Deposit Account Control Agreements (DACA) in ABL: Blocked vs Springing, UCC Perfection, and What Borrowers Should Know

Of all the documents that close alongside an ABL credit agreement, the Deposit Account Control Agreement -- the "DACA" -- is the one most borrowers spend the least time on and most underestimate the operational impact of. The DACA is not a back-office clean-up document. It is the legal mechanic that perfects the lender's security interest in the borrower's operating cash, determines who controls the deposit account, and sets the timeline by which a default can be converted into a cash sweep.

At Don Clarke Enterprises we routinely walk borrowers through DACA mechanics during deal structuring and amendment work, because the DACA terms shape the day-to-day operational footprint of an ABL relationship more than almost any other closing document. This post explains how DACAs work under UCC Article 9, the difference between blocked and springing structures, and what borrowers should pay attention to before signing.

Why a DACA exists -- the UCC Article 9 mechanic

Most secured lien types perfect by filing a UCC-1 financing statement. Deposit accounts are different. As Lewis Rice's analysis of deposit-account perfection sets out, "filing a UCC-1 financing statement does not perfect a lien on a deposit account." Under UCC § 9-312(b), a security interest in a deposit account can only be perfected by control, not by filing.

UCC § 9-104 defines three ways a secured party can obtain that control:

1. The secured party (lender) is itself the depository bank where the account is held -- automatic control by virtue of the banking relationship
2. The borrower, lender, and depository bank execute a tri-party agreement under which the depository bank agrees to comply with the lender's instructions without further consent from the borrower -- this is the DACA
3. The lender becomes the depository bank's customer with respect to the account -- a less common structure used in particular master-feeder arrangements

For an ABL borrower whose operating accounts are at a separate depository bank from the agent, the DACA is the only practical path to perfected control. Without it, the lender has a security interest in the deposit account that is unperfected, which is functionally equivalent to no security interest at all once a competing lien holder or a bankruptcy trustee shows up. The Vorys analysis of common pitfalls notes that under UCC § 9-327, "a competing secured party's security interest in a deposit account that is perfected by control takes priority over any security interest in the deposit account that is not perfected by control." Without DACA-perfected control, the ABL lender's cash collateral position is junior to anyone who has it.

Blocked DACA vs springing DACA

There are two principal forms of DACA, both legally sufficient for control and perfection under the UCC but operationally very different.

Blocked (or "active") DACA

Also called an active DACA or BACA (Blocked Account Control Agreement). The depository bank takes disposition instructions from the lender only, from day one. The borrower cannot move money out of the account without the lender's consent. As Regions Bank's overview of control agreements explains, in an active DACA "the bank only accepts disposition instructions from the lender, without further consent from the debtor."

Blocked DACAs are common in two structures: traditional bank-syndicated ABL revolvers with daily cash dominion from closing (the entire AR lockbox sweeps to revolver repayment), and workout-driven situations where a previously springing DACA has been activated. They are less common in middle-market ABL deals where the borrower is in good standing and cash dominion is springing.

Springing (or "passive") DACA

Also called a passive DACA. The depository bank takes disposition instructions from the borrower in the ordinary course. The lender retains the contractual right to deliver a "notice of exclusive control" upon a triggering event -- typically a covenant default, an event of default, an excess availability shortfall below a threshold, or another defined trigger. Once that notice is delivered, the springing DACA "springs" into a blocked DACA, and the depository bank stops accepting borrower instructions.

The springing structure is the dominant form in middle-market ABL. It keeps the borrower's operating cash workflow normal while the borrower is in good standing, gives the lender perfected control from day one for UCC purposes, and provides a fast contractual mechanism to convert to blocked control if needed.

Why both forms work for perfection

The key point both for borrowers and counsel: control for purposes of UCC § 9-104 does not require that the lender actually be exercising control on a daily basis. As Alston & Bird's cash-management overview for ABL notes, "a secured party has control under section 9-104(a)(2) or (a)(4) even if the instructions originated by the secured party directing the disposition of funds in the deposit account or the provisions of the DACA addressing the disposition of funds or the right to direct the disposition of funds are conditioned on a future event." A springing DACA is just as perfected as a blocked DACA from day one. The legal protection is identical; the operational footprint is different.

The cash dominion overlay

DACA structure and cash dominion structure interact but are not the same. Cash dominion is a credit agreement concept -- it specifies whether daily collected cash sweeps to the revolver. DACA is a perfection concept -- it specifies who has UCC-level control of the account.

The common structures borrowers see:

• Full cash dominion + blocked DACA. All daily lockbox and operating account collections sweep to the revolver. The depository bank takes instructions from the lender only. Common in tight credit profiles, workout situations, and historically in large-corporate ABL deals.
• Springing cash dominion + springing DACA. Daily cash sweep activates only when excess availability falls below a defined threshold or a default occurs. The DACA also springs. Common in healthy middle-market ABL.
• Springing cash dominion + blocked DACA. The lender has full UCC control of the account from day one but has not yet exercised the right to sweep. This belt-and-suspenders structure gives the lender the option to sweep immediately upon a trigger without having to first activate the DACA.
• Full cash dominion + springing DACA. Rare and structurally inconsistent in most deals; we mention it primarily as a flag that borrowers should not accept this structure inadvertently.

We walked through the broader cash dominion mechanics in our piece on cash dominion in ABL -- full versus springing operational impact. The DACA piece is the legal-perfection counterpart.

What borrowers should look for in the DACA itself

Most depository banks have form DACAs, and most lenders will accept the depository bank's form with a handful of negotiated edits. Borrowers should still pay attention to several specific provisions, because the form documents vary materially across banks.

Subordination of bank fees and chargebacks

Depository banks routinely insist on the right to debit the account for service fees, returned items, and chargebacks. Lenders push for these to be subordinated to the lender's lien except for ordinary-course service fees in defined amounts. Borrowers want this clearly drafted so that disputed chargebacks do not get debited without notice.

Account-closing notice and transfer rights

If the borrower wants to close the account or move funds to a different bank, the DACA should require notice to the lender and give the lender time to enter into a new DACA at the destination bank. Lewis Rice's checklist of DACA terms emphasizes this: the depository bank and borrower agree "to notify the lender prior to closing any deposit account(s) and to give the lender an opportunity to enter into a new DACA." Without this language, the borrower can technically move cash to a different bank but cannot do so without disrupting the lender's control structure -- a fast path to a covenant breach.

Springing notice mechanics

For springing DACAs, the form of the notice of exclusive control and the bank's commitment to act on it quickly are critical. Lender-favorable drafting says the depository bank acts on the notice within one business day. Bank-favorable drafting gives the bank two to three business days. In a stressed credit, that delta can be material.

Set-off rights

Depository banks have common-law and contractual set-off rights against deposit accounts maintained with them. Most DACAs require the depository bank to waive set-off rights against the controlled account except for ordinary-course fees. This is non-negotiable from the lender's perspective. Borrowers should make sure the carve-out for ordinary fees is reasonably bounded.

Multi-account structures

ABL borrowers typically maintain a network of accounts -- lockbox account, collection account, operating account, payroll account, tax account. Not every account in the network needs the same level of control. Borrowers and counsel should clearly map which accounts are subject to DACAs, which are excluded (typically payroll and tax accounts subject to ABL-specific carve-outs), and which are routed through transfer instructions versus blocked outright.

Implementation timeline

Donald Clarke, who authored "Asset Based Lending Disciplines" -- the first ABL textbook -- and trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays, has watched DACA execution slip closing dates more times than any other documentation workstream. The reason is administrative: depository banks have their own internal DACA review processes, often centralized in a treasury-management operations group that does not move at the pace of a closing deal.

A realistic timeline for putting DACAs in place at a new closing:

• Identification of accounts that need DACAs: 1 to 2 weeks pre-close, driven by counsel's lien and collateral review
• Outreach to depository banks and exchange of bank-form DACAs: 2 to 4 weeks pre-close
• Negotiation of bank-form changes acceptable to the lender: 1 to 2 weeks
• Final execution by all three parties: 1 to 5 business days, depending on bank-internal signing protocols

For ABL deals on a compressed closing timeline -- 363 sale acquisitions, refinancings driven by a maturity date, or any situation under 30 days from term sheet to close -- the DACA workstream needs to start at term-sheet stage. It is one of the few execution items that genuinely cannot be accelerated from the borrower's side.

Renewals, amendments, and bank changes

DACAs do not expire on their own but typically need to be refreshed at credit agreement renewal or amendment. If the lead lender changes, all DACAs require new tri-party execution to substitute the new agent or lender. If the borrower opens new deposit accounts post-close, those new accounts need new DACAs (which is why credit agreements typically require the borrower to deliver DACAs for new accounts within a defined window -- often 30 to 60 days). If a depository bank exits a banking relationship or stops offering DACA services, the borrower has to move the account and execute a new DACA, all without losing perfected control along the way.

The administrative burden of managing the DACA portfolio over the life of an ABL facility is real but manageable. Treasury teams that have established DACA workflows -- a standing list of accounts, designated points of contact at each depository bank, template communications for new-account notices -- handle this in stride. Treasury teams that have not built the workflow learn it the hard way at the first amendment or renewal.

How we help

Don Clarke Enterprises is an independent advisor and loan placement consultant. We are not a lender, broker, or financial institution. We do not originate, underwrite, fund, approve, or close loans -- final credit and funding decisions are made by the lender.

Where we add value on the DACA workstream:

• Reviewing credit agreement and security agreement drafts to identify all accounts that will need DACAs, including operating, lockbox, collection, payroll, and tax accounts
• Helping borrowers prepare DACA outreach plans and timelines so the closing date is not slipped by depository-bank administrative delays
• Reviewing depository-bank form DACAs against the lender's expectations and the credit agreement's collateral requirements
• Advising borrowers on cash management structure decisions -- which accounts to consolidate, which to leave at separate depositories, which to route through transfer instructions versus blocked control
• Field examination and underwriting advisory work drawn from Don's career building the ABL training curriculum used at the world's largest lending institutions
• Coordinating with our colleagues at the Asset Based Lending Consultants network on complex multi-account or multi-jurisdictional cash management situations

Donald Clarke is a Secured Finance Network (SFNet) Hall of Fame inductee (2021) and Lifetime Achievement Award recipient.

The bottom line

The DACA is a small document with a large operational footprint. It perfects the ABL lender's control over the borrower's operating cash; it sets the contractual conditions under which a springing structure becomes a blocked structure; it determines who can move money out of the account on a moment's notice. Borrowers who treat the DACA workstream as a back-office checkbox routinely lose closing date momentum or get caught off-guard when a trigger event activates a structure they had not fully understood. Borrowers who treat it as a strategic document -- mapping their cash management architecture deliberately and negotiating the DACA terms with the same attention they give the credit agreement -- get the operational flexibility they need.