Source: http://www.dfs.ny.gov/legal/interpret_opinion/banking/lo101028.htm
Timestamp: 2015-10-10 14:25:57
Document Index: 734085743

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NYS DFS - Banking Interpretations - Banking Law: October 28, 2010
NYBL 580
Deputy Superintendent and Counsel Marjorie Gross
Thomas Eckmier, Senior Attorney
Budget Planners - Reimbursement of Payments under a Surety Bond or Pledged
Deposit pursuant to Section 580(4) and Part 402
If an individual was not a New York state resident when he or she entered into a budget planning contract with a licensed budget planner, are payments made by such individual eligible for reimbursement pursuant to Banking Law ("BL") Section 580(4)?
Recommendation No. BL Section 580(4) states that a licensed budget planner's security bond or deposit shall be used to reimburse payments "by debtors" that have been improperly distributed. In turn, Parts 402 and 404 of the Superintendent's Regulations define "debtor" as an individual who was a New York resident at the time he or she entered into a budget planning contract with a licensee. Thus, payments by an individual who was not a New York resident when he or she entered into a budget planning contract are not payments by a "debtor" and are not eligible for reimbursement from a licensee's security bond or pledged deposit.
Reasoning BL Section 580(4) requires budget planner licensees to maintain a surety bond. In lieu of a bond, a licensee may also "keep on deposit" various assets, including dollar deposits. According to BL Section 580(4), the proceeds of such surety bond or pledged deposit
"shall constitute a trust fund to be used exclusively to reimburse payments by debtors that have not been properly distributed to creditors or to reimburse fees determined by the superintendent to be improperly charged or collected and, in the event of the insolvency, liquidation, or bankruptcy of such licensee, to pay outstanding banking department examination costs and assessments" (emphasis added).
Further, Section 402.1 (d) of Part 402 states, "For purposes of this Part ... the term 'debtor' shall mean an individual who enters into a contract with a licensee while the individual is a New York resident"; and this definition is unquestionably meant to apply to the use of the word "debtors" in BL Section 580(4). In this regard, I note that Section 402.5 of Part 402 repeats the above-quoted text from BL Section 580(4) nearly verbatim in prescribing the language which a surety bond or deposit agreement must contain (and which the Deposit Agreement does contain). Moreover, Part 402 was adopted in 2003 in conjunction with amendments to BL Article 12-C that included the addition of the security bond and pledged deposit requirements of BL Section 580(4).2
A separate but highly similar definition of "debtor" is found in Section 404.1 (a) of Part 404: "For purposes of this Part ... the term 'debtor' shall mean an individual who enters into a contract with a licensee and is at that time a New York resident.”3 In addition, Section 404.2 of Part 404 explains that, pursuant to "Section 580.4 of article 12-C," a surety bond or pledged deposit is "used to reimburse payments made by debtors that have not been properly distributed by the licensee to the creditors of the debtors."4 This extended, explicit reference to the surety bond and deposit provisions of the Banking Law indicates that the definition of "debtor" in Part 404 is, like the nearly identical definition in Part 402, intended to apply to the word "debtors" as it is used in BL Section 580(4).
I would also note that these definitions of "debtor" were promulgated pursuant to BL Section 587, which authorizes the Superintendent to make "such general rules and regulations ... as he may deem necessary for the proper conduct of the business authorized and licensed" under BL Article 12-C. Further, these definitions of "debtor" are consistent with the jurisdictional requirements for the licensing of budget planners found in the General Business Law ("GBL"). Specifically, GBL Section 455(1) states:
"[A] person or entity shall be considered as engaged in the business of budget planning in New York, and subject to ... the licensing and other requirements of article twelve-C of the banking law, if such person or entity solicits budget planning business within this state and, in connection with such solicitation, enters into a contract for budget planning with an individual then resident in this state" (emphasis added).
In short, Parts 402 and 404 offer highly similar, consistent definitions of the term "debtor"; those definitions are intended to apply to the use of the word "debtors" in the surety bond and deposit provisions of BL Section 580(4); and those definitions are consistent with the business of budget planning as it is authorized and licensed under BL Article 12-C and the General Business Law.
Moreover, the reimbursement provisions of BL Section 580(4) are repeated nearly verbatim in the Deposit Agreement, to which the Superintendent is a party, along with [---] (the "Depository"). Specifically, the Deposit Agreement states:
"The proceeds of all ... deposit(s) pursuant to this Agreement shall constitute a trust fund to be used exclusively to reimburse payments by debtors that have not been properly distributed to creditors.... [In such case], the Depository shall, upon the order of the Superintendent, promptly deliver [such proceeds] ... to the Superintendent for disposition in accordance with the applicable provisions of the Banking Law."
Thus, the use of [---]’s Budget's pledged deposit to reimburse payments made by persons other than "debtors" would not only be contrary to BL Section 580(4); such use would also appear to violate the terms of the Deposit Agreement.
In sum, the payments that can be reimbursed pursuant to BL Section 580(4) are "exclusively" "payments by debtors." If an individual was not a New York resident when he or she entered into a budget planning contract, that individual is not a "debtor." In turn, payments by such individuals are not "payments by debtors" and cannot be reimbursed. [---]
Noted: MEG.
The Section 402.1 (d) definition of "debtor" has been included in Part 402 since that Part was adopted on an emergency basis effective April 7, 2003, which was also the effective date of BL Section 58O(4). Part 402 has since become permanent. This definition of "debtor" has been included in Part 404 since that Part was adopted on an emergency basis effective December 23, 2003. Part 404 has since become permanent.
The blank surety bond form provided by the Banking Department to applicants contains yet another definition of "debtor," which is consistent with those found in Parts 402 and 404: "As used herein, the term 'debtor' shall mean an individual who enters into a New York contract with a licensed budget planner and is then a New York resident." No definition of "debtor" is found in the deposit agreement form, but that form does make repeated reference to the deposit and bond provisions of Part 402. About DFS