Except for a few states that have enacted nonuniform amendments to their respective versions of the UCC, Article 9 as currently in effect ("Current Article 9") excludes security interests in "deposit accounts," i.e., time, savings or similar accounts maintained with depository institutions, except as proceeds of other collateral. Specifically, the UCC as in effect in California, Hawaii, Idaho, Illinois and Louisiana covers deposit accounts as original collateral. See Calif. Comm. Code § 9104; HRS § § 490: 9-104, 490: 9-302(h); Idaho Code 28-9-302(j); ILCS § § 5/9-104, 5/9-302; LSA-RS § 10: 9-305(4). The Oregon UCC covers security interests in savings and time deposit accounts, but not checking accounts, as original collateral. ORS § § 79.1040, 79.3020, 79.3120.
This exclusion has forced lenders and their counsel to rely on common law principles, often imprecisely articulated in the case law, when taking security interests in such accounts. See, e.g., Miller v. Wells Fargo Bank Intern. Corp., 540 F.2d 548 (2d Cir. 1976).
Perfection under the common law appears to require that the lender have "sole dominion and control" over the account, which is generally understood to mean that the lender must have the exclusive authority to control the disposition of funds held in the account. It is not clear, however, whether the lender's rights in this respect must be exclusive or, alternatively, whether the lender can be perfected even if the borrower retains withdrawal rights prior to an event of default. In addition to substantive difficulties, a significant choice-of-law issue arises under Current Article 9 when the borrower is located in a different jurisdiction than the account. In this case, it is unclear which jurisdiction's substantive law will govern.
A substantially revised version of Article 9 ("Revised Article 9") has been approved by the National Conference of Commissioners on Uniform State Laws. As of September 1, 1999, Revised Article 9 had been enacted in Arizona, Maryland, Montana, Nebraska, Nevada and Texas. In order to avoid repetition of the legal nightmare associated with the piecemeal enactment of the recent revisions to Article 8 of the UCC, Revised Article 9 has an effective date of July 1, 2001.
Among other things, Revised Article 9 remedies the difficulties described above by including deposit accounts as original collateral, except in "consumer transactions." Revised § 9-102(a)(29); Revised § § 9-109(d)(13), 9-102(a)(26).
Perfection of security interests in deposit accounts as original collateral will be achieved under Revised Article 9 exclusively by control, which will be obtained in three circumstances. First, the secured party will have control if the secured party and the depository bank enter into an agreement, with the consent of the debtor, pursuant to which the bank agrees to comply with the secured party's instructions concerning the account without further consent of the debtor. Second, the secured party will have control if it becomes the bank's "customer," in which case the secured party would be entitled to withdraw funds from the account. Revised § 9-104(a)(3). This method of perfection is analogous to control through a "hard pledge" of investment property, i.e., the crediting of such property to an account in the name of the secured party. See, Current § § 8-106(d)(1), 9-115(1)(e). Finally, if the secured party is the depository bank, the bank will automatically have control. Revised § 9-104(a)(1).
Revised Article 9 will not require that the debtor be deprived of the right to withdraw funds for the secured party to have control. Revised § 9-104(b). Also, subjecting the secured party's ability to direct the disposition of funds to certain conditions, such as a default by the debtor, will not negate its control. A creditor will not have control, however, if such condition is the consent of the debtor.
Revised Article 9 includes comprehensive rules governing the priority of perfected security interests in deposit accounts:
- Perfection by control will trump other forms of perfection, e.g., as proceeds of other collateral or through "automatic perfection." Revised § 9-327(1).
- A security interest in favor of the depository bank will be senior to another security interest, except where the other secured party becomes the customer of the depository bank maintaining the account. Revised § 9-327(3), (4).
- A depository bank's right of set-off with respect to a deposit account generally will prime the security interest of a secured party therein. Revised § 9-340(a).
- If, however, such secured party is the depository bank's customer with respect to such account, its security interest will defeat such set-off right. Revised § 9-340(c).
Multiple secured parties perfected by control generally will rank according to the time control was obtained. Revised § 9-327(2).
Choice of Law
The law governing the perfection and priority of a security interest in a deposit account will be the local law of the "bank's jurisdiction." Revised § 9-304. This rule is quite similar to the rules governing the determination of a "securities intermediary's jurisdiction," and thus the law governing security entitlements and security interests therein under Current Article 9. See Current § § 8-110(b)(1), 9-103(6)(d).
If the agreement between the bank and the debtor governing the account specifies that a certain jurisdiction is the bank's jurisdiction under Revised Article 9, such jurisdiction will be the "bank's jurisdiction." Revised § 9-304(b)(1). For situations not covered by the baseline rule of this subsection, Revised Article 9 includes a "waterfall" patterned after the rules that determine a "securities intermediary's jurisdiction." Revised § 9-304(b)(2)-(5); Current § 8-110(e).
If the bank's jurisdiction is not so specified, Revised Article 9 includes a "waterfall" for determining its jurisdiction that is patterned after the rules governing determination of a "securities intermediary's jurisdiction" under Article 8. Current UCC § 8-110. This provision, in effect, will permit the parties to select the substantive law to govern such security interest, and, moreover, to choose a different governing law for other matters.