UCC § 9-304(b) provides a “cascade” of methods for determining the jurisdiction of a custodian bank for UCC purposes. UCC § 9-304 (b) (1) states: “If an agreement between the bank and its customer regulating the deposit account expressly provides that a particular jurisdiction is the jurisdiction of the bank for the purposes [of the UCC], that jurisdiction shall be the jurisdiction of the bank.” Article 9-304(b)(2) of the UCC states: “If paragraph (1) is not applicable and an agreement between the bank and its customer regulating the deposit account expressly provides that the agreement is governed by the law of a particular jurisdiction, that jurisdiction shall be the jurisdiction of the bank.” Why do lenders use deposit guarantee agreements? Often, customers do not store their deposits with their lenders, and some lenders do not offer deposit accounts. Lenders are putting in place deposit guarantee agreements as an additional protection against defaults and to help repay their loans. The inclusion of such wording could avoid the risks and uncertainties that would arise if the application of the provisions of Article 9(304)(b) of the UCC led to the identification of two separate jurisdictions under two separate agreements. Advanced Security – At the end of DACA, the secured party is granted an advanced security right that gives it the exclusive rights to control the debtor`s deposit account under the Unified Commercial Code. Regions has an experienced and centralized deposit account control team that can provide a number of benefits to lenders and clients, as well as their law firms. A Deposit Guarantee Agreement (DACA), also known as a control agreement, is a tripartite agreement between a depositing customer (the debtor), the lender of a depositing customer (the secured party) and a bank. The parties want to have this involvement of third parties so that they know that the agreement is bound by the agreed terms. Active Deposit Account Control Agreement – A control agreement that orders the bank to receive disposition instructions from the secured party (not the debtor).
A problem could arise if the control agreement and the “customer contract” concluded between the custodian bank and the debtor as a customer in connection with the opening of the account each expressly provide for a specific but different jurisdiction from that of the bank for the purposes of the UCC, since any agreement would be “an agreement between the bank and its customer on the deposit account”. The same problem could arise if neither the control contract nor the customer contract expressly provides for the competence of the bank, but each of these agreements provides that it is subject to the law of a particular but different jurisdiction. To avoid such problems, all secured parties should (i) have their supervisory agreements explicitly stating that a particular jurisdiction is the jurisdiction of the bank for the purposes of the UCC, and (ii) consider adding the following provision (or equivalent words) to their control agreements: For transactions that require DACA, a strong banking partner is essential. A private equity firm (lender) lends $30 million to a commercial real estate developer (borrower) who will use the funds to develop a new luxury hotel on vacant land. The lender sets up a DACA at the borrower`s commercial bank and then finances the loan. The borrower has the total loan of $30 million, but DACA gives the lender some degree of control over how and when the funds are distributed. Initially, the lender offers access to $20 million to make the immediate purchase of the property. The borrower may use these funds as described in the loan agreement. The lender then considers the remaining $10 million to be ancillary costs in the controlled account – but the borrower does not have access to that money until the lender has received mortgage payments.
Once the mortgage begins to be paid to the lender, the lender releases the $10 million on an approved schedule. Article 9 of the Uniform Commercial Code (CDU) defines a deposit account as a current, time, savings, savings or similar account held with a bank. Unlike most types of collateral, depositing a UCC-1 proof of funding does not perfect a privilege on a deposit account. .