Understanding Security Interests in Cash and Deposit Accounts
How to properly secure and perfect interests in cash and deposit accounts.
Date:
June 1, 2025
Category:
Commercial Finance



It hardly needs mentioning that the animating force in a secured financing is money. The debtor needs money, and the creditor provides it. Cash is king, as the saying goes. For the creditor, money is perhaps the most valuable form of collateral to seize in the event of default, because it is liquid. But as this article describes, how to collateralize a debtor’s monetary assets, and how to balance the interests of the parties in doing so, requires careful consideration.
Nuances of Perfecting Security Interests in Cash and Deposit Accounts
Unfortunately, methods of perfecting a security interest in monetary assets aren’t always as simple as parties often expect. Filing a UCC-1 financing statement may be ineffective. Under UCC§9-312, a security interest in physical cash itself can only be perfected by actual possession. This makes sense as a practical matter. It’s hard to envision how a non-possessory security interest in cash (i.e., one that permits the debtor to use the cash while enabling the secured creditor to reliably establish or release their interest in the cash as collateral) would work. That said, a non-possessory security interest can be granted in a debtor’s deposit account where money is held.
Commercially and financially, we understand that a deposit account represents a liability on the relevant bank’s balance sheet to repay deposited funds to the debtor. Legally, the UCC provides for a specific collateral type – “a deposit account” – over which a secured creditor can perfect its security interest, not by filing a UCC-1 but by establishing “control.”
Under UCC§9-104, control is established by entering into “an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor.” The section further clarifies that control exists even if the debtor “retains the right to direct the disposition of funds from the deposit account.” As an additional benefit, §9-327 establishes that a secured creditor that has established control over a deposit account enjoys priority over other conflicting security interests, including that of the bank where the account is maintained. With this in mind, let’s turn to the Deposit Account Control Agreement (DACA), the contract that secured creditors use to establish control over debtors’ deposit accounts.
DACA Considerations for Creditors and Debtors
The creditor, at a minimum, will want to ensure that the DACA meets the aforementioned requirements under the UCC. The depository bank often will have its own form of Deposit Account Control Agreement, which to that end acknowledges that the agreement confirms that the subject account is a “deposit account” under the UCC, that the DACA provides the creditor with “control” for UCC purposes. As further discussed below, most DACAs will also provide language setting forth how the depositary bank’s rights against the account holder may be enforced relative to the secured creditor’s interest in the account. Most bank DACA forms will also set forth additional undertakings for the bank not to change the account number or account name without the creditor’s consent and not to close the account without giving the creditor notice.
Beyond these common features, DACAs fall along a spectrum in terms of the rights and protections they afford to secured creditors. At one end, a “blocked” DACA (sometimes abbreviated as a “BACA”) prohibits the debtor that holds the account from accessing the funds (i.e., the creditor enjoys exclusive access). More often, a “springing” DACA allows for the debtor to access the account freely until the credit delivers a notice of exclusive control to the bank. Following notice, the bank must comply with the creditor’s instructions and no longer take any instruction from the debtor that holds the account.
Debtors, of course, will prefer a springing DACA. They will also want to make clear the triggers and process for a secured creditor to bring an account under a springing DACA under exclusive control (e.g., it must be upon an event of default occurring under the financing agreement between with the creditor and upon the creditor’s delivery of a notice of exclusive control to the bank, as opposed to the creditor being able to provide notice to the bank at its discretion). Finally, debtors will want to negotiate for as much latitude as possible in terminating the DACA. For instance, a DACA that can be terminated immediately upon repayment of the secured obligations to the creditor is preferable to needing to obtain the creditor’s and bank’s authorization to terminate.
Creditors enjoy greater protection under a blocked DACA than a springing DACA, but the administrative burden of operating the blocked account may make such a blocked DACA arrangement impractical in many financings. For creditors, often the most relevant provisions to negotiate in a DACA affect its dealings with the bank, not the debtor. The topics of these provisions include whether the bank will subordinate its claims against the account holder/debtor to the creditor’s claims and whether the bank will waive its setoff rights against the account holder/debtor. The bank’s willingness to agree to these terms will often turn on whether the bank is being paid a set-up fee, whether the debtor and/or creditor are indemnifying the bank in connection with its performance under the DACA, and from a risk perspective, the applicable borrower’s credit profile and the nature of the account. To briefly elaborate on why the nature of the account matters, a bank may be less willing to subordinate or waive its setoff rights completely over an operating account with significant operating activity that may generate significant fees or returned payments than it would be over a non-operating account.
It hardly needs mentioning that the animating force in a secured financing is money. The debtor needs money, and the creditor provides it. Cash is king, as the saying goes. For the creditor, money is perhaps the most valuable form of collateral to seize in the event of default, because it is liquid. But as this article describes, how to collateralize a debtor’s monetary assets, and how to balance the interests of the parties in doing so, requires careful consideration.
Nuances of Perfecting Security Interests in Cash and Deposit Accounts
Unfortunately, methods of perfecting a security interest in monetary assets aren’t always as simple as parties often expect. Filing a UCC-1 financing statement may be ineffective. Under UCC§9-312, a security interest in physical cash itself can only be perfected by actual possession. This makes sense as a practical matter. It’s hard to envision how a non-possessory security interest in cash (i.e., one that permits the debtor to use the cash while enabling the secured creditor to reliably establish or release their interest in the cash as collateral) would work. That said, a non-possessory security interest can be granted in a debtor’s deposit account where money is held.
Commercially and financially, we understand that a deposit account represents a liability on the relevant bank’s balance sheet to repay deposited funds to the debtor. Legally, the UCC provides for a specific collateral type – “a deposit account” – over which a secured creditor can perfect its security interest, not by filing a UCC-1 but by establishing “control.”
Under UCC§9-104, control is established by entering into “an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor.” The section further clarifies that control exists even if the debtor “retains the right to direct the disposition of funds from the deposit account.” As an additional benefit, §9-327 establishes that a secured creditor that has established control over a deposit account enjoys priority over other conflicting security interests, including that of the bank where the account is maintained. With this in mind, let’s turn to the Deposit Account Control Agreement (DACA), the contract that secured creditors use to establish control over debtors’ deposit accounts.
DACA Considerations for Creditors and Debtors
The creditor, at a minimum, will want to ensure that the DACA meets the aforementioned requirements under the UCC. The depository bank often will have its own form of Deposit Account Control Agreement, which to that end acknowledges that the agreement confirms that the subject account is a “deposit account” under the UCC, that the DACA provides the creditor with “control” for UCC purposes. As further discussed below, most DACAs will also provide language setting forth how the depositary bank’s rights against the account holder may be enforced relative to the secured creditor’s interest in the account. Most bank DACA forms will also set forth additional undertakings for the bank not to change the account number or account name without the creditor’s consent and not to close the account without giving the creditor notice.
Beyond these common features, DACAs fall along a spectrum in terms of the rights and protections they afford to secured creditors. At one end, a “blocked” DACA (sometimes abbreviated as a “BACA”) prohibits the debtor that holds the account from accessing the funds (i.e., the creditor enjoys exclusive access). More often, a “springing” DACA allows for the debtor to access the account freely until the credit delivers a notice of exclusive control to the bank. Following notice, the bank must comply with the creditor’s instructions and no longer take any instruction from the debtor that holds the account.
Debtors, of course, will prefer a springing DACA. They will also want to make clear the triggers and process for a secured creditor to bring an account under a springing DACA under exclusive control (e.g., it must be upon an event of default occurring under the financing agreement between with the creditor and upon the creditor’s delivery of a notice of exclusive control to the bank, as opposed to the creditor being able to provide notice to the bank at its discretion). Finally, debtors will want to negotiate for as much latitude as possible in terminating the DACA. For instance, a DACA that can be terminated immediately upon repayment of the secured obligations to the creditor is preferable to needing to obtain the creditor’s and bank’s authorization to terminate.
Creditors enjoy greater protection under a blocked DACA than a springing DACA, but the administrative burden of operating the blocked account may make such a blocked DACA arrangement impractical in many financings. For creditors, often the most relevant provisions to negotiate in a DACA affect its dealings with the bank, not the debtor. The topics of these provisions include whether the bank will subordinate its claims against the account holder/debtor to the creditor’s claims and whether the bank will waive its setoff rights against the account holder/debtor. The bank’s willingness to agree to these terms will often turn on whether the bank is being paid a set-up fee, whether the debtor and/or creditor are indemnifying the bank in connection with its performance under the DACA, and from a risk perspective, the applicable borrower’s credit profile and the nature of the account. To briefly elaborate on why the nature of the account matters, a bank may be less willing to subordinate or waive its setoff rights completely over an operating account with significant operating activity that may generate significant fees or returned payments than it would be over a non-operating account.
Conclusion
A well-drafted Deposit Account Control Agreement coupled with the right financing documents can serve as the foundation for a balanced collateral arrangement that serves the needs of the creditor and debtor alike. The creditor can assert its priority over a deposit account far more easily than it could over physical cash, and can take steps to foreclose on the account and the funds it holds upon an event of default. At the same time, under a springing DACA, the debtor can enjoy access to its account absent an event of default while still granting to its creditor the collateral protections it requires.

Tom Meister
Partner
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