What Determines Whether an Account Is a General Account or a Special Account?
 
July 27, 2004
 
Michael Weissman - Chicago

Merrill Lynch Mortgage Capital, Inc. v. Federal Deposit Insurance Corporation, 293 F.Supp. 2d 98 (D.D.C. 2003) arose out of the failure of Chicago-based Superior Bank, FSB.

In March of 2001, Merrill Lynch Mortgage Capital and Superior, a federally-insured savings and loan association, executed an agreement under which Merrill purchased large pools of residential mortgages originated by Superior. The agreement stated that ownership and title to the mortgages inured to Merrill immediately upon the date of sale.

Although Superior sold the mortgage pools to Merrill, Superior retained the servicing rights for which it charged a fee. Monthly, Superior was to remit principal and interest payments it received from borrowers, less servicing expenses, to Merrill. Furthermore, the agreement called for Superior to segregate all funds collected on the mortgages separate and apart from its own funds and maintain a Custodial Account title “Superior Bank FSB, in trust for Merrill Lynch Mortgage Capital, Inc.”

In July 2001, the Office of Thrift Supervision closed Superior and retained the FDIC as receiver. At that point, $10,084,567.43 was in the custodial account. A number of issues arose between Merrill and the FDIC, the most critical of which was a refusal by the FDIC to recognize the custodial account as a special account. If the account were deemed a special account it would have had priority over all other claims to Superior’s assets and be paid in full. In contrast, if Merrill’s account were deemed a general account, it would receive 65 percent of its $10 million claim comparable to what other uninsured depositors would be paid.

Beginning its discussion, the court noted that: “If a bank fails, special deposits do not become part of the receivership estate, and therefore special depositors are entitled to be paid in full before other creditors of the bank.” However, the court also noted that deposits are generally presumed to be general, not special, thus imposing on the depositor the burden of proving the existence of an express or implied agreement to deem the account a special account.

Looking at the agreement between Merrill and Superior, the court held that it overcame the general deposit presumption and created a special account primarily because Superior was to keep the mortgage collections “separate and apart from any of its own funds and general assets.” Furthermore, the court observed that “… the existence of a written agreement – explicitly obligating the bank to segregate deposited funds and leaving legal title with the depositor – seems to be, practically, the dispositive issue in deciding whether a deposit is special.”

What’s the point?

If a depositor and a depository institution wish to establish a special account, use of a written agreement obligating the depository to keep the funds in the account separate and distinct from all other funds is essential to overcome the presumption that the account is a general account.

For more information e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.