Meaning
Tri-party contract establishes a secured lender’s legal control over a debtor’s liquid bank accounts maintained at a third-party depository institution. A deposit account control agreement perfects the lender’s security interest in cash deposits under commercial law without requiring the movement of funds into a lender-owned account. The agreement obligates the bank to follow the lender’s instructions regarding account funds without further consent from the debtor upon notice of default.
Coverage ends when the underlying debt is satisfied and the secured party issues a formal release.
Control Mechanism
Establishing account control requires a formal execution between the borrowing company, the lending institution and the depository bank holding the operational funds. Under a deposit account control agreement, the depository institution acknowledges the primary lender’s security interest while allowing the business daily access to cash under standing conditions. In a springing arrangement, the debtor retains full control over withdrawals and wire transfers until the lender delivers a notice of exclusive control following a loan default.
Blocked account arrangements, by contrast, direct all incoming receipts into an account where access requires immediate lender approval. The bank assumes legal liability if it transfers funds contrary to established instructions after receiving formal notice. These structured rules prevent liquid assets from being siphoned off during financial strain.
Notice Execution
Lenders activate exclusive rights by serving formal written notice on the depository bank’s legal department. Upon receipt of notice, the bank blocks debtor withdrawals and redirects account balances strictly according to creditor directions. Verification processes prevent premature execution caused by minor operational disputes between borrower and lender.
Priority Protection
Secured creditors achieve priority status over liquid cash reserves through perfected control rather than general financing filings. Without an executed agreement, a bankruptcy trustee or judgment creditor can attach account funds before the lender asserts rights over liquid capital. Perfection by control overrides general filing claims.
