seller 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 any specific funds held by (or for) the seller, and does not provide a basis for "pass-through" deposit insurance for the benefit of the buyer. Rather, in the typical case, it is the seller who owns the down payment, and bears the risk of its loss, and who is eligible, therefore, to claim beneficial ownership in a qualifying representative deposit account comprised of down payments.
Enclosed, for your convenient reference, is a copy of our regulation that governs deposit insurance coverage.