Pledge of Deposit Account and Control Agreement

Issue/Inquiry

A Bank customer has provided a Control Agreement that the customer has entered into with the company lending its funds. Is this acceptable and compliant with all regulations? Is there additional documentation that is needed to do this or is the agreement sufficient?

Response Summary

Under Article 9 of the Uniform Commercial Code, a security interest in a deposit account is perfected by granting the secured party control of the account. One method of granting control over a deposit account is a control agreement, under which the secured party, the debtor, and bank agree with the secured party’s instructions to pay out funds in the account without further consent from the debtor. The Control Agreement in this case is such an agreement. Among other things, it does not allow the Grantor to withdraw funds or give instructions regarding the deposit account.

Response Detail

The Deposit Account Control and Pledge and Assignment of Deposit Accounts Agreement (the “Control Agreement”) in this case is between the Bank (the “Depository Bank”), the Bank’s customer (the “Grantor”), and the company making a loan to the Grantor (the “Lender”). Under the Control Agreement, the Grantor provides a security interest to the Lender in a deposit account that the Grantor has with the Bank, as listed in Schedule I, and gives the Lender control over the account.

Perfection of a security interest makes it enforceable against not only the parties to a transaction, but to third parties who may have an interest in the collateral. Under Article 9 of the Uniform Commercial Code, there are three ways of perfecting a security interest in a deposit account:

• The secured party is the bank that maintains the deposit account, in which case, perfection is automatic. UCC 9-104(a)(1)
• The secured party, debtor, and bank have agreed that the bank will comply with the secured party’s instructions to pay out the funds in the deposit account without further consent by the debtor. UCC 9-104(a)(2)
• The secured party becomes the bank’s customer with respect to the account. UCC 9-104(a)(3).

A bank is not required to enter into a control agreement, even if its customer directs it to do so. UCC 9-342.

The Control Agreement includes the following:

• Secures payment of obligations from the Borrower to the Lender under a certain Loan Agreement.
• The Depository Bank warrants that it has established the Deposit Account which is subject to the Control Agreement, as listed in Schedule I of the Control Agreement, that the Grantor is the sole owner of said account, and that its records do not show that it has received a notice of the pledge or assignment of the Deposit Account to any other party.
• The Depository Bank agrees that it will comply with instructions originated by Lender directing disposition from time to time of funds in the Deposit Account or as to any such matters relating to any such Deposit Accounts relating thereto without further consent by the Grantor.
• The Depository Bank shall not permit the Grantor or any other person except the Lender to withdraw any amounts from the Deposit Account or follow any instructions with regards the Depository Account, other than those approved by the Lender.
• The Depository Bank may rely on the instructions of the Lender without being required to inquire whether the obligations of the Grantor to the Lender are in default or whether the Lender is entitled to provide any instructions. The Lender agrees to indemnify the Depository Bank for any liability or expense incurred in carrying out the agreement or following the instructions of the Lender. This includes reasonable legal expenses.
• The security interest of the Lender is superior to any lien or right of set off the Depository Bank may have, except to the extent that such lien or right of set off is related to the customary fees of the Depository Bank regarding deposit accounts.
• The Depository Bank shall provide account statements to the Grantor and to the Lender upon the Lender’s request.

The Control Agreement satisfies the requirement of the Uniform Commercial Code for control of the deposit account pledged by the Grantor as collateral, as it requires the Bank to comply with the instructions of the Lender concerning the disposition of funds in the account without the further consent of the Grantor. As such, the Lender has a perfected security interest in the deposit account listed in Schedule I of the Control Agreement.

In executing the Control Agreement, the Bank should be aware that, thereafter, it cannot honor any instructions from the Grantor regarding the funds on deposit unless the Lender has approved such instructions. Any instructions related to the deposit account must come from the Lender. As provided by the Control Agreement, the Lender may provide such instructions from time to time. While the Control Agreement has been given to secure repayment of the obligations of the Grantor to the Lender, between the Bank and the Lender, there is no requirement that the instructions from the Lender regarding the deposit agreement must be related to the repayment of said obligations.

The Uniform Commercial Code provides that a secured party can establish control over the account even if the debtor retains the power to direct the disposition of funds from the account. UCC 9-104(b). However, in this case, the Control Agreement does not permit the Grantor to use the deposit account unless the Lender approves what the Grantor wants to do. This means that the Bank must do one of the following:

• Obtain the approval of the Lender any time the Grantor wishes to withdraw funds from or give instructions regarding the deposit account.
• Obtain an agreement amending the Control Agreement and signed by the Bank, the Lender, and the Grantor, which permits the Grantor to withdraw funds from or give instructions regarding the deposit account without the separate approval of the Lender.

If the Bank does not obtain a separate agreement allowing the Grantor to withdraw funds from the deposit account or provide instructions regarding such, then it cannot allow the Grantor to do either without the approval of the Lender.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, September 14th, 2020 at 9:33 am.