Opinion 99 - 16


This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

INDEPENDENT CONTRACTORS -- Defense and Indemnification (indemnification of custodial bank)

MUNICIPAL CORPORATIONS -- Powers and Duties (authority to indemnify custodial bank)

MUNICIPAL FUNDS -- Deposits and Investments (authority to indemnify custodial bank)

PUBLIC CONTRACTS -- Terms and Conditions (indemnification provision in custodial bank agreement)

TOWNS -- Powers and Duties (authority to indemnify custodial bank)

GENERAL MUNICIPAL LAW, §10: A town may enter into a custodial agreement under which the custodial bank will be indemnified for costs, expenses, damages, liabilities or claims that do not arise out from the custodian's own negligence or willful misconduct. 15 Opns St Comp 1959, p 37 is superseded to the extent it may be inconsistent.

This is in response to your inquiry concerning the propriety of an indemnification provision in a proposed custodial agreement. You indicate that the town intends to enter into a three party custodial agreement with the bank that is the town's official depository and a bank that will act as the custodian of the collateral pledged by the depository bank as security for the town's deposits. The depository bank has requested that the town execute the model security and custodial agreements prepared by the Office of the State Comptroller pursuant to section 44 of chapter 708 of the Laws of 1992 (see Office of the State Comptroller's Financial Management Guide, Cash Management and Investment Policies and Procedures, Appendix E). Paragraph 6(a) of this model custodial agreement provides that the local government and the depository bank:

agree, jointly and severally, to indemnify the Custodian and to hold it harmless against any and all costs, expenses, damages, liabilities or claims, including reasonable fees and expenses of counsel, which the Custodian may sustain or incur or which may be asserted against the Custodian by reason of or as a result of any action taken or omitted by the Custodian in connection with operating under this Agreement, except those costs, expenses, damages, liabilities or claims arising out of the negligence or willful misconduct of the Custodian or any of its employees or duly appointed agencies.

You note that this clause appears to be inconsistent with our 15 Opns St Comp, 1959, p 37. In that opinion, this Office concluded that a town had no authority to agree to indemnify a lessor for damages sustained through the town's use of the leased property as a town garbage dump. We indicated that the authority in Town Law, §64(4) for a town to contract to purchase insurance indemnifying the town against losses arising from injuries to persons or property did not authorize a town to enter into a general indemnification agreement with a lessor. You ask, therefore, whether the 1959 opinion still represents the view of this Office.

We still believe that Town Law, §64(4), relative to the purchase of insurance indemnifying the town, does not constitute authority for a town to indemnify a third party. It is our opinion, however, for the reasons set forth below, that a town may include an indemnification clause such as the one set forth above in its custodial agreements.

In relation to the model custodial agreement at issue here, we note, initially, that sections 10 and 11 of the General Municipal Law prescribe uniform procedures for securing deposits and investments of public funds by local governments. All public deposits in excess of the amount insured under the provisions of the Federal Deposit Insurance Act must be secured in accordance with subdivision 3 of section 10. Among the permissible methods of securing public deposits specified under subdivision 3 is the pledge of certain securities, together with a security agreement from the depository bank or trust company (General Municipal Law, §10[3][a]). If the securities pledged as collateral are not registered or inscribed in the name of the local government, they must be delivered in a form suitable for transfer or with an assignment in blank to the local government or to a bank or trust company with which the local government has entered into a written custodial agreement (ibid.). Subdivision 3 of section 10 prescribes certain minimum requirements for the custodial agreement, including that it contain all provisions necessary and sufficient to secure the local government's interest in the collateral. In addition, subdivision 3 states that "[s]uch agreement may also contain such other provisions as the governing board may deem necessary."

Pursuant to section 44 of chapter 708 of the Laws of 1992, the legislation that enacted the new section 10, the Office of the State Comptroller prepared and distributed model security and custodial agreements for local governments for the purpose of providing information and assistance to local governments that were formulating local agreements. We believe that the authority in section 10(3) of the General Municipal Law to include in the custodial agreement "such ... provisions as the governing board may deem necessary" is sufficient to authorize the inclusion of the indemnification provision contained in our model agreement.

In reaching this conclusion, we note that several courts of this State have upheld analogous municipal indemnification provisions (see Fisher v Biderman, 154 AD2d 155, 552 NYS2d 221, lv denied 76 NY2d 702, 559 NYS2d 239; Arocho v Town of Brookhaven, 71 AD2d 635, 418 NYS2d 474, affd 51 NY2d 778, 432 NYS2d 697; Singer v Liberty Lines, 183 AD2d 820, 584 NYS2d 111; Twitchell v Town of Pittsford, 106 AD2d 903, 483 NYS2d 524). Moreover, in a several opinions rendered after 15 Opns St Comp, 1959, p 37, this Office concluded that a municipality may enter into a contract containing similar indemnification provisions (1980 Opns St Comp No. 80-219, unreported; 1980 Opns St Comp No. 80-210, p 57; 1980 Opns St Comp No. 80-50, unreported).

You should be aware, however, that local governments are not required to enter into custodial agreements identical to the models prepared by this Office (see 1995 Opns St Comp No. 95-32, p 64). Provided that a local government ensures that a custodial agreement includes all provisions necessary and sufficient to secure the local government's interest in the collateral, it would be within the discretion of the town board to negotiate as to whether the custodial bank would be indemnified in a manner similar to that provided for in the model agreement. In negotiating the terms of a custodial agreement, it would be incumbent upon the governing board of the local government to assess the potential risks and costs associated with the services to be provided under the contract and whether the indemnification is in the best interests of the local government.

Accordingly, it is our opinion that a town may enter into a custodial agreement under which the custodial bank will be indemnified for costs, expenses, damages, liabilities or claims that do not arise out from the custodian's own negligence or willful misconduct. 15 Opns St Comp 1959, p 37 is hereby superseded to the extent it may be inconsistent with this opinion.

December 31, 1999
Herbert A. Kline, Esq., Town Attorney
Town of Kirkwood