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4000 - Advisory Opinions

Insurance Coverage Provided for Commingled Funds Contributed by Subscribers for Capital of Corporation About To Be Formed


April 27, 1992

Mark A. Mellon, Attorney

This is in response to your letter of April 22, 1992 to Mr. Alan Kaplan. Based on your letter and telephone conversations which I have had with one of your associates, Mr. ***, it is my understanding that you wish to ascertain how much insurance coverage is available for funds held in an escrow account.

Your client ("the Bank") proposes to hold funds from subscribers in an escrow account. If sufficient funds are contributed, the money will become the capital of a newly-formed corporation. If an insufficient amount is contributed, the funds will revert to the subscribers. Contributions will be credited initially to a non-interest bearing trust checking account. The funds of each subscriber will then be routed to an individual interest-bearing sub-account. Mr. *** has informed me that the Bank itself will pay the interest earned by the sub-accounts and the funds will not be invested in the obligations of a third party. Mr. *** has also stated that the escrow agreement provides that the funds will be the property of the subscribers until a sufficient amount has been accumulated for capitalization purposes.

The FDIC insurance regulations state that the deposit account records of an insured depository institution must disclose the existence of any fiduciary relationship before any claim for deposit insurance based on that relationship will be recognized. 12 C.F.R. § 330.4(b)(1). If the deposit account records of the insured depository institution do disclose the existence of a fiduciary relationship, the details of the relationship and the interests of the other parties in the account can then be determined either from the deposit account records of the insured depository institution or from the records of the fiduciary, the nominal depositor (or some person or entity whom the fiduciary has engaged to perform that task). 12 C.F.R. § 330.4(b).

If the FDIC disclosure and recordkeeping requirements described above are satisfied, deposit insurance should then pass through to the owners of the funds in the escrow account and sub-accounts in the event of an insurance determination. The issue of ownership of the funds will have to be resolved in accordance with the escrow agreement and relevant state law. If the funds are deemed to belong to the subscribers, they will be insured on an agency basis to the subscribers as principals in whatever right and capacity that those funds are held in. 12 C.F.R. § 330.6(a). For example, if a person contributes his own funds to the escrow account, they would be aggregated with any other individual funds which he might have on deposit with the Bank and insured up to $100,000 pursuant to 12 C.F.R. § 330.5. If the funds are deemed to belong to the corporation, they will be aggregated and added to any other funds which the corporation might have on deposit with the Bank and insured up to $100,000 as corporate funds. 12 C.F.R. § 330.9.

I hope that this answer is responsive to your query. Please do not hesitate to contact me if you should have any questions about this or any other matter.

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