The Uniform Commercial Code treats a commercial trust or deposit account used as collateral differently from almost any other asset: under Article 9, a secured party’s interest in the account can only be perfected by establishing “control,” not by filing a UCC-1. The UCC trust account rules then layer priority, bank set-off, and default remedies on top of that control requirement, and the method you use to obtain control changes the answer at every layer.
What Article 9 Covers Here
Article 9 governs how a creditor creates, perfects, and enforces a security interest in a deposit account used as collateral in a business transaction.1Legal Information Institute. U.C.C. – Article 9 – Secured Transactions (2010) That framework decides whether your claim to the funds survives against the debtor’s other creditors, a bankruptcy trustee, or the bank itself.
One boundary matters before anything else. Article 9 does not apply to deposit accounts assigned as collateral in consumer transactions.2Legal Information Institute. Uniform Commercial Code 9-109 – Scope Everything that follows assumes the underlying deal is commercial.
Perfection Requires Control, Not Filing
For deposit accounts, the UCC is unusually rigid: a security interest can only be perfected by control.3Legal Information Institute. Uniform Commercial Code 9-312 – Perfection of Security Interests in Chattel Paper, Deposit Accounts, Documents, Goods Covered by Documents, Instruments, Investment Property, Letter-of-Credit Rights, and Money Filing a financing statement does nothing. This is one of the few collateral categories where filing is completely ineffective, and it is the single most common place lenders make a mistake with trust and collateral accounts.
Control also does not require locking the debtor out. A secured party can have control even if the debtor keeps the day-to-day right to use the funds, write checks, and make withdrawals.4Legal Information Institute. Uniform Commercial Code 9-104 – Control of Deposit Account What matters is that the bank has agreed to follow the secured party’s instructions when the secured party decides to exercise its rights.
The Three Ways to Establish Control
UCC 9-104 recognizes three control methods, and the choice matters later for priority.
- The secured party is the depository bank. If the lender is the same institution that holds the account, control exists automatically.
- A three-party control agreement. The debtor, the secured party, and the bank sign an authenticated record in which the bank agrees to follow the secured party’s instructions about the funds without needing further consent from the debtor. This is the common arrangement in commercial lending.
- Customer-based control. The secured party becomes the bank’s customer on the account, effectively taking over the account relationship.
Blocked DACA or Springing DACA
The three-party agreement, usually called a Deposit Account Control Agreement, comes in two forms.
A blocked DACA cuts off the debtor’s access the moment it is signed. The secured party controls every withdrawal from day one. The protection is the strongest available, but it is commercially restrictive and most borrowers will not accept it on an operating account.
A springing DACA leaves the debtor’s access intact until a triggering event, usually a default. The secured party then sends a notice to the bank, the bank cuts the debtor off, and from that point forward the bank follows only the secured party’s instructions. Most commercial relationships use springing DACAs so the business can keep running while the loan performs.
A workable DACA also addresses the bank’s own fees, its subordination of competing claims, how the agreement terminates, and what happens to items already in the payment pipeline when the secured party activates its rights.
Priority When Interests Compete
UCC 9-327 sets the priority ladder for competing security interests in the same deposit account.5Legal Information Institute. Uniform Commercial Code 9-327 – Priority of Security Interests in Deposit Account
- A security interest perfected by control beats one that is not.
- Among multiple parties who all have control, priority generally runs in the order each party obtained it.
- The depository bank’s own security interest in the account outranks a secured party who got control through a three-party DACA.
- The exception reverses that: a secured party who obtained control by becoming the bank’s customer on the account outranks even the bank’s own security interest.
That last rule is why sophisticated lenders occasionally insist on customer-based control. It is the only arrangement that defeats the depository bank’s built-in priority advantage.
The Bank’s Set-Off Right
Priority rules for security interests are not the only way a bank can reach the funds. Banks have a common-law right of set-off against a deposit account when the account holder owes the bank money on something else, and the UCC preserves that right alongside a secured party’s perfected interest. A bank can exercise set-off regardless of a secured party’s control, with one exception: if the secured party obtained control by becoming the bank’s customer on the account, the bank’s set-off based on a claim against the debtor is ineffective.5Legal Information Institute. Uniform Commercial Code 9-327 – Priority of Security Interests in Deposit Account
The practical risk is concrete. If the debtor has a separate loan with the depository bank and defaults on both obligations, the bank can sweep the trust account to cover its own debt before the secured party moves. Negotiating a waiver of set-off rights in the DACA is standard practice. Banks do not always agree, and when they do they usually carve out their account fees.
What You Can Do on Default
Enforcement runs through the bank, not through court. If the secured party is itself the depository bank, it can apply the account balance directly to the secured obligation.6Legal Information Institute. Uniform Commercial Code 9-607 – Collection and Enforcement by Secured Party If control came through a DACA or customer-based arrangement, the secured party instructs the bank to turn the balance over or apply it to the debt, and the bank complies.
No judgment is required, no court order, no replevin. That self-help remedy is the main practical reason to perfect correctly in the first place.
Funds That Leave Before You Act
A springing DACA carries an exposure that borrowers and lenders often miss. A transferee who receives funds out of the account in the ordinary course generally takes those funds free of the security interest, unless the transferee was colluding with the debtor to violate the secured party’s rights. If the debtor withdraws money and pays a supplier the day before the secured party sends its activation notice, the secured party typically cannot pull those funds back from the supplier. The window between default and the activation notice is where this risk lives.
Trustee Duties and Account Housekeeping
When one party serves as trustee of the account, that role carries fiduciary obligations to the beneficiary, including the duty to keep trust funds segregated from the trustee’s own money and the duty to maintain accurate records of every deposit and disbursement.7Legal Information Institute. Fiduciary Duties of Trustees Commingled trust funds lose their protected status, which defeats the whole reason for using a segregated account.
Two tax points round out the setup. The institution paying interest on the account files Form 1099-INT whenever interest reaches $10 or more in a tax year.8Internal Revenue Service. About Form 1099-INT, Interest Income And most commercial trust accounts need their own Employer Identification Number rather than running on the grantor’s Social Security number.9Internal Revenue Service. Understanding Your EIN Get the EIN before opening the account so the bank can tag the right taxpayer from the first deposit.