UCC Article 9-304 Analysis and Commentary: Law Governing Perfection and Priority of Security Interests in Deposit Accounts

1. Introduction

UCC Article 9-304 establishes which jurisdiction’s law governs the perfection and priority of security interests in deposit accounts. This section is part of Article 9 of the UCC, which deals with secured transactions (interests in personal property used as collateral).

UCC 9-304 specifically addresses an important choice-of-law issue: when a deposit account (for example, a bank checking or savings account) is used as collateral, whose law decides how a security interest in that account is perfected and whose law governs disputes over priority.

2. Scope and Purpose of UCC Article 9-304

UCC Article 9-304 applies to security interests in “deposit accounts” as collateral. In Article 9 terms, a deposit account generally means a demand, savings, time, or similar account maintained with a bank (excluding deposit accounts evidenced by a certificate or instrument).

When a creditor (secured party) takes a security interest in a debtor’s deposit account, unique legal questions arise because deposit accounts are intangibles not tied to any single physical location.

UCC 9-304 provides certainty by designating one jurisdiction’s law to govern key issues for such collateral.

The core issues covered are perfection of the security interest (how the secured party makes its interest effective against third parties), the effect of perfection or nonperfection (the legal consequences depending on whether the interest is perfected or not), and the priority of the security interest (how it ranks against competing claims to the same account).

By fixing a single governing law for these issues, UCC 9-304 helps avoid confusion that could arise if multiple states’ laws potentially applied to an intangible asset like a bank account.

In essence, this provision ensures that everyone—debtors, secured parties, and banks—can identify which state’s rules determine the validity and rank of a security interest in a deposit account.

3. The General Rule: Law of the Bank’s Jurisdiction (UCC 9-304(a))

UCC 9-304(a) sets out the general rule in a single sentence: “The local law of a bank’s jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank.”

In simpler terms, to find the relevant law for perfection and priority, one must identify the “bank’s jurisdiction” for the deposit account in question, and then apply that jurisdiction’s local law.

All questions about how to perfect a security interest in the account and who has priority over the account will be answered by the law of the bank’s jurisdiction.

Implications of the General Rule: If a lender takes a security interest in a debtor’s bank account, it does not necessarily use the law of the debtor’s state or the bank’s headquarters by default – instead, it uses the law determined by UCC 9-304’s specific rules.

For example, the method of perfection for a deposit account under Article 9 is typically by obtaining “control” of the account rather than filing a financing statement.

The specifics of what constitutes control, as well as the priority rules (such as those in UCC 9-327, which addresses priority of interests in deposit accounts), will be governed by the local law of the bank’s jurisdiction as defined in this section.

Thus, UCC 9-304(a) centralizes all such legal requirements and priority outcomes to one chosen state’s version of Article 9, providing predictability.

This approach is especially crucial given the intangible nature of deposit accounts. Without UCC 9-304, there could be uncertainty – for instance, should perfection be governed by the law of the state where the debtor resides, where the bank’s main office is, or where a branch is located?

UCC 9-304(a) resolves this by saying it is the law of the bank’s jurisdiction (a term which subsection (b) precisely defines) that controls, even if the deposit account or parties otherwise have little connection to that jurisdiction.

3.1 Determining the Bank’s Jurisdiction: Hierarchy of Rules in UCC 9-304(b)

The term “bank’s jurisdiction” is the linchpin of UCC 9-304, and subsection (b) provides a detailed hierarchy of rules to determine it.

These rules are applied in order, from paragraph (1) through (5), until one of them yields an answer. The goal is to objectively identify a single jurisdiction that will be deemed the bank’s jurisdiction for purposes of applying subsection (a).

The hierarchy is as follows:

3.1.1 Express Agreement Designating “Bank’s Jurisdiction”

If the agreement between the bank and the debtor governing the deposit account explicitly states that a certain jurisdiction is the bank’s jurisdiction for purposes of UCC Article 9 (or that part of the UCC), then that stated jurisdiction is the bank’s jurisdiction.

This is a specific clause sometimes included in account agreements to directly designate the governing law for secured transactions purposes. When such a clause exists, it overrides the other considerations and fixes the jurisdiction as whatever is named, even if that jurisdiction has no other connection to the account or parties.

3.1.2 Governing Law of the Account Agreement

If no jurisdiction was designated specifically for Article 9 purposes, the next test is whether the account agreement has a standard governing law clause.

If the agreement expressly provides that it is governed by the law of a particular jurisdiction, that chosen state (or country) becomes the bank’s jurisdiction.

This is a typical choice-of-law clause in many contracts. Under UCC 9-304(b)(2), that general contract choice-of-law now doubles as the decisive law for perfection and priority issues as well.

3.1.3 Location of the Account as Stated in Agreement

If neither of the above clauses is present, one looks for any provision in the account agreement stating that the deposit account is maintained at an office in a particular jurisdiction.

For example, some bank agreements or account documentation might say “this account is maintained at the bank’s [City, State] branch.”

If such a statement is made, then the specified jurisdiction (the state where that office is located) is deemed the bank’s jurisdiction for UCC 9-304 purposes.

3.1.4 Location of the Office Handling the Account (from Account Statement)

If the contract itself doesn’t specify any jurisdiction under tests (1)–(3), UCC 9-304(b)(4) instructs us to look at the account statements. The bank’s jurisdiction is the jurisdiction where the office identified in an account statement as the office serving the customer’s account is located.

In practice, bank statements often list a branch or office address (e.g., “Customer Service Branch: [City, State]”). That location, if given, determines the jurisdiction.

This provides a fallback based on the bank’s own records for the account.

3.1.5 Chief Executive Office of the Bank

Finally, if none of the above rules apply – meaning the agreement had no relevant clauses and even the account statements do not identify a servicing office – the bank’s jurisdiction is the jurisdiction where the bank’s chief executive office is located.

In other words, as a last resort, one uses the location of the bank’s headquarters or main office. This catch-all ensures that every deposit account will have some jurisdiction that can be identified as the bank’s jurisdiction, even if the bank is silent in all documentation about location.

These five rules cover all scenarios, from the most explicit contractual designation to an implicit default based on the bank’s home base.

The structure of this hierarchy demonstrates an emphasis on honoring the intentions of the parties first (if they clearly agreed on a governing jurisdiction for these matters), then using any general choice-of-law or location indications they agreed on, and only in the absence of those, falling back to objective criteria like statement addresses or headquarters.

3.2 Flexibility for Party Autonomy under Rule (1)

It is worth highlighting the exceptional flexibility granted by subsection (b)(1). Under rule (1), banks and their customers can choose a specific jurisdiction’s law solely for the purposes of perfection and priority of security interests, even if that jurisdiction is different from the law governing other aspects of the account agreement.

This allows, for example, a deposit account agreement to be governed generally by the law of State A, while specifying that for secured transactions matters (Article 9 perfection and priority) the law of State B will govern.

Notably, the jurisdiction chosen under (b)(1) does not need to bear any relation to the parties or the transaction – it can be entirely a strategic or neutral choice. This kind of clause gives parties the ability to opt into a jurisdiction with well-understood Article 9 rules or a favorable legal environment for secured transactions, thereby providing certainty.

This approach in UCC 9-304(b)(1) aligns with modern commercial needs and is modeled after similar provisions in UCC Article 8 for investment securities. It represents a conscious policy choice to facilitate clarity in multi-jurisdictional transactions.

By allowing a designated law for perfection issues, the UCC drafters acknowledged that parties might want the predictability of a known legal regime for collateral perfection, separate from the law that governs their overall banking relationship.

4. Perfection and Priority Under the Chosen Law

Once the bank’s jurisdiction is determined using the above tests, the substantive law of that jurisdiction will govern how a security interest in the deposit account is perfected and how priorities are resolved.

This means two things in practice:

4.1 Perfection and Effect of Perfection/Nonperfection

The chosen jurisdiction’s Article 9 (or equivalent law) will tell the secured party what steps are necessary to perfect the security interest in the deposit account.

Under UCC Article 9, a security interest in a deposit account as original collateral is perfected by obtaining “control” of the account (UCC Article 9-312 and UCC Article 9-104 define the concept of control for deposit accounts).

Thus, if New York is the bank’s jurisdiction, one must comply with New York’s requirements for obtaining control of the deposit account to achieve perfection.

Likewise, the effects of not perfecting (for instance, the risk of losing priority to lien creditors or trustees in bankruptcy) are governed by that jurisdiction’s law. Therefore, all consequences that hinge on whether the interest is perfected are dictated by the law of the bank’s jurisdiction.

4.2 Priority under UCC Article 9-304

The law of the bank’s jurisdiction also governs priority rules for competing interests in the deposit account. Article 9 contains specific priority provisions, such as UCC 9-327 which gives certain secured parties (like the bank maintaining the account, or others with control) priority over others.

If, for example, the bank’s jurisdiction is Illinois, then an issue of whose security interest has priority in a particular deposit account will be resolved under Illinois’s version of UCC 9-327 and related sections.

No matter where the debtor or competing claimant is located, they all look to Illinois law for the rules of decision on priority if Illinois is the bank’s jurisdiction as per UCC 9-304.

This unified approach prevents a scenario where two creditors might each claim that different state laws apply leading to conflicting outcomes; UCC 9-304 ensures a single state’s priority scheme will decide the winner.

By focusing the analysis on one state’s law, UCC Article 9-304 simplifies what could otherwise be a complicated conflict-of-laws question. It avoids multiple filings or multiple compliance requirements in different states for the same deposit account.

5. Change of the Bank’s Jurisdiction and Continuity of Perfection

One practical question arises: What happens if the bank’s jurisdiction changes over time? For instance, suppose initially the bank’s jurisdiction (determined by the above rules) was State X, but later the situation changes – perhaps the bank merges and the account is now considered maintained in State Y, or the parties amend their agreement to designate a different jurisdiction under (b)(1).

In such cases, the governing law for perfection and priority will switch to the new jurisdiction at the time of change, as UCC 9-304 implicitly indicates (because the bank’s jurisdiction is a factual determination based on current circumstances).

However, the UCC provides safeguards so that a change in governing law does not unexpectedly strip a secured party of its perfected status.

When the applicable law governing perfection changes (due to a change in the bank’s jurisdiction), the secured party typically has a grace period to re-perfect under the new law without losing continuity.

The security interest remains perfected for a short period (e.g. four months under many UCC jurisdictions) after the change, giving the secured party time to comply with the new jurisdiction’s perfection requirements.

This ensures there is no immediate lapse in perfection simply because, say, a bank re-organized or an account agreement was modified. The important takeaway is that UCC 9-304 works in concert with UCC 9-316 to balance a clear choice-of-law rule with practical protection for secured creditors if circumstances evolve.

6. Conclusion

UCC Article 9-304 provides a streamlined and predictable rule set for determining the law applicable to perfection and priority of security interests in deposit accounts.

In summary, the law of the bank’s jurisdiction – defined by a series of hierarchical tests favoring explicit agreement and clear indicia of location – will govern how a secured party makes its interest in a deposit account effective against others and whose interest prevails in a conflict.

This not only simplifies transactions involving bank accounts as collateral but also ensures uniform outcomes under a single chosen law.