Account control agreements are common in loan transactions where cash held in a bank deposit account or securities and other investment property held in a securities account maintained with a financial intermediary are pledged as collateral. See La. R.S. 10:9-314, 10:9-106 and 10:8-106. Perfection by control is the exclusive means of perfection of a UCC security interest in deposit accounts as primary collateral (though funds in a deposit account may be subject to a security interest as proceeds from the sale or lease of other types of collateral such as inventory which has been perfected by filing), and perfection by control is required to assure priority over conflicting security interests affecting deposit accounts and securities entitlements with respect to securities accounts that are perfected by filing.  See La. R.S. 10:9-327(1) and 10:9-328.

A security interest in a deposit or securities account may be perfected by control when a debtor agrees with a financial institution acting as depositary bank or with a securities intermediary with whom a securities account is maintained that the named secured party may give the financial institution or securities intermediary binding instructions or entitlement orders regarding disposition of the funds or financial assets in the deposit or securities account without further consent of the debtor.[1]  Account control agreements typically accompany a separate security agreement where the debtor grants a security interest to a secured party to secure the underlying debt, and generally only agrees to allow the security interest to be enforced, and the underlying pledged funds or financial assets maintained in a deposit or securities account to be liquidated and applied to the secured debt, after the occurrence of a default and the passage of any applicable cure periods.

All control agreements are not the same. In a springing account control agreement, the secured party has immediate and uncontrolled right, as far as the depositary bank or securities intermediary is concerned, to act on the instructions of the secured party, but the debtor retains at least some rights to deal with funds and securities in the underlying account that it has always enjoyed, unless and until the financial institution or securities intermediary has received a “notice of exclusive control” from the secured party.  Some springing agreements allow unrestricted account access to the account by the debtor until a notice of exclusive control is sent.  Others allow limited access, such as to allow trading in the account or withdrawals of accrued interest or dividends, but not withdrawals of principal from a deposit account or proceeds from the liquidation of a security from a securities account which would reduce the account balance, even before a notice of exclusive control is issued.  Security agreements affecting such accounts typically provide that a notice of exclusive control will not be sent unless and until there has been a default in the secured obligation and any applicable cure periods have passed. But if a blocked account control agreement is used, it allows only the secured party to give disposition instructions or entitlement orders to make any withdrawals or issue liquidation instructions until the agreement is terminated, and the debtor is cut off from any control over or access to the account and has no rights to demand or receive any funds from the account so long as the account control agreement and the underlying security interest remain in effect.

What is an account owner/debtor to do when asked to sign such an agreement? First, the debtor must consider the balance or value of the account relative to the amount of the secured obligation. If the deposit or securities account is considered primary collateral, the underlying agreement governing the collateral requirements for the secured obligation may require an account balance at its inception that is equal or greater than the amount of the secured debt to meet the loan to value requirements for the collateral in the underlying secured obligation. If the account in question has deposits or other financial assets with a value that exceeds the value to loan, the debtor should only sign a springing account control agreement so that the debtor maintains some right of access to any excess funds until a default occurs.   Better yet, the debtor should consider moving any excess funds or securities out of the account before signing the control agreement so that the excess deposits in a deposit account or financial assets in a securities account are not encumbered in the event of a default in the secured debt.

While there are numerous ways to structure a control agreement that meets the necessary elements of control necessary to perfect a UCC security interest, the depositary institution or securities intermediary will likely have its own forms and its own policies as to the degree of access and control allowed an account owner debtor and its secured party when it agrees to recognize an adverse claim by a secured party.  Its forms will likely require that the secured party agree to subordinate its security interest to the security interests or setoff rights of the financial institution or securities intermediary, at least as to fees and expenses related to maintenance of the account, if not to other obligations the debtor may have to it. The parties must be careful to assure that the type of control arrangement envisioned by the control agreement with the financial institution or securities intermediary meets the needs of both the debtor and the secured party.

[1] Perfection by control over a deposit or a securities account may also be accomplished if the secured party becomes the bank’s customer with respect to the deposit account or the entitlement holder with respect to the securities account. Perfection by control over a deposit or securities account occurs automatically where the deposit account is maintained by the debtor with the secured party also acting as the depositary bank or if the secured party is the securities intermediary with whom the securities account is maintained. See La. R.S. 10:9-104 and 10:8-106.  However, because La. R.S. 10:9-327(4) provides that a security interest perfected by control with a control agreement has priority over a conflicting security interest perfected by automatic control, banks acting as secured parties frequently require control agreements affecting deposits accounts maintained with them as the depositary bank even though its security interest would be perfected by control automatically.

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