Banks who want to perfect a security interest in deposit accounts can do so easily by requiring the debtor to maintain its deposit accounts at the bank – UCC Article 9 provides that a secured party has “control” of a deposit account if the secured party is the bank with which the deposit account is maintained.[i] If a secured party has “control” of a deposit account, its security interest is deemed perfected.[ii]
Not all lending situations allow for the lender to also be the depository bank – a bank customer could obtain financing from a private lender and pledge its deposit account as collateral, or multiple banks may participate in a loan deal with only one bank serving as depository. Perfecting a security interest in a deposit account not maintained at the secured party’s bank is achieved by way of a Deposit Account Control Agreement (“DACA”).[iii] In order for a DACA to be effective, it takes at least three to tango. A DACA is an agreement signed by the depository bank, its customer, and one or more secured parties which memorializes the depository bank’s agreement to comply with instructions from the secured party regarding disposition of funds in the account without further consent of the customer. Some benefits of a DACA include (i) the customer keeps their depository relationship with the bank, and (ii) the depository bank generates additional treasury management revenue by facilitating the DACA.
DACAs have evolved to provide parties to the agreement with more flexibility. Historically, a “Hard Block” DACA was the only type of DACA permitted under UCC Article 9. Under a Hard Block DACA, the secured party takes immediate control of the account, and the customer loses control of the account. Amendments to UCC Article 9 permit a “Springing Block” DACA whereby the customer maintains access to the account, and the secured party only takes control after delivering notice to the depository bank. Springing DACAs provide customers access to their cash during the life of the loan, while also providing secured parties quick access to control of the cash in the event of a default.
If the loan involves a deposit account with government receivables, DACAs are generally prohibited by federal law.[iv] However, lenders can use what federal agencies refer to as a “Deposit Account Instruction Service Agreement” (“DAISA”). A DAISA provides a similar arrangement to a DACA, but complies with applicable federal law.
While the concept of a DACA may be simple, as with any agreement drafted by lawyers, DACA terms can quickly become complex and risky. If, for example, the subject deposit account is overdrafted or the depository bank misses a notice and money leaves the account when it shouldn’t, someone will be liable, and the terms of the DACA should address such scenarios ahead of time. Whether a bank is entering into a DACA as a secured party or a depository, it should carefully review reimbursement and indemnification obligations as well as general limitations of liability.
For more information, please contact Charlie Otten.
[i] KRS 355.9-104(1)(a)
[ii] KRS 355.9-314(1)
[iii] KRS 355.9-104(1)(b)
[iv] See 42 U.S.C § 1396a(32) and 42 U.S.C. § 1395g(c)
