Chapter 11 Protection of Interests in Cash

• Jurisdiction: United States

Chapter 11 Protection of Interests in Cash

Creditors can gain protections through security interests in deposit accounts, where most cash resides, which are governed by the Uniform Commercial Code (UCC). In addition to the protections offered by the UCC, creditors' interests in cash may be safeguarded using lockboxes. Lockboxes also protect debtors' interests in cash, and debtors can further safeguard their ownership interests through insurance.

A. Uniform Commercial Code

Perfection of a security interest in a deposit account under the UCC is only accomplished through "control."¹¹⁹ The three means by which a secured party obtains control of a deposit account are set forth in § 9-104 of the UCC. A secured party has control if (1) the secured party is the bank within which the deposit account is maintained, (2) the debtor, the secured party and the bank enter into an authenticated agreement that the bank will comply with the instructions of the secured party directing disposition of the funds without further consent of the debtor, or (3) the secured party becomes the bank's customer with respect to the deposit account.¹²⁰

The first means of obtaining control is simple enough. The debtor simply maintains the account at the bank, which is also the secured party. The second, and frequently used, means of obtaining control requires a three-party agreement that is sometimes called a deposit account control agreement (DACA) or a blocked account agreement. The third means requires the secured party to be the actual owner of the account with the right to direct the disposition of the funds. Significantly, perfection by control is not available for bank accounts evidenced by an instrument, such as certain certificates of deposit.¹²¹

B. Deposit Account Control Agreements

DACA arrangements fall into two categories: In a "springing" arrangement, the DACA provides that the borrower may use the funds in its bank account without restriction unless and until the secured creditor sends a "notice of control" to the bank, usually after the borrower defaults. Once the notice of control becomes effective, the bank must follow the secured creditor's instructions with regard to the account, not the borrower's instructions, which generally require the deposit bank to send all money to the secured creditor. In a "hard" DACA arrangement, the secured creditor receives all monies from the first day of the arrangement.

Banking institutions often have their own forms of DACAs; sometimes they even have multiple forms. A form of DACA used when the bank is the depository institution may be different than the form it uses when it is the secured creditor. The degree to which a DACA can be negotiated varies from situation to situation. Potential areas of negotiation include the degree to which the depository institution agrees to subordinate its claims against its customer (usually, the bank's customary fees and charges related to the deposit account) to the claims that the secured creditor has against the customer, the manner of giving a notice of control (and how long after receipt of notice the "control" takes effect), and how or when the DACA may be terminated.

A depository institution's form may require that the notice of control be given by first class or overnight...