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?June 12, 2014 UCC, Due Diligence
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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:
- 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).
- 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.