A key component of the collateral package for subscription-backed credit facilities (each, a “Facility”) is the security interest an investment fund (each, a “Fund”) grants to the lender(s) under a Facility in the deposit or securities account established to hold the capital contributions received from the Fund’s investors (the “Collateral Account”). Although the Collateral Account in many Facilities may be a securities account, this Legal Update is limited to a discussion of deposit accounts as that term is defined in the applicable Uniform Commercial Code (the “UCC”). This Legal Update explores potential areas of concern for lenders associated with Collateral Account documentation and follows with considerations for drafting and best practices used to mitigate, and ideally avoid, potential issues associated with Collateral Accounts.
Under the UCC in effect in the State of New York (the “NY UCC”), in order to perfect a security interest in a Collateral Account which is a deposit account, the lender (as the secured party) must establish and maintain control of the account.1 The NY UCC provides the following methods a lender may use to establish the control required for perfecting a security interest in a deposit account: (1) the lender is the bank maintaining the deposit account (the “Account Bank”), (2) the lender, the Fund and the Account Bank enter into a written agreement pursuant to which the Account Bank agrees to follow the lender’s instructions regarding the funds in the account without further consent from the Fund, (3) the lender is the customer of the Account Bank with respect to the deposit account, (4) the name on the account is the name of the lender or indicates that the lender has a security interest in the account, or (5) another person has control of the account on behalf of the lender or, if...