We are pleased to welcome attorney Bennett Cohen from the Illinois law firm Cohen, Salk and Huvard, P.C. back as a guest blogger! In the coming weeks, Mr. Cohen will share his expertise on promised deposit account control agreements. Active Deposit Account Control Agreement — A control agreement that directs the bank to receive disposition instructions from the secured party (not the debtor). In a DACA, a borrower grants a lender security on their specific account with a bank. This allows a lender to have overall control over the distribution of funds for its loan and provides some protection to the lender in the event of the borrower defaulting. The lender has the ability to control the flow of money from the account to the borrower, freeze it if necessary and give its own instructions. Alternatively, the lender may release the loan funds to the borrower, but as a condition of the loan, require that all hotel income go through the controlled DACA account. The lender monitors the income, and if the borrower is unable to start paying off the mortgage, the lender can redirect some or all of the income to mortgage payments. First instruction – An instruction to the bank issued by the lender to stop following the debtor`s disposition instructions.
The initial instruction often includes a disposition order from the secured party that allows the secured party to control the flow of money from the deposit account. Disposition Order – An instruction to the bank that orders the disposition of funds in the deposit account. Initially, the lender offers access to $20 million to make the immediate purchase of the property. The borrower may use these funds as described in the loan agreement. The lender then considers the remaining $10 million to be ancillary costs in the controlled account – but the borrower does not have access to that money until the lender starts receiving mortgage payments. Once the mortgage begins to be paid to the lender, the lender releases the $10 million on an approved schedule. Control agreements for secured securities accounts come in all shapes and sizes, and it is necessary to have a basic understanding of what to look for when reviewing these agreements, so that you can get an idea of what to look out for. These agreements generally exist between the owner/secured creditor (“Creditor”) of the deposit account (“Deposit Account”), the securities intermediary (i.e. broker or bank where the Deposit Account is held, the “Broker”) and the lender (“Lender”). There is a wide range of business risks arising from some of the existing industry control contract forms, and as securities accounts are increasingly becoming part of commercial loan guarantees, we felt this would be a valid topic for bank loan officers and staff. A Deposit Account Control Agreement (DACA), also known as a Control Agreement, is a tripartite agreement between a depositing customer (the debtor), the lender of a depositing customer (the secured party) and a bank.
Regions has an experienced and centralized deposit account control team that can provide a number of benefits to lenders and clients, as well as their law firms. The parties wish to have this involvement of third parties so that they know that the agreement is respected on the agreed terms. (b) receive a written tripartite control agreement signed by Pledgor, the broker and the lender and containing appropriate “control language” (see below). Another method of “control” is to title the deposit in the name of the lender (this alternative method can be problematic and goes beyond the scope of this article). Entering into a deposit account control agreement allows lenders to refine their interest on a debtor`s deposit accounts (UCC § 9-104) and to define who can initiate disposition instructions (transfer) to the bank with respect to the controlled deposit account (controlled deposit accounts). UCC § 9-104 – The “Uniform Commercial Code” section, which deals with “Deposit Account Control”. This section allows you to perfect the collateral on deposit accounts as an original guarantee. Why do lenders use deposit account control agreements? Often, customers do not account for their deposits with their lenders and some lenders do not offer deposit accounts. Lenders are putting in place deposit account control agreements as an additional layer of protection against defaults and to help them repay their loans. Deposit account control agreements are tripartite agreements between a lender, a borrower and a bank. These are often mentioned in other, sometimes better known terms, such as . B “lock-in box agreements”, “control agreements”, “account control agreements” or “ACA”.
(However, these are not “fiduciary arrangements.”) First of all, there are two types of deposit account control agreements: assets and liabilities. Debtor (Customer) — As one of three parties to DACA, the debtor provides the security and receives the deposits to the deposit account. The Code provides that the acquisition of “control” of a deposit account is the preferred method of perfecting a securities interest in a securities account. A secured party may also enhance its security by depositing a UCC financing statement against the Pledgor that covers the securities account, but such a UCC deposit is prepared by a secured party who takes “control” of the deposit account. A UCC deposit is a useful method of perfection for lenders who acquire a second stake in a securities account and cannot obtain subordinated “control” over such an account because the principal lender or broker does not authorize such subordinated security. In addition, the right banking partner is crucial for urgent transactions. A strong banking partner can act quickly to implement DACA between all parties. The bank service level agreements (SLAs) required to secure CASSs can range from days to weeks. Working with a bank that understands time sensitivity and strives to operate within your constraints is essential to ensure the smooth running of transactions.
Under the terms of DACA, the borrower may or may not have direct access to the funds in the account. In “uncalled” or “jumper” DAACs, borrowers can access funds; in “accessible” or “blocked” CAECs, borrowers are not allowed to do so. However, it is important to note that a lender may change these terms – either by “invocation” or “irrevocation” – at its sole discretion as often as it wishes. It is possible to include multiple accounts in a DACA, but they must all have called the same status or not. These arrangements are made when a borrower obtains a loan from a third party and help lenders maintain a certain degree of control and minimize their risk during a transaction. Understanding the intricacies of a Deposit Account Control Agreement (DACA) is important for both the lender and borrower. Secured party (lender) — A part of a DACA that lends funds and receives an advanced security right in the debtor`s deposit account upon conclusion of the agreement. Advanced security right — When DACA is enforced, the secured party is granted an advanced security right that gives it exclusive rights to control the debtor`s deposit account under the Uniform Commercial Code. Deposit Account Control Agreement (DACA) – A tripartite agreement between a customer (debtor), a secured party (lender) and a bank that allows the lender to perfect a security right in the customer`s funds by taking control of the deposit account (UCC § 9-104). (a) enter into a written security agreement signed by the secured creditor of the pledged securities account; and first, working with a trusted bank is paramount. The right banking partner is willing to work with the parties to ensure that the terms of the contract are in line with the situation.
Once the specific terms of a DACA have been established, a banking partner must comply with all the points set out in the agreement. It`s important to have a partner who understands and follows all the nuances of a particular DACA, especially since DAACs are designed for specific transactions. Be sure to stop again next week while M. Cohen continues to dive into control agreements for promised deposit accounts. Looking for more educational resources? Visit First Corporate Solutions` resource library to download documents related to corporate transactions, UCC filing, privilege search, and more. A private equity firm (lender) lends $30 million to a commercial real estate developer (borrower) who will use the funds to develop a new luxury hotel on vacant land. The lender sets up a DACA at the borrower`s commercial bank and then finances the loan. The borrower has the total loan of $30 million, but DACA gives the lender some degree of control over how and when the funds are distributed. Deposit Account Control Agreements: While this unusual term may not ring a bell, it`s useful to know, especially for those who work in commercial real estate or alternative investments. In general, a lender who perfects a securities interest in a deposit account through “control” should do the following: First, let`s briefly review the steps to follow to perfect a securities interest in a securities transaction classified as “investment property” under the revised Article 9 of the Unified Commercial Code (the “Code”). It is also important to note that DAACs have no inherent time limit and do not require renewal.
Most often, DAACs are established in commercial real estate transactions, alternative investments and energy development. Partners often include hedge funds, private equity firms, tech startups, and venture capitalists. Of course, this list is not exhaustive, but it should paint a strong picture of its usefulness. .