A lender may establish “control” in one of the following ways: (i) the borrower maintains his or her deposit account directly with the lender; (2) the lender becomes the beneficial owner of the borrower`s custodian accounts with the borrower`s custodian banks; or (3) the lender and borrower enter into an agreement with the borrower`s custodian bank to control the deposit account (called DACA). These agreements apply in any event in addition to the creation of security by which the borrower grants a security right in its deposit accounts. Under the terms of DACA, the borrower may or may not have direct access to the funds in the account. In “uncalled” or “jumper” DAACs, borrowers can access funds; in “accessible” or “blocked” CAECs, borrowers are not allowed to do so. However, it is important to note that a lender may change these terms – either by “invocation” or “irrevocation” – at its sole discretion as often as it wishes. It is possible to include multiple accounts in a DACA, but they must all have called the same status or not. UCC § 9-104 – The “Uniform Commercial Code” section, which deals with “Deposit Account Control”. This section allows you to perfect the collateral on deposit accounts as an original guarantee. Alternatively, the lender may release the loan funds to the borrower, but as a condition of the loan, require that all hotel income go through the controlled DACA account. The lender monitors the income, and if the borrower is unable to start paying off the mortgage, the lender can redirect some or all of the income to mortgage payments. The parties wish to have this involvement of third parties so that they know that the agreement is respected on the agreed terms. The general rule under the UCC is that perfection, the effect of perfection or non-perfection and the priority of a security right are subject to the local laws of the jurisdiction in which the debtor is located. However, according to uCC §-9-304(a), the local law of the jurisdiction of a depositary bank regulates the perfection, perfection or non-perfection effect and priority of a security right in a deposit account held with the deposit bank.
In addition, the right banking partner is crucial for urgent transactions. A strong banking partner can act quickly to implement DACA between all parties. The bank service level agreements (SLAs) required to secure CASSs can range from days to weeks. Working with a bank that understands time sensitivity and strives to operate within your constraints is essential to ensure the smooth running of transactions. Although a security right in a deposit account can be further developed as a “product” of other collateral (e.g. B debt collection) as long as the proceeds are “identifiable” under the Unified Commercial Code (the “UCC”), the only way is to perfect a security right in a deposit account as the primary collateral (and to take precedence over a competing security based on a redemption request), to have “control” over the deposit account. Submitting a UCC funding statement is completely ineffective for this purpose. Each custodian bank often has its own form of DACA, although the elements listed above are common to each form. CAACs are being discussed and negotiated. Therefore, borrowers and lenders should realize that it may take some time before a DACA is agreed to and signed by all parties so that the lender can obtain an advanced security on a deposit account. Entering into a deposit account control agreement allows lenders to refine their interest on a debtor`s deposit accounts (UCC § 9-104) and to define who can initiate disposition instructions (transfer) to the bank with respect to the controlled deposit account (controlled deposit accounts).
In the wake of the recent financial crisis, it has become clear that cash is indeed king in many ways, especially as a form of security. Therefore, secured parties would be advised to ensure that they have a well-settled security right in a debtor`s deposit accounts. In this regard, secured parties should consider adding language to their control arrangements in order to avoid a possible pitfall. Strafford`s live courses offer you a convenient, high-quality training option. We have been serving the legal and accounting community for over 30 years. For a secured lender, cash is often the most critical security. Borrowers usually hold cash in deposit accounts with a bank. .