December 20, 1999
Re: Section 131 of the New York Banking Law
Dear [ ]:
Your October 28, 1999 letter requesting an opinion confirming that a bank chartered under the laws of a state other than New York State that maintains no branches in New York State ("Bank") may perform certain corporate trust and escrow activities as described in your letter without complying with the provisions of Section 131 of the Banking Law has been referred to me for response.
According to your letter, the Bank will act as Trustee for issues of bonds or indentures ("Debt Issues") issued by private sector companies organized under the laws of the State of New York, as well as municipalities, industrial development authorities or other governmental entities ("Issuers") located in New York State. Additionally, the Bank will act as escrow agent in transactions involving entities either organized under the laws of New York State or maintaining a place of business in this State.
All the administrative and other functions performed by the Bank as Trustee or escrow agent will be conducted outside New York State and the Bank will also hold all bank accounts, funds or securities outside New York State. Therefore, you assert that the only two possible contacts that the Bank could have with New York State would be either while acting as Trustee for a Debt Issue when the initial closing of a Debt Issue takes place in New York State or should the Issuer default on its obligations thereby requiring the Bank as Trustee to foreclose in New York State upon any property located here that was pledged as collateral to secure the Debt Issue. The Bank does not anticipate performing any other functions or maintaining trust or escrow agent activities through an office in New York.
Following the exchange of the documentation by the parties at the closing on a Debt Issue, funds are typically wired or delivered by check directly from the underwriter to the Issuer without being handled by the Trustee. After execution and delivery of documents and receipt of the funds, the Trustee must authenticate and release the debt instruments. The Bank represents that although the execution and delivery of any documents it holds as Trustee would take place in New York State, the authentication and release of the debt instruments would take place outside New York State.
In instances when the Issuer defaults on its obligations and the collateral is comprised of real property located in New York State, the Bank as Trustee will be required to institute an action in New York State to foreclose or realize upon such collateral. Further, in the event of a default or bankruptcy of the Issuer, the Trustee would be required to pursue legal action or assert claims on behalf of the holders of the Debt Issue in New York State.
Banking Law §131.3 states that a duly qualified out-of-state trust company may only act as a Trustee and exercise trust powers in New York State upon filing certain documents with the Superintendent as set forth in Banking Law §131.3. Therefore, you state that the two legal issues relevant to this matter are whether the functions performed by the Bank would be considered to be conducted in the State of New York, and if so, do they constitute exercising fiduciary powers.
Your analysis concludes that the Bank would not be exercising fiduciary powers in the State of New York since it would be performing all the administrative and other functions outside New York State since the execution and delivery of documents at a closing that takes place in New York State and the possible need to foreclose or otherwise realize upon collateral located in New York State, or enforce other legal rights or remedies in New York State if a default by the Issuer occurs, does not constitute the exercise of fiduciary powers.
Relying on prior letter opinions of the NYSBD, you also conclude that the Bank would not be involved in a fiduciary function while acting as an escrow agent on a Debt Issue. You cite an October 27, 1961 letter opinion stating that the receipt by a foreign bank branch of securities for safekeeping for its customers and transmitting its customers instructions to brokers to sell and buy securities for custodial accounts did not involve the exercise of trust functions prohibited by Banking Law §131.3. You also refer to a January 7, 1992 letter opinion stating that certain shareholder servicing activities provided by a bank to registered investment companies do not involve the exercise of fiduciary powers. That letter referred to NYSBDs Legal Interpretation LI3 ("LI 3"), which lists certain types of functions that could be exercised by a branch of a foreign bank that did not require authority to exercise fiduciary powers pursuant to Banking Law §131.3. You assert that the escrow functions that the Bank will be performing are similar to those listed in LI 3, and therefore, the Bank would not be required to obtain authority to exercise fiduciary powers.
With respect to the actions that the Bank will perform as Trustee, we agree with your conclusion that the delivery and execution of documents in New York State by the Bank as Trustee in connection with the closing of a Debt Issue Trustee would not constitute the exercise of fiduciary powers in New York State requiring the Bank to comply with the provisions of Banking Law §131.3. However, when Debt Issues involve the pledge of real property located in New York State as collateral, the Bank must comply with the filing requirements of Banking Law §131.3 since the Bank as Trustee would be required to exercise fiduciary powers in New York State in connection with the pursuit of the legal rights and remedies on behalf of the beneficiaries should such a default occur.
Additionally, we concur with your view that when acting as an escrow agent for Debt Issues, the Bank is not engaged in a fiduciary function and therefore, would not required to comply with the provisions of Banking Law §131.3.
I trust this is responsive to your inquiry.
Very truly yours,