What Is a Deposit Account Control Agreement?

A Deposit Account Control Agreement (DACA) is a legal arrangement establishing a security interest in a deposit account. It enables a lender to secure its claim over funds held in the account, providing a framework for managing and controlling access to these funds when they serve as collateral for a loan. A DACA helps assure lenders they can recover their investment if a borrower defaults.

Understanding Deposit Account Control Agreements

A Deposit Account Control Agreement is a three-party contract involving a customer, a lender, and a bank. The customer (debtor) owns the deposit account and grants a security interest. The lender (secured party) provides financing and seeks to secure its claim. The depository bank is the financial institution where the account is maintained.

The primary purpose of a DACA is to “perfect” a lender’s security interest in a deposit account under Article 9 of the Uniform Commercial Code (UCC). Perfection is a legal process that makes a security interest enforceable against third parties and establishes the lender’s priority claim on the account’s funds. Without perfection, a lender’s claim might be subordinate to other creditors, especially in bankruptcy.

The UCC, a comprehensive set of laws governing commercial transactions, specifically addresses secured transactions. For deposit accounts, control is the exclusive method of perfecting a security interest, meaning a UCC-1 financing statement alone is insufficient. This control allows the lender to direct the disposition of funds in the account without further consent from the debtor, protecting the lender’s interest.

Methods of Establishing Control

Control over a deposit account can be established through specific methods outlined in UCC Article 9-104. The most common approach involves a three-party agreement, known as control by agreement. In this scenario, the debtor, the secured party, and the depository bank all agree in an authenticated record that the bank will comply with instructions from the secured party regarding the disposition of funds without requiring additional consent from the debtor.

Another method for establishing control occurs when the secured party is the bank holding the deposit account. The bank automatically has control over the account by virtue of being the depository institution, simplifying the perfection process as no separate control agreement is necessary.

The third method involves the secured party becoming the bank’s customer with respect to the deposit account. This means the account might be titled in the secured party’s name or set up to grant the secured party exclusive control over the funds. This method is analogous to a hard pledge of investment property.

DACAs operate in two primary ways: active (or blocked) and passive (or springing). An active DACA grants the lender immediate and exclusive control, meaning the borrower cannot access or withdraw funds without lender consent. A passive DACA allows the borrower to retain control until a predefined trigger event, such as a loan default, occurs, at which point control “springs” to the lender.

Common Provisions in a DACA

Deposit Account Control Agreements contain several key provisions that define the rights and obligations of all parties. A central clause is the grant of control, where the depository bank agrees to follow the secured party’s instructions regarding the account. This provision outlines the conditions under which the secured party can direct fund transfers or freeze the account.

Many DACAs include a “no adverse claims” representation, where the bank confirms no knowledge of other claims or agrees not to honor conflicting instructions. This helps ensure the secured party’s priority. The agreement also contains standard representations and warranties from each party, affirming their authority and the accuracy of provided information.

Indemnification clauses are common, protecting the depository bank from liabilities that may arise from complying with the DACA’s terms. Both the debtor and the secured party agree to indemnify the bank against losses, claims, or expenses, except in cases of the bank’s gross negligence or willful misconduct.

Provisions for termination outline how the DACA can be concluded, usually upon notice from the secured party indicating the underlying debt is satisfied or the security interest is released. Specifying the governing law, typically a state’s version of the Uniform Commercial Code, ensures clarity. Some DACAs also address subordination, clarifying the priority of security interests if multiple lenders are involved.

Real-World Applications of DACAs

Deposit Account Control Agreements are used across various financial sectors to secure lending. In asset-based lending (ABL), where businesses secure loans with current assets, DACAs allow lenders to control cash and deposit accounts serving as collateral. This ensures cash flows can be directed to repay the loan.

DACAs are used in bankruptcy proceedings, particularly concerning cash collateral. When a debtor files for bankruptcy, their cash and cash equivalents become “cash collateral” under Section 363 of the Bankruptcy Code. Lenders with a perfected security interest via a DACA can control these funds, preventing the debtor from using them without lender consent or a court order.

In securitization transactions, DACAs secure collection accounts in structured finance, where future cash flows from assets are pooled and converted into marketable securities. DACAs ensure payments from underlying assets are directed to the special purpose entity or trustee for distribution to investors. This provides comfort to investors regarding the flow of funds.

DACAs are included in intercreditor agreements, which define rights and priorities among multiple lenders to the same borrower. By establishing control over deposit accounts, DACAs clarify which lender has priority over cash collateral, especially in complex financing structures.

DACAs are utilized in vendor financing and supply chain finance arrangements. Here, a lender might provide financing against a company’s accounts receivable or inventory. DACAs ensure cash generated from sales is deposited into a controlled account, giving the lender oversight and access to funds as collected.