Perfection Requirements for Security Interests in Deposit Accounts and Securities Accounts

By: Matt Barr, Associate

February, 2022

Secured creditors need to be aware of the differences in perfection requirements for security interests in “deposit accounts” and “securities accounts.” UCC § 9-102(a)(29) defines “deposit account” as a “demand, time, savings, passbook or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.” UCC § 8-501(a) defines “securities account” as “an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset.” The definition of “investment property” in UCC § 9-102(a)(49) includes securities accounts.

Pursuant to UCC § 9-312(a), a security interest in investment property may be perfected by properly filing a UCC-1 financing statement with the central office of the state where the debtor-entity was formed or, if the debtor is an individual, where they reside. On the other hand, a security interest in a deposit account may only be perfected by control pursuant to UCC § 9-312(b). There are three ways a secured party can obtain control of a deposit account:

    1. the secured party is the bank with which the deposit account is maintained;

    2. the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the account without further consent by the debtor; or

    3. the secured party becomes the bank’s customer with respect to the deposit account.

UCC § 9-104(a). A secured party that has satisfied any of these requirements has control of the deposit account even if the debtor retains the right to direct the disposition of funds from the deposit account. UCC § 9-312(b) also provides that a security interest in a deposit account’s funds is perfected if the funds are proceeds of collateral in which the creditor had a perfected security interest.

These differences in perfection requirements proved determinative in Seitz v. Republic First Bank (In re Gem Refrigerator Co.), 512 B.R. 194 (Bankr. E.D. Pa. 2014), where a bankruptcy trustee sought to avoid a secured party’s security interest in the debtor’s brokerage account and subaccounts. The trustee alleged these were deposit accounts and the creditor’s interest was unperfected, as it did not have control of the accounts. The creditor argued, and the court agreed, that the brokerage accounts were securities accounts (and therefore investment property), not deposit accounts. The creditor had properly filed a financing statement covering the debtor’s investment property. Its security interest was thus perfected, and the trustee could not avoid it.