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Risk Management Blog

UCC & Corporate Due Diligence

Resource Guide for Legal and Financial Professionals

Control Agreements Effect on Priority Position

UCC, Due Diligence, Reduce Financial Risk

This is a guest post from 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.

Control Agreement for Pledged Deposit Account: Does the depository bank need to subordinate its security interest in the pledged deposit account to a lender’s security interest granted in the pledged deposit account?

Answer: Yes. The depository bank has an automatic first priority security interest in the pledged deposit account by statute (Code Section 9-327), and should be required to subordinate its security interest in the control agreement. If the depository bank will not agree to subordinate its security interest, the only other way for the lender to obtain priority in the pledged deposit account is to have the account titled in its name.

Security Agreement for Pledged Securities Account. Does a lender need to obtain a separate security agreement in addition to obtaining a control agreement signed by the account owner/pledgor, the securities intermediary (brokerage house or bank where the pledged securities account is maintained) and the lender?

Answer: Yes. The control agreement serves to vest “control” of the pledged securities account in the lender, and is not intended to serve as a security agreement.

Control Agreement for Pledged Securities Account. Does the securities intermediary need to subordinate its security interest in the pledged securities account to the lender’s security interest in the pledged securities account?

Answer: Yes. The securities intermediary has an automatic first priority security interest in the pledged securities account by statute (Code Section 9-328), and should be required to subordinate its security interest in the control agreement.

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