Deposit Accounts as Collateral Under Revised Article 9

Deposit Accounts as Collateral Under Revised Article 9

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One of the most significant practical effects of the Article 9 revision is that many types of transactions not currently affected by Article 9 will be governed by the revised act. Although there are several areas where the scope of Article 9 has been expanded, the two most significant changes in the scope of Article 9 are: (1) the revised act will govern asset securitization transactions and (2) the revised act makes it fairly simple to obtain a security interest in a business debtor's bank accounts. While next month's column will discuss the provisions dealing with asset securitization, this column analyzes the new rules governing security interests in bank accounts.

Bank Accounts as Original Collateral

The uniform version of current Article 9 does not apply to most security interests in bank accounts. Current §9-1041 expressly excludes from Article 9's scope "a transfer of an interest in any deposit account," except to the extent that the funds in the account represent identifiable proceeds of some other collateral. The "deposit account" definition includes virtually all bank accounts except for certificates of deposit. Thus, current Article 9 does not apply to a transaction that creates a security interest in a typical bank account as original collateral. It would, however, apply to a security interest in a certificate of deposit as original collateral and would apply to the extent that the proceeds of some other collateral are deposited into a deposit account.

The exclusion of deposit accounts from current Article 9 was not designed to prohibit security interests in deposit accounts. It merely left such transactions subject to the state's non-UCC common law. However, the practical effect of the exclusion has been to make it extremely difficult or impractical to use such accounts as original collateral in most states.

As a result, non-uniform amendments that bring deposit account security interests within Article 9 have been adopted in several states, including California, Illinois, Louisiana, Hawaii and Idaho.2 Picking up on this trend, the revised act extends the coverage of Article 9 to include security interests taken in non-consumer deposit accounts as original collateral. See §9-109. By providing clear rules for taking and perfecting deposit account security interests, the revised act will likely result in lenders routinely obtaining security interests in debtor's bank accounts, thereby reducing the amount of free assets available in bankruptcy.

Although the revised act excludes from its scope security interests taken in deposit accounts as original collateral in "consumer transactions" [§9-109(d)(13)], the definition of "consumer transaction" requires both that the obligation be incurred primarily for personal, family or household purposes and that the collateral be held primarily for personal, family or household purposes. See §9-102(a)(26). An individual who borrows money for business purposes or who uses a single account for both business and personal funds may find little protection in the consumer transaction exclusion.

Attachment of Deposit Account Security Interests

With one exception, the usual rules for attachment (enforceability) apply to security interests in deposit accounts. The debtor must have rights in the account, value must be given and the debtor must authenticate a security agreement that describes the deposit account. See §9-203(b). The description requirement is very liberal. The deposit account could be described specifically or generically (e.g., "all deposit accounts"). See §9-108(b)(1, 2 & 3). It could even be described by an allocational formula or procedure or any other method, as long as the identity of the collateral is objectively determinable. See §9-108(b)(5 & 6). Note, however, that since deposit accounts are not included within the definitions of "account" or "general intangible," a security agreement merely listing those categories will not reach a deposit account. Problems will no doubt arise from the improper use of the word "accounts" to describe deposit accounts.

The one exception to the general rule allows attachment to occur if the debtor has in fact agreed to grant a security interest in the deposit account and if the secured party has "control" of the deposit account, even though the security agreement is not authenticated or does not adequately describe the deposit account. See §9-203(b)(3)(D).

Finally, as under current law, if the funds deposited into a deposit account are "identifiable proceeds" of some other collateral, then the security interest automatically attaches to those proceeds. See §9-315(a)(2).

Perfection by Control

The perfection rules for deposit accounts are significantly different from the normal perfection rules under current law. Filing a financing statement will not perfect a security interest in a deposit account as original collateral.3 Compare §9-312(a) with §9-312(b)(1). Instead, the revised act relies on the concept of "control" that is used under both current law and the revised act for security interests in "investment property." See current §9-115 and revised §9-314. In order to perfect a security interest in a deposit account as original collateral under the revised act, the secured party must have "control" of the account. §9-312(b)(1).

There are three different ways to obtain "control" over a deposit account. First, if the secured party is the bank that maintains the deposit account, then control, and hence perfection, is automatic. See §9-104(a)(1). Thus, since a depository bank needs only the debtor's agreement in order to obtain a perfected security interest in a deposit account maintained at that bank,4 many banks will likely insert security agreement language into their standard account agreements.5

Other secured creditors can obtain control in either of two ways. The method likely to be used in most cases is a "control agreement." A secured party has control if the debtor, the secured party and the bank have agreed in an authenticated record 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. See §9-104(a)(2). The bank is not required to enter into a control agreement, even if its customer directs it to do so. §9-342. Further, the debtor may retain the right to use the account without destroying the secured party's control. See §9-104(b).

The final method by which a secured party can obtain control is to become the bank's customer with respect to the account. See §9-104(a)(3). The benefits of this method are that it does not require the bank to enter into a control agreement, it avoids the risk of some later creditor obtaining a competing control agreement, and it gives the secured party greater priority rights against the depository bank. However, this method may be impractical for checking accounts and other types of accounts to which the debtor needs regular access.

Although control is the only method of perfecting a security interest in a deposit account as original collateral, a security interest might arise in a deposit account because the funds in the account are identifiable proceeds of some other collateral. A security interest in identifiable proceeds is automatically perfected for the first 20 days, as long as the security interest in the original collateral was perfected. See §9-315(c). Further, since proceeds deposited into a deposit account would constitute "identifiable cash proceeds," the 20-day limitation would not apply to proceeds placed in a deposit account, and the automatic perfection will continue beyond the 20th day. See §9-315(d)(2).


Both the proceed's secured party and any secured party with an attached security interest that has not been perfected by control will have difficulty enforcing their security interest in a deposit account. Although the general collection and enforcement rules appear to give the secured party the right, upon default, to demand payment from the bank and to enforce the debtor's rights against the bank (see §§9-607(a)(1 & 3)), §9-341 relieves the bank of any obligation to comply with such a demand. Under §9-342, the existence of a security interest has no effect on the bank's rights and duties with respect to the deposit account, unless the bank otherwise agrees in an authenticated record. Thus, absent such an agreement, the bank has no duty to pay over the funds or to restrict the debtor's use of the account, notwithstanding its knowledge of the security interest or receipt of a demand by the secured party. See §9-341(2 & 3).

If, however, the secured party has control of the deposit account, then, upon default, it may instruct the bank to pay the balance of the account to or for the benefit of the secured party. See §9-607(a)(5).6 Further, since the bank has agreed to honor these instructions in the control agreement, §9-341 does not excuse the bank from complying with the secured creditor's instructions.

Priority of Competing Claims

Special priority rules apply to deposit account security interests. A major change from current law is that a perfected security interest in proceeds will no longer have priority over competing claims of the depository bank. Thus, an inventory or accounts lender will need to obtain control over the debtor's deposit accounts and may need to obtain a subordination agreement from the bank in order to fully protect its security interest.

First, a security interest perfected by control has priority over any security interest not perfected by control. See §9-327(1). Thus, both an automatically perfected proceeds security interest7 and an unperfected security interest are subordinate to a security interest perfected by control. Among security interests perfected by control, the automatically perfected security interest of the depository bank will have priority over a security interest perfected by a control agreement, regardless of the time of perfection. See §9-327(3).8 However, if the secured party obtained control by becoming the bank's customer, then it will have priority over the bank's security interest. See §9-327(4). In all other cases, security interests perfected by control rank according to time of control. See §9-327(2).

However, in addition to a possible security interest, the depository bank may have set-off or recoupment rights against the deposit account. With one exception, the depository bank's set-off and recoupment rights have priority over all security interests in a deposit account. See §9-340. If, however, the secured party obtains control by becoming the bank's customer, then the security interest will not be subject to set-off rights that are based on a claim that the bank holds against the debtor. See §9-340(c). Recoupment rights can be asserted by the bank, even though the secured party became the bank's customer. See §9-340(c).

Finally, a transferee of funds from a deposit account takes the funds free of a security interest unless the transferee "acts in collusion with the debtor in violating the rights of the secured party." See §9-322(b). This standard is more protective of the transferee than various other standards used elsewhere in the UCC (e.g., "knowledge that the in violation of interest"). See §§1-201(9) and 9-332, cmt. 4. In addition, note that a transferee is protected even if no value was given in exchange for the funds.

Enactment Update

Since the June column, six new states have enacted the revision. They are Alaska, Delaware, Hawaii, Oklahoma, Tennessee and Vermont. In addition, the act is awaiting the governor's signature in Illinois, North Carolina and Rhode Island. Two new states have introduced legislation to adopt revised Article 9: New Jersey and New York. Thus, a total of 27 states have passed or enacted revision bills, and 11 additional states plus the District of Columbia have pending bills.


1 All citations are to the revised 1999 version of Article Nine of the Uniform Commercial Code, unless otherwise indicated. Citations to the currently applicable 1972 version of Article Nine are indicated by the term "current." Return to article

2 See Clark, Barkley, "Revised Article 9 of the UCC: Scope, Perfection, Priorities and Default," 4 N.C. Banking Inst. 129 (2000). For an excellent detailed analysis of the revised act's treatment of deposit account collateral, see Markell, Bruce, "From Property to Contract and Back: An Examination of Deposit Accounts and Revised Article 9," 74 Chi.-Kent L. Rev. 963 (1999). Return to article

3 A certificate of deposit could be either a "deposit account" or an "instrument" depending on whether there is a certificate that in the ordinary course of business is "transferred by delivery with any necessary indorsement or assignment." See §9-102(a)(47). A security interest in an "instrument" can be perfected either by possession or filing. See §§9-312(a) and 9-313(a). Return to article

4 Note that the bank's control of the deposit account gives it attachment even if the security agreement is not authenticated or does not adequately describe the collateral. See §9-203(b)(3)(D). Return to article

5 By obtaining a security interest instead of relying merely on its set-off rights, the depository bank may lose the protection of §553 and become subject to §547 preference liability for deposits made prior to bankruptcy. See Markell, supra. Return to article

6 If the secured party is the depository bank, then it may apply the account balance to the secured obligation. See §9-607(a)(4). Return to article

7 Competing proceeds security interests rank according to their priority in the original collateral. See §9-322(b)(1). Return to article

8 These priorities could be altered by a subordination agreement. Return to article

Journal Date: 
Saturday, July 1, 2000