Control of deposit accounts as collateral

A security interest in a deposit account as original collateral can be perfected only by control. Filing does nothing.

Three routes to control. The secured party is the bank at which the account is maintained; the secured party becomes the bank’s customer on the account; or the bank authenticates an agreement to comply with the secured party’s instructions without further consent of the debtor.

The bank as secured party has automatic control, which is why a lender’s own institution is the preferred depository in a credit facility.

The control agreement is the common route for accounts elsewhere. It may be blocked, requiring the depository to follow the secured party’s instructions immediately, or springing, activating on a notice of exclusive control. Lenders generally accept springing control; the negotiation concerns the notice period and the bank’s protections.

Bank protections. Depository banks require indemnity, a period to implement instructions, preservation of their own setoff rights for fees and returned items, and no duty to monitor.

Priority. A secured party with control prevails over one without. As between those with control, the bank generally has priority except against a secured party that becomes the bank’s customer.

Practical failure mode. A credit agreement requiring control agreements within a post-closing period, never followed up, leaving the cash unperfected.