Borrowers' deposit accounts as collateral - Part I: Legal and practical difficulties

In most states, deposit accounts are among the few types of collateral excluded from the parameters of UCC Article 9. Since the depositor's interest in a deposit account is really a right of repayment, courts have historically required that a creditor seeking to "hold" that interest as collateral have exclusive control and irrevocable authority over the account. In the absence of clear judicial guidance, many lawyers advise lenders to make sure that the borrower/depositor has no access to withdraw funds without the lender's approval and involvement. In complex financings, it is often difficult to determine whether a bank or similar account is a deposit account, or some other type of financial investment account. The American Law Institute is in the process of discussing amendments to the UCC which could bring within the scope of Article 9 interests in deposit accounts. Commercial lenders could be directly impacted by any such amendments.