status: draft

Account control agreements

Account Control Agreements (ACAs) give the capital provider “control” over the SPV’s deposit accounts for UCC perfection purposes. These are seemingly technical documents, but they determine who actually controls your cash when things go wrong.

status: draft

Purpose and UCC perfection

Under UCC Article 9, a security interest in a deposit account can only be perfected by “control.” This is different from most other types of collateral, which can be perfected by filing a UCC-1 financing statement.

What control means

Control means the secured party (the capital provider) can direct the bank to dispose of funds without further consent from the depositor (the SPV). There are two ways to establish control:

Control Method	How It Works
Automatic control	The secured party becomes the bank’s customer on the account (adds its name)
Control agreement	The bank agrees in writing to follow the secured party’s instructions without requiring depositor consent

Most ABF facilities use the control agreement method. The SPV remains the sole customer on the account, but the bank agrees to follow capital provider instructions if certain conditions are met.

Why this matters

Without a valid ACA, the capital provider’s security interest in the deposit accounts may be unperfected. In the SPV’s bankruptcy, unperfected security interests are subordinate to perfected interests and may be avoided entirely.

Practical impact: If the SPV has $5M in collection accounts and the ACA is defective, that $5M may not be available to the capital provider as collateral.

status: draft

Parties and structure

The typical ACA is a three-party agreement:

Party	Role
Depositor (SPV)	The entity that owns the account and normally operates it
Secured Party	The capital provider or trustee with a security interest in the account
Bank	The depository institution where the account is maintained

Account types covered

A facility typically has multiple accounts, each requiring its own ACA:

Account	Purpose
Collection Account	Receives collections from obligors
Principal Collection Account	Sometimes separate for principal vs. interest
Reserve Account	Holds required reserves
Payment Account	Used for distributions on payment dates
Operating Account	(If facility funds origination) working capital
Lockbox Account	If hard lockbox, receives obligor payments directly

status: draft

Control instruction mechanics

The core of the ACA is when and how the capital provider can issue instructions to the bank.

Typical structure

Account Status	Who Controls	What Happens
Normal operations	SPV operates freely	SPV can deposit, withdraw, transfer; secured party has latent control
After Notice	Secured Party takes over	Bank follows secured party instructions exclusively
After Termination	SPV resumes control	Secured party releases control

The notice mechanism

The secured party’s takeover is triggered by a “Notice of Exclusive Control” or similar notice. The ACA specifies:

Who can send: Only the secured party (or its authorized representative)
Required content: Usually must state that an Event of Default has occurred
Bank’s obligation: Upon receipt of valid notice, bank follows secured party instructions only
Bank’s verification: Bank typically has no duty to verify the notice is accurate

Critical issue: The bank’s “no duty to verify” provision means the capital provider can take control even if there is a dispute about whether an Event of Default has occurred. The SPV’s remedy is to sue the capital provider, not to prevent the bank from following instructions.

Instruction types

After taking control, the secured party can typically instruct the bank to:

Freeze all account activity
Transfer funds to another account
Pay specified parties
Close the account
Any other disposition

status: draft

Blocking conditions

When the capital provider exercises control, what happens to normal operations?

Standard blocking

Upon receipt of a Notice of Exclusive Control:

All pending transactions may be blocked
Automatic transfers (e.g., sweeps) are halted
SPV cannot withdraw funds
Standing instructions from SPV are overridden

Operational concerns

Payroll and operating expenses: If the SPV has employees or vendors, blocking all payments can create immediate operational crisis.

Servicing expenses: If the servicer needs to advance collection costs, pay insurance, or maintain collateral, frozen accounts prevent this.

Payment date distributions: Even if the facility is in default, there may be distributions owed to subordinate parties.

Carve-outs to negotiate

Push for carve-outs that allow ordinary course payments even after a Notice of Exclusive Control:

Carve-out	Purpose	Typical Cap
Servicing expenses	Continue collections	Monthly servicing fee amount
Trustee/agent fees	Keep deal administration running	As specified in fee letters
Operating expenses	Basic SPV operations	Specified monthly amount
Professional fees	Legal/accounting during workout	Specified amount
Insurance premiums	Maintain coverage	As billed

Sample language: “Notwithstanding receipt of a Notice of Exclusive Control, Bank shall continue to honor payment instructions from Depositor for Permitted Ongoing Expenses (as defined in Schedule X) up to the aggregate monthly limit specified therein, provided such instructions do not exceed amounts then on deposit.”

status: draft

Setoff waiver

A critical provision: the account bank waives its right to set off amounts the SPV owes the bank against account balances.

Why setoff is a problem

Banks have a common law right to set off customer obligations against deposit balances. If the SPV has a loan from the bank or owes fees, the bank could seize collection account funds to satisfy those obligations.

For capital providers, this means their collateral could disappear to satisfy the bank’s claims.

Standard setoff waiver

“Bank hereby waives any right of setoff, banker’s lien, or other right to deduct or retain any amounts from the Account(s) in respect of any obligations owed by Depositor to Bank.”

Watch out for exceptions

Some banks resist absolute setoff waivers. Common exceptions include:

Exception	Risk Level
”Except for returned items”	Low; limited to NSF checks
”Except for fees owed under this Agreement”	Moderate; ACA fees are usually small
”Except for amounts owed under any credit facility”	High; undermines collateral protection
”Except as permitted by law”	Very High; unclear what’s covered

Negotiation: Push for absolute setoff waiver. If the bank insists on exceptions, limit to returned items and fees directly related to the ACA (not other banking relationships).

status: draft

Additional provisions

Priority of instructions

In complex deals with intercreditor arrangements, whose instructions prevail?

Scenario	Problem
Multiple secured parties	Which one controls?
Agent vs. individual lenders	Can individual lenders issue instructions?
Senior vs. subordinate	Can subordinate party issue instructions?

Solution: The ACA should specify that the bank follows only instructions from a designated party (typically the Agent or Controlling Party under the intercreditor agreement). Include a mechanism for the bank to receive updated designation upon intercreditor changes.

Successor bank procedures

What happens if the account bank is downgraded below required ratings, becomes insolvent, or is acquired?

Required provisions:

Notice period for account transfer (30-60 days)
Bank’s obligation to cooperate in transfer
Mechanism for establishing successor ACAs
Interim operations during transition

Bank’s liability

Banks typically seek broad liability limitations:

Limitation	Market Standard
No liability for following instructions	Yes (even if instructions are wrong)
No duty to verify default	Yes
Liability limited to account balance	Common
Indemnification from depositor and secured party	Yes

What to verify: The bank should remain liable for following instructions from someone other than authorized parties, or for failing to follow valid instructions.

Termination

The ACA should specify termination conditions:

Payment in full of all secured obligations
Written release from secured party
Replacement with successor ACA
Automatic termination upon facility maturity plus wind-down period

status: draft

Common pitfalls

Inadvertent blocking

The ACA says capital provider can exercise control “upon an Event of Default,” but Event of Default in the credit agreement is broadly defined and includes immaterial breaches. A technical covenant breach could freeze all your accounts.

Fix: Define the trigger in the ACA more narrowly. “Event of Default under Section [X] of the Credit Agreement” (limited to payment defaults, bankruptcy, and material covenant breaches) rather than “any Event of Default.”

Conflicting instructions

In intercreditor situations (warehouse with back leverage, multiple tranches with different creditors), the ACA needs to specify whose instructions prevail.

Fix: Single designated party to give instructions. Clear intercreditor provisions on when designation transfers. Bank has no liability for following designated party’s instructions.

No ordinary course carve-outs

The ACA allows complete blocking with no provisions for ordinary course payments. When default occurs, operations grind to a halt.

Fix: Negotiate carve-outs for servicing expenses, trustee fees, operating expenses, and insurance premiums. Specify monthly limits.

Missing successor provisions

The account bank is downgraded below required ratings. No one specified how to transition to a successor bank. Operations stall while parties negotiate.

Fix: Include successor bank provisions: required ratings, notice period for transition, bank cooperation obligations, interim arrangements.

Bank form conflicts

The bank insists on using its standard ACA form. The form has provisions inconsistent with the credit agreement (different definitions, different trigger events, different instruction mechanics).

Fix: Review bank form against credit agreement requirements before execution. Mark up inconsistencies. If bank will not modify its form, ensure the credit agreement ACA requirements align with what the bank will actually sign.

status: draft

Negotiation checklist

Before signing, verify: