Security Interest in a Deposit Account Must Be Perfected by a Control Agreement
April 7, 2006
Michael Weissman - Chicago
John Councellor was the president and controlling stockholder of First Metals and Plastics Technologies, Inc. He loaned the company more than $200,000 and filed a financing statement with the Indiana Secretary of State’s office on December 30, 2002, covering “all Debtor’s presently owned or hereafter acquired assets, including, without limitation, ... deposit accounts ... and all products and proceeds of the foregoing.” No control agreement was executed.
Control agreements must be used when a lender wants to perfect a security interest in a deposit account that the borrower maintains at another depository institution, or to perfect a security interest in an investment account the borrower has at a stock brokerage firm. The typical control agreement gives the lender the exclusive right to direct the disposition of the funds in the depository account or investment account, as the case may be. Perhaps the only right the borrower has, at least in the case of an investment account with a stock brokerage firm, is to change the investments – but only if a specified level of value is maintained. This method of perfection was introduced with the advent of Revised Article 9 of the Uniform Commercial Code.
On June 15, 2004, Applied Metal and Machine Works obtained a default judgment against First Metals for $5,270.25 plus costs. Applied Metal began supplemental proceedings to satisfy the judgment by serving garnishment interrogatories on National City Bank. The bank responded that First Metals had two accounts with a combined balance of $5,411.28.
Councellor intervened on September 7, 2004, arguing that his financing statement gave him a security interest in the deposit accounts and trumped the claim of Applied Metal.
Noting that under the provisions of Revised Article 9 a security interest in a deposit account can be perfected only through a control agreement, the court ruled in favor of Applied Metal. It also said that the funds could not be claimed by Councellor as identifiable proceeds from the sale of inventory because there was no proof in the record that the deposit accounts were composed of the proceeds from the sale of inventory. Councellor v. Ecenbarger, 834 N.E. 2d 1018 (Ind. 2005).
What’s the Point?
The court correctly applied the provisions of Revised Article 9 that make control the exclusive method of perfecting a security interest in a deposit account.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.