Control Agreements — Avoiding a Potential Pitfall

Originally published May 26, 2010

Keywords: Control Agreements, security interest, deposit account, UCC, depositary bank,

In the wake of the recent financial crisis, it has become apparent that in many respects cash is indeed king, particularly as a form of collateral. Thus, secured parties would be wise to ensure that they have a properly perfected security interest in a debtor's deposit accounts. In that regard, secured parties should consider adding language to their control agreements to avoid a potential pitfall.

Although a security interest in a deposit account can be perfected as "proceeds" of other collateral (e.g., collections on accounts receivable) as long as the proceeds are "identifiable," pursuant to the Uniform Commercial Code (the "UCC"), the only way to perfect a security interest in a deposit account as primary collateral (and to have priority over a competing security interest based on a claim of proceeds) is to have "control" of the deposit