Banking Interpretations

NYSBL 247 

April 25, 2006

[ ]

Re: Restrictions upon Trustees

Dear [ ]:

Your inquiry to the New York State Banking Department (“the Department), as to whether your proposed transaction would be prohibited by Banking Law Section 247(2)(d) has been referred to me for response.

You explain in your letter that [ ] Savings Bank (“the Bank”) is a New York State-chartered mutual savings bank which has a board of trustees governing the Bank. You further explain that one of the trustees is also a partner of a law firm and serves as counsel to the Bank in connection with real estate matters. Some of the other partners of this trustee’s law firm are the members of a limited liability company (“LLC”). The LLC intends to acquire commercial property and then lease said property to the law firm. The Bank would like to finance the loan to the LLC secured by a first mortgage on the land and the building comprising the property.

Banking Law Section 247(2)(d) provides that a savings bank trustee shall not:

“For himself or as agent or partner of another, directly or indirectly borrow or use any of the funds of the savings bank or become the owner of real property on which the savings bank holds a mortgage.”

The Legal Division of the Banking Department is of the view that the broad wording of Section 247 of the Banking Law reveals an intention to impose the most stringent of fiduciary standards upon trustees of savings banks. The proposed transaction would be prohibited by Banking Law Section 247(2)(a) as well as Section 247(2)d). Section 247(2)(a) prohibits a trustee from receiving a benefit from any loan made by the savings bank.

In the case at hand, the trustee is not one of the members of the LLC, however, the other partners of the trustee’s law firm have formed this LLC in order to purchase land and then lease it back to the law firm. It is conceivable that the law firm may be unable to make the payments on the lease agreement which would lead to a situation where the LLC would not have sufficient funds to make the monthly mortgage payments. If the Bank were to consider its options in such a case, including whether to foreclose, would it exercise independent business judgment or would it be influenced by the fact that the trustee is a partner of the law firm? As mentioned above, the Banking Department and the opinions of the Attorney General’s Office consistently held that Banking Law Section 247 be broadly construed. In view of the foregoing, it is the opinion of the Legal Division that the conflict of interest prohibited by Banking Law Section 247(2)(a) and 247(2)(d) would not be cured by financing the loan to an LLC that consisted of the other partners of the trustee’s law firm.

I trust that this has been responsive to your inquiry. If you have any questions or wish to discuss this further, please let me know.

Very truly yours,

Megan Prendergast
Associate Attorney