A deposit account control agreement, usually called a DACA, is a three-party contract signed by a lender, a borrower, and the bank that holds the borrower’s deposit account. It gives the lender a legally enforceable claim over the cash in that account and, under Article 9 of the Uniform Commercial Code, “perfects” the lender’s security interest in those funds. Perfection is what makes the claim stick against other creditors, and for a deposit account it’s the only way to get there. DACAs appear in nearly every commercial loan where the borrower’s cash reserves are pledged as collateral.
Who Signs and What Each Party Agrees To
Three separate entities have to sign, and the agreement fails if any one refuses.
The secured party is the lender. The DACA gives it the legal right to direct what happens to the money in the account, either immediately or after a triggering event such as default. In exchange, the lender agrees to exercise that right only under the conditions the agreement spells out.
The debtor is the borrower who owns the account. By signing, the borrower pledges the balance as collateral and accepts some level of lender control over it. How much control depends on whether the DACA is “blocked” or “springing.”
The depositary institution is the bank. Its role is largely administrative: it acknowledges the lender’s interest and commits to following the lender’s instructions under defined circumstances. A bank is not obligated to sign a DACA for its customer, and most large banks insist on using their own standardized form rather than a lender’s draft.
Because the bank takes on real exposure by agreeing to follow a third party’s instructions, DACAs almost always contain an indemnification clause. Under a typical provision, the bank is not liable for following the lender’s instructions in good faith, for refusing to act on defective notices, or for complying with court orders or regulatory demands that conflict with the lender’s directions.
Why a DACA Is Needed to Perfect a Security Interest in Cash
Under UCC Article 9, a security interest in a deposit account can be perfected only by obtaining “control” of the account. Filing a UCC-1 financing statement, which works for equipment, inventory, and most other collateral, does not work for cash.
The UCC recognizes three ways to establish control:
- The lender is the bank itself. If the lender and the depositary institution are the same entity, control exists automatically and no separate agreement is needed.
- The lender becomes the bank’s customer on the account. The account is re-titled so the lender is the customer of record. This is the strongest form of control and carries a priority advantage discussed below.
- All three parties sign a DACA. The debtor, lender, and bank agree in a written record that the bank will act on the lender’s instructions concerning the funds without needing the debtor’s further consent.
The third method is by far the most common. The first two either require a pre-existing banking relationship or force a restructuring of the account itself, which most borrowers will not accept.
One point that trips people up: under the UCC, the lender has control even if the borrower keeps day-to-day use of the account. Control does not mean the borrower’s access is frozen. It means the bank has agreed to follow the lender’s instructions when the lender gives them. That is why springing DACAs, where the borrower operates the account freely until default, still satisfy the perfection requirement.
Blocked vs. Springing Control
DACAs come in two basic forms, and the difference shapes how the borrower can use its money while the loan is outstanding.
Blocked Control
A blocked DACA, sometimes called an active control agreement, gives the lender immediate authority over the account from the moment it is signed. The borrower cannot make transfers or withdrawals without written lender approval. The funds are effectively frozen as collateral.
This structure gives the lender certainty that the cash will be there when needed. The balance cannot be drained by the borrower or intercepted by other creditors. Lenders typically demand blocked control when cash is the primary or sole collateral for the loan. The cost to the borrower is that the account has zero operational liquidity, so blocked DACAs are usually acceptable only for reserve accounts, escrow accounts, or similar pools the borrower doesn’t need for daily operations.
Springing Control
A springing DACA, also called a passive control agreement, is far more common for working capital accounts. The borrower keeps full access to the funds during normal operations, and the lender’s control sits dormant until a specific trigger event, almost always a default under the loan agreement.
When the trigger hits, the lender sends a written notice to the bank. From that point forward the bank stops following the borrower’s instructions and takes direction only from the lender. The control “springs” into effect.
Springing DACAs let the borrower operate normally while still giving the lender a perfected, first-priority interest in the cash. The trade-off is uncertainty about the balance. By the time default is declared and the control notice reaches the bank, the borrower may have drawn the account down significantly. The negotiated definition of “default” matters here. Vague or subjective trigger language invites disputes over whether the lender’s notice was valid, which can delay enforcement at the moment the lender most needs it.
Where a DACA Leaves the Lender in a Priority Fight
Perfection by control is not just a formality. It sets who gets paid first when multiple creditors claim the same account. The UCC hierarchy runs like this:
- Control beats no control. A lender with control defeats a competing creditor that relied on a financing statement or has an unperfected interest.
- Among lenders that both have control, first in time wins.
- The bank holding the account outranks other secured parties. If the bank itself holds a security interest in the deposit account, it beats any other lender that perfected by DACA.
- A lender that has become the bank’s customer on the account beats even the bank. That is the sole exception to the bank’s own advantage.
For most commercial lending, then, a DACA gives the lender strong priority against other creditors, but the depositary bank keeps a superior position unless the lender takes the additional step of becoming a customer on the account.
The Bank’s Right of Setoff
A bank has an inherent right to apply funds in a customer’s deposit account against debts that customer owes the bank, and a standard DACA does not automatically eliminate that right. Under the UCC, a bank’s exercise of setoff is generally effective even when another party holds a security interest perfected by control. The only statutory carve-out applies when the secured party perfected by becoming the bank’s customer on the account, which is the rarely used method above.
Because a typical DACA uses the three-party agreement method, the UCC’s default rule leaves the bank’s setoff right intact. To change that outcome, the lender has to negotiate a contractual waiver of setoff directly in the DACA. This is standard practice. A typical waiver states that the bank will not offset or deduct funds from the account until the lender confirms the borrower’s obligations have been paid in full. Getting the bank to agree to this waiver is often one of the most contentious parts of the negotiation.
What the Document Has to Get Right
A DACA needs certain information stated precisely to be enforceable. At minimum, it must identify the exact account name, account number, and the location of the depositary institution.
It also needs to specify which jurisdiction’s law governs. The UCC provides a cascading set of rules for locating the bank’s jurisdiction: the parties can designate one in the deposit account agreement; if they haven’t, the jurisdiction where the bank maintains the office serving the account applies; failing that, it defaults to where the bank is headquartered. A mismatch between the DACA’s governing law clause and the UCC’s jurisdictional rules can create ambiguity in a priority dispute.
Notice procedures matter just as much. The DACA should spell out the exact method, address, and format for delivering a notice of exclusive control, along with any required attachments such as a copy of the executed DACA. Banks routinely reject notices that deviate from the agreed format.
All three parties must sign through authorized representatives. Execution delays are common when the bank requires internal legal review, when signatories at the borrower change, or when a credit facility involves multiple accounts at different banks, each needing its own DACA.
How a DACA Ends
A DACA typically terminates when the underlying loan is repaid and the lender releases its security interest. The lender sends a notice to the bank confirming termination, and the borrower regains unencumbered control of the account.
Standard terms also let the bank terminate under certain circumstances. The bank can terminate immediately if a law, regulation, or court order requires it. If any party breaches the agreement, the bank can typically terminate on five business days’ notice. Otherwise, the bank can exit on 30 days’ notice. The borrower generally cannot terminate unilaterally; termination on the borrower’s side requires a joint notice signed by both borrower and lender.
When the bank terminates, the agreement usually requires it to remit remaining funds at the lender’s direction if the lender provides instructions before the termination date. If no instructions come in, the bank may send the funds to the lender’s address on file. Obligations that arose before termination, including indemnification duties, survive the end of the agreement.