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UCC & Corporate Due Diligence

Resource Guide for Legal and Financial Professionals

Does the control agreement go too far in limiting the potential liability of the Broker?

UCC, Due Diligence, Revised Article 9

We’re back this week with more in our series from attorney Bennett Cohen on control agreements for pledged securities accounts. This is the fourth post in our series, so if you need a refresher please visit his introductory post, Examining Issues with Control Agreements for Pledged Securities Accounts.

We’ve reviewed quite a number of control agreements which provide that the Broker shall have no liability to the Lender except for the Broker’s gross negligence or willful misconduct. This limit of liability is too narrowly drawn. Three (3) additional exceptions that should be carved-out of this standard non-recourse language are as follows:

(a) if the Broker permits any withdrawals of any assets from the Securities Account at any time without the prior written consent of Lender (except to the extent, if any, that the control agreement permits the Pledgor to receive cash interest or regular cash dividends prior to Lender’s issuance of a “notice of exclusive control” and such withdrawals occur prior to such notice),

(b) if trading by Pledgor is allowed in the Securities Account, then if Pledgor is allowed to trade in the account after the Broker has received from Lender a “notice of exclusive control”, or

(c) if the Broker permits the Pledgor to trade in the Securities Account and the control agreement provides that the Pledgor has no authority to trade in the Securities Account at any time.


About the Author

Bennett L. Cohen is a partner in the law firm of Cohen, Salk & Huvard, P.C.  Bennett concentrates his practice in commercial finance. He regularly represents banks, commercial finance companies and other institutional lenders in the structuring, documentation and closing of commercial financing transactions, including asset-based loans, commercial & industrial loans, commercial real estate mortgage and construction loans, equipment lease loans and factoring transactions. He served for fifteen years as general counsel to the Midwest Association of Secured Lenders, a trade association of over eighty banks and finance companies located in Chicago and outlying areas. Bennett is a member of the American Bar Association and serves on the ABA Committee on Commercial Financial Services and the ABA Subcommittees on Secured Lending, Loan Documentation and the Uniform Commercial Code. He was a member of the ABA Joint Task Force on Deposit Account Control Agreements, the ABA Model Intercreditor Task Force, and the ABA Joint Task Force on Filing Operations and Search Logic.



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