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Secured Party vs. Judgment Creditor
Secured Party vs. Judgment Creditor
By Robert M. Wonneberger
Pursuant to a change in the Connecticut bank execution statute, a secured party with a perfected security interest in a deposit account can lose its collateral unless it acts promptly to protect its rights. Further, a depository bank, if it does not follow the proper procedures, can end up paying the wrong party or find itself caught between competing claims to the amounts on deposit.

While the new statute was intended to clarify rights and procedures, it also creates traps for the unwary. The change in the statute was designed to address Revised Article 9 of the Uniform Commercial Code which included for the first time procedures for taking a perfected security interest in bank deposit accounts. The interest is automatically perfected if the secured party is also the depository bank. Otherwise, the secured party can perfect its interest by becoming the depository bank’s customer with respect to the account or by entering into what is commonly referred to as a “Control Agreement” with the bank and the debtor. If the Control Agreement mechanism is used, the secured party’s interest is perfected even though the account remains in the name of the debtor and the debtor may have the continuing right to make withdrawals from and write checks against the account.

Two New Procedures
Effective Oct. 1, 2003, the Connecticut statutes dealing with post-judgment bank execution were amended to address this new situation. Two procedures were established, depending on whether the account holder/judgment debtor is an entity or an individual.

Under the statute applicable to an account held by an entity (Connecticut General Statutes section 52-367a), the depository bank is required to remove the amount of the execution from the account prior to its midnight deadline (midnight on the next banking day following the banking day on which it receives the execution, Connecticut General Statutes section 42a-4-104). It must then mail a copy of the execution to the secured party and the judgment debtor and hold the removed funds for a period of 20 days from the date of mailing. If the secured party fails to take appropriate action within such 20 day period, the depository bank is required to pay the amount removed to the serving officer upon demand, who, in turn, pays it to the judgment creditor, notwithstanding the prior perfected security interest of the secured party. In order to prevent this from happening, within such 20 day period, the secured party must deliver to the court that issued the execution and to the depository bank a written claim for determination of interest in property (the process is described in Connecticut General Statutes section 52-356c). In that event, the matter is set down for a hearing before the court. The depository bank continues to hold the amount removed until it receives an order from the court regarding disposition of the funds.

The procedures for an account held by a natural person are somewhat different (Connecticut General Statutes section 52-367b). The depository bank must remove the funds from the account by its midnight deadline, and mail a copy of the execution and accompanying exemption form to the secured party (and the depositor). In order to protect its rights, the secured party must deliver to the bank written notice of its prior perfected security interest in the deposit account within 15 days after the execution and exemption form are mailed by the bank. Again, if the secured party fails to act in time, it could lose its collateral even though it holds a perfected security interest. If notice from the secured party (or an exemption form from the depositor) is received within the 15 day period, the bank must file it with the court within two business days and the matter is set down for a hearing. The depository bank continues to hold the funds for 45 days or receipt of a court order regarding disposition of the funds, whichever is earlier. If no court order is received, the funds are deposited back into the account.
Parties Must Be Vigilant

It is important to note that the statutory changes do not, as a substantive matter, change the priority of claims and, if a properly perfected secured party takes the necessary procedural steps, its claims should prevail. (“A Perfected Security Interest [in a bank deposit account] of course, has priority over an unsecured judgment against the same debtor.” See Sonic Engineering, Inc. v. The Konover Construction Co., Superior Court of Connecticut, Sept. 3, 2003, citing Walter E. Heller & Co. v. Salerno (1975).) However, the parties must be vigilant in meeting the requirements. Concerns for depository banks include ensuring that amounts are not mistakenly paid over to the serving officer without complying with the new procedures, disputes over timing (i.e. the exact date notices are sent or received or time periods expire) leading to uncertainty and disputes over who is entitled to the funds, and conflicting obligations between its duties under the new statute and its duties under its agreement with the secured party. In order to address these concerns, depository banks entering into these types of arrangements should consider the following:

• Training all personnel receiving or handling bank executions to understand the new procedures and especially the fact that amounts are no longer automatically paid over to the serving officer;

• Including in its information systems a mechanism to allow those employees to quickly and easily determine if a control agreement is in place.

• Instituting a system to maintain records of the exact date of mailing of notices to and receipt of notices from the secured party in order to help avoid disputes over when the 15 or 20 day period runs and whether required responses are received in time;

• Designating in the correspondence to the secured party and in the account control agreement the exact officer or department to whom notices should be sent; and

• Addressing the applicable statutes in the control agreement itself, including an acknowledgment by the secured party of such statutes and procedures and an agreement that they supersede any obligations of the depository bank under the account control agreement.

The major issue for secured parties is the need to respond within a very short time. Since the 15 or 20 day time period begins upon mailing by the depository bank (not receipt by the secured party) but the response must be received by the bank or court (not sent by the secured party) within the time period, the secured party may have only a matter of days to prepare and send out its response. Secured parties (especially out-of-state secured parties who may be unfamiliar with Connecticut law and lose several days to the mails) should consider the following:

• Designating in the account control agreement the exact officer or department (e.g. the legal department) to whom copies of executions should be sent;

• Familiarizing the designated recipients with the requirements under Connecticut law (this is especially important since the execution and exemption forms, on their faces, do not indicate the steps required of the secured party or the consequences if they are not taken) and providing them with ready access to information and/or documentation describing the secured party’s interest;

• Making necessary preparations to allow the recipients to respond quickly in order to ensure that the necessary claim or notice is delivered within the applicable 20 or 15 day time period. This may include having blank form responses prepared in advance and/or arranging in advance with in-state legal counsel to prepare and file necessary court papers when the need arises.

• Requiring in the account control agreement that copies of any executions be faxed as well as mailed in order to give the secured party a few extra days to respond.

The new statute requires that parties fully understand the requirements and remain vigilant about the time restrictions. A secured party that is prepared to act quickly, however, should have no trouble protecting its collateral, and a depository bank that follows the prescribed procedures and timetables should avoid being caught between competing claims.         

Robert M. Wonneberger is a partner in the Stamford office of Shipman & Goodwin LLP. He is the chairman of the firm’s commercial law practice group and practices in the areas of commercial, asset- based and mortgage finance, debt restructures and workouts, problem loan resolution and commercial law. For more information, visit, or e-mail

Posted on Thursday, June 30, 2005 (Archive on Wednesday, September 28, 2005)
Posted by kdroney  Contributed by kdroney


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