Emerging Views®

Instruments of Finance – The Deposit Account Control Agreement

For a secured lender, cash is often the most critical piece of collateral. Borrowers generally keep cash in deposit accounts at a bank. Thus, a lender will want to obtain a perfected security interest in those deposit accounts in order to have a perfected security interest in that cash.

Article 9 of the Uniform Commercial Code (UCC) defines a deposit account as a demand, time, savings, passbook, or similar account maintained with a bank. Unlike with most types of collateral, the filing of a UCC-1 financing statement does not perfect a lien on a deposit account. A lender can perfect a lien on a deposit account only by obtaining "control" over the account.

A lender can establish “control” in any of the following ways: (i) the borrower maintains its deposit account directly with the lender; (2) the lender becomes the actual owner of the borrower's deposit accounts with the borrower's depository banks; or (3) the lender and borrower enter into a deposit account control agreement (known as a DACA) with the borrower's depository bank. These arrangements are, in all cases, in addition to the security agreement through which the borrower grants a security interest in its deposit accounts.

The lender should obtain a DACA from each third-party depository bank with which the borrower has a deposit account. A depository bank that signs a DACA agrees to comply with the lender's instructions regarding the borrower's deposited cash, without further action by or consent of the borrower. Such an agreement gives the lender "control" of the deposit account that is required for perfection under the UCC.

There are two principal forms of DACAs, either of which is sufficient for purposes of control and perfection under the UCC. A "blocked" control agreement provides that the borrower will have no access to the funds in the deposit account(s) and that the lender will have complete control over the funds. The more common “springing” control agreement provides that the borrower can access the deposit account(s) until the lender delivers a notice of exclusive control to the depository bank. Generally, such a notice can be given by the lender only if the borrower is in default under the underlying loan. Once such notice is given, the depository bank must stop complying with instructions from the borrower regarding the deposit account(s) and comply with the instructions of the lender. Typically, a springing DACA includes, as an exhibit, a form of notice of exclusive control.

From the lender's perspective, the DACA also should contain the following provisions:

• An acknowledgment by the depository bank that the DACA is intended to evidence the lender's "control";
• A representation by the depository bank that the accounts in question are "deposit accounts";
• An agreement by the depository bank that it will not change the name or account number of the deposit account(s) without the written consent of the lender;
• An agreement by the depository bank and the borrower to notify the lender prior to closing any deposit account(s) and to give the lender an opportunity to enter into a new DACA with respect to any deposit account(s) into which the borrower might move the cash collateral; and
• An agreement by the depository bank to subordinate any lien that it has on the deposit account and to waive its right of set-off against the deposit account, except to the extent of deposits credited to the account that are returned unpaid and ordinary service fees charged by the depository bank.

Each depository bank often has its own form of DACA, although the elements listed above are common to each form. DACAs are subject to some discussion and negotiation. Thus, borrowers and lenders should recognize that it can take some time to get a DACA agreed and signed by all parties so that the lender can obtain a perfected security interest in a deposit account.

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