A Deposit Account Control Agreement (DACA) is a legal agreement between a borrower (debtor), a secured party (lender), and a bank that holds the borrower’s deposit account. The purpose of a DACA is to provide the secured party with control over the deposit account, thereby perfecting the security interest in the account under Article 9 of the Uniform Commercial Code (UCC). This control ensures that the lender has priority over the account and can access funds in the account to satisfy the borrower’s obligations in the event of default.

Key Aspects of a Deposit Account Control Agreement (DACA):

1. Parties Involved:
   • Borrower (Debtor): The entity that owns the deposit account and is seeking financing from the lender.
   • Secured Party (Lender): The entity providing the loan or credit to the borrower and seeking to secure its interest in the deposit account as collateral.
   • Depository Bank: The financial institution where the borrower’s deposit account is held. The bank agrees to the terms of the DACA and acknowledges the lender’s security interest in the account.
2. Purpose of a DACA:
   • Security Interest: A DACA is used to perfect the lender’s security interest in the borrower’s deposit account. This means the lender gains a legal claim to the funds in the account, ensuring they can be used to repay the loan in case of default.
   • Control over Account: By entering into a DACA, the lender obtains control over the deposit account. Control is a key element under the UCC for perfecting a security interest in deposit accounts, as it gives the lender priority over other creditors.
3. Types of DACA:
   • Springing Control DACA: In this arrangement, the borrower retains control of the deposit account until an event of default occurs. Upon default, the control “springs” to the lender, who can then access and direct the funds in the account.
   • Blocked Account DACA: The account is fully controlled by the lender from the outset. The borrower cannot access or withdraw funds without the lender’s consent. This type of DACA provides maximum security for the lender.
4. Key Provisions in a DACA:
   • Control and Access: The agreement details who has control over the account and under what circumstances the lender can access the funds. It specifies whether the borrower has any access to the account before a default occurs.
   • Notification of Default: The agreement outlines the process by which the lender can notify the bank of a default. Upon such notification, the bank is required to follow the lender’s instructions regarding the account.
   • Instructions to Bank: The DACA typically includes provisions that obligate the bank to comply with the lender’s instructions, such as transferring funds or freezing the account, once the lender has control.
   • Termination and Release: The DACA may include terms under which the agreement can be terminated, such as when the loan is fully repaid, or the lender releases its interest in the account.
5. Legal Framework:
   • Uniform Commercial Code (UCC): In the United States, DACAs are governed by Article 9 of the UCC, which deals with secured transactions. Control over a deposit account is a critical factor under the UCC for a lender to perfect its security interest in the account.
   • Perfection of Security Interest: Under the UCC, a lender perfects its security interest in a deposit account by obtaining control of the account, which is typically achieved through a DACA.
6. Benefits for Lenders:
   • Priority Claim: By perfecting a security interest through a DACA, the lender gains a priority claim over the deposit account, which can be critical in the event of the borrower’s insolvency or bankruptcy.
   • Reduced Risk: The lender’s risk is mitigated because the DACA allows for direct access to the account funds to satisfy the borrower’s obligations without requiring further legal action.
7. Borrower Considerations:
   • Access to Funds: Depending on the type of DACA, the borrower may have limited or no access to the funds in the account, especially after a default.
   • Collateral Requirements: Agreeing to a DACA may be a requirement for obtaining financing, especially in secured lending arrangements where the lender needs assurance of repayment.
8. Practical Applications:
   • Commercial Lending: DACAs are commonly used in commercial lending, especially in asset-based lending and secured financing transactions where the deposit account is part of the collateral package.
   • Real Estate Transactions: DACAs may be used in real estate transactions where deposit accounts hold escrow funds, ensuring that the lender can access these funds if necessary.
9. Enforcement:
   • Bank’s Role: The bank’s cooperation is crucial for enforcing a DACA. The bank must act in accordance with the agreement and the lender’s instructions, particularly in the event of default.
   • Dispute Resolution: The DACA may include provisions for resolving disputes between the borrower, lender, and bank, often through arbitration or litigation.
10. Risks and Challenges:
    • Bank Cooperation: The effectiveness of a DACA depends on the depository bank’s willingness and ability to comply with the terms of the agreement.
    • Legal Complexities: Negotiating and drafting a DACA can be complex, requiring careful attention to the rights and obligations of all parties involved.

In summary, a Deposit Account Control Agreement (DACA) is a legal tool used in secured lending to give the lender control over a borrower’s deposit account, thereby perfecting the lender’s security interest under the UCC. DACAs are crucial in ensuring that lenders have priority access to the account funds in the event of a default, thereby reducing the risk associated with the loan.