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Can a Lender Perfect a Security Interest in a Deposit Account at Another Banking Institution?

June 03, 2014 UCC

We continue our guest blog series on commercial lending this week with attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Deposit Account As Collateral: If a lender has a security interest in equipment or inventory and such collateral is sold and the proceeds deposited in a bank that is not the lender, can the lender claim a security interest in the deposit account as proceeds of its equipment or inventory?

Answer: The lender cannot claim such deposit account as original collateral since the only way for a lender to perfect a security interest in a deposit account at another banking institution under the Code is to take “control” of such deposit account which includes:

  1. Obtaining a three-party control agreement between the depositor, the lender and such banking institution (or having the deposit account titled in the lender’s name)
  2. Obtaining a security agreement from the depositor which grants to the lender a security interest in the specific deposit account. Nevertheless, the lender may still be able to claim a derivative security interest in the collateral proceeds in the deposit account if the lender can successfully trace identifiable proceeds from the sale of the lender’s collateral under Code Section 9-315(b). However, such derivative security interest, even if it can be successfully traced, is still subject to a number of risks under the Code, including, without limitation, (i) being primed by a secured party who has taken “control” of the deposit account (which may include the depository bank), (ii) being primed by the depository bank’s common-law right of setoff, and (iii) being primed by a non-collusive transferee of funds out of the deposit account.

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