In most facilities, the lender establishes control of the guarantee account by acting as an account bank or by entering into a tripartite control agreement with the Fund and the account bank, as described in NY UCC Section 9-104(a)(2) above (each, a ”Control Agreement”). The control agreement establishes the lender`s control over the collateral account for perfection purposes and determines when the bank in the account accepts instructions regarding funds in the lender`s account, the fund, or both. Although the dominance agreement provides the lender with the continuous control necessary for perfection, in practice the lender may have problems maintaining and exercising its contractual rights in the Facility`s collateral account that are virtually impossible to address in the Facility`s documents or control agreement. A Deposit Account Control 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. Why do lenders use deposit account control agreements? Often, customers do not account for their deposits with their lenders and some lenders do not offer deposit accounts. Lenders are putting in place deposit account control agreements as an additional layer of protection against defaults and to help them repay their loans. Deposit Account Control Agreement (DACA) – A tripartite agreement between a customer (debtor), a secured party (lender) and a bank that allows the lender to perfect a security right in the customer`s funds by taking control of the deposit account (UCC § 9-104). The ability of the account bank to close the security account or terminate the control agreement could also pose a risk to the lender. In general, the bank of the account reserves the right to close the security account without giving reasons after informing all parties to a control contract of the necessary notice.
The bank of the account may also be allowed to immediately close the security account if the fund does not fulfill its obligations to the bank of the account, including non-payment of the bank fees described in the control agreement (and possibly if the fund is late with a separate obligation to the bank of the account). Whatever the cause, an unexpected account closure can cause the lender to lose control of the account guarantee and thus the perfection of its security on the guarantee account under the New York UCC. First of all, there are two types of deposit account control agreements: assets and liabilities. Each custodian bank often has its own form of DACA, although the elements listed above are common to each form. CAACs are being discussed and negotiated. Therefore, borrowers and lenders should realize that it may take some time before a DACA is agreed to and signed by all parties so that the lender can obtain an advanced security on a deposit account. An essential part of the collateral package for subscription-backed credit facilities (each, a ”Facility”) is the security granted by an investment fund (each, a ”Fund”) to the lender(s) under a facility in the deposit or deposit account established to hold capital contributions received from investors in the fund (the ”Collateral Account”). Although the securities account may be a securities account in many institutions, this legal update is limited to a discussion of current accounts, as this term is defined in the applicable Uniform Commercial Code (the ”UCC”). This legal update explores potential issues for lenders related to collateral account documentation and follows with considerations for creation and best practices that are used to mitigate and ideally avoid potential issues related to collateral accounts. Secured party (lender) — A part of a DACA that lends funds and receives an advanced security right in the debtor`s deposit account upon conclusion of the agreement.
In addition to the time issues discussed above, there may be circumstances in which the account bank decides not to follow the lender`s instructions regarding the collateral account in order to avoid violations of applicable laws or regulations or liability to the fund or third parties. For example, the account bank may be reluctant to follow the lender`s instructions if it suspects that the instructions are premature or inappropriate, or if the account bank is concerned that acting on the instructions could violate applicable bankruptcy or bankruptcy law. In order to address those concerns, the control agreement should include an exemption from liability on the part of the bank of the account for measures taken in accordance with the creditor`s instructions, as well as language showing that the bank of the account is not required to investigate the circumstances that led to the transmission of an exclusive control notice by the creditor and may rely on that notification; that she receives. The inclusion of such provisions is useful because it can encourage the bank of the account to comply with the lender`s instructions by addressing its concerns about liability to the fund if it follows through on those instructions. However, most account banks require a similar exemption from liability from the lender, which could reduce the likelihood that the bank of the account will comply with the lender`s instructions under the control agreement in the event of a dispute over default or other contentious circumstances. Alternatively, the lender may release the loan funds to the borrower, but as a condition of the loan, require that all hotel income go through the controlled DACA account. The lender monitors the income, and if the borrower is unable to start paying off the mortgage, the lender can redirect some or all of the income to mortgage payments. Advanced security right — When DACA is enforced, the secured party is granted an advanced security right that gives it exclusive rights to control the debtor`s deposit account under the Uniform Commercial Code. Debtor (Customer) — As one of three parties to DACA, the debtor provides the security and receives the deposits to the deposit account. The deadlines mentioned above can be reduced or eliminated if the lender is the bank of the account, as this avoids delays associated with the internal procedures of a separate institution. In order to protect the Facility`s guarantees against withdrawal not authorized by the Fund, the Facility`s documents generally include provisions that limit the Fund`s ability to withdraw funds from the guarantee account in the event of default. If the creditor is not the bank of the account, the control agreement should explicitly limit the time available to the bank of the account to comply with an exclusive control notification.
Finally, all procedures for the service of instructions and notifications of sole control should be explicitly defined in the control agreement and strictly followed by the creditor in order to avoid possible delays. Article 9 of the Uniform Commercial Code (CDU) defines a deposit account as a claim, time, savings, savings account or similar account held with a bank. Unlike most types of collateral, depositing a UCC-1 funding statement does not perfect a privilege on a deposit account. A lender can only perfect a lien on a deposit account by taking ”control” of the account. Deposit account control agreements are tripartite agreements between a lender, a borrower and a bank. These are often mentioned in other, sometimes better known terms, such as . B ”lock-in box agreements”, ”control agreements”, ”account control agreements” or ”ACA”. (However, these are not ”fiduciary arrangements.”) In addition, the right banking partner is crucial for urgent transactions.
A strong banking partner can act quickly to implement DACA between all parties. The bank service level agreements (SLAs) needed to secure DACA can range from days to weeks. .