DEPOSIT ACCOUNT CONTROL AGREEMENT

 

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                                                                    EXHIBIT 10.7

 

                        DEPOSIT ACCOUNT CONTROL AGREEMENT

 

      THIS DEPOSIT ACCOUNT CONTROL AGREEMENT ("Agreement") is dated June 29,

2005 by and among BancorpSouth Bank (together with its successors and assigns,

"Bank"), Hancock Fabrics, Inc. (together with its successors and assigns, the

"Company") and Wachovia Bank, National Association, in its capacity as agent

pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf

of the parties thereto as lenders (in such capacity, together with its

successors and assigns, "Agent").

 

                               W I T N E S S E T H

 

      WHEREAS, Bank maintains or will maintain for the use of the Company the

deposit account listed on Schedule 1 hereto as the collection account (the

"Collection Account") and in addition, Bank maintains the other deposit accounts

used by or on behalf of the Company listed on Schedule 1 hereto (the "Operating

Accounts", and together with the Collection Account and any other deposit

accounts at any time established or maintained at Bank by or for the benefit of

the Company or to which any funds of the Company are at any time remitted or

deposited, but excluding deposit accounts specifically and exclusively used for

payroll, payroll taxes and other employee wage and benefit payments, being

collectively, the "Deposit Accounts", and individually, each a "Deposit

Account");

 

      WHEREAS, the Company has entered or is about to enter into financing

arrangements with Agent and the parties to the Loan Agreement as lenders

(collectively, together with their respective successors and assigns, "Lenders")

pursuant to which the Company may from time to time have certain indebtedness or

other obligations to Agent and Lenders as set forth in the Loan and Security

Agreement by and among Agent, Lenders, the Company and certain of its affiliates

(as the same now exists or may hereafter be amended, modified, supplemented,

extended, renewed, restated or replaced, the "Loan Agreement");

 

      WHEREAS, such indebtedness and other obligations of the Company to Agent

and Lenders are secured by, among other things, all right, title and interest of

the Company in and to the following, whether now or hereafter existing or

arising (collectively, the "Deposit Account Collateral"): (a) the Deposit

Accounts, (b) all checks, money orders, drafts, instruments, electronic funds

transfers and other items and forms of remittances and all funds and other

amounts at any time paid, deposited or credited (whether for collection,

provisionally or otherwise), held or otherwise in the possession or under the

control of, or in transit to, Bank or any agent or custodian thereof for credit

to or to be deposited in any Deposit Account, (c) all funds and cash balances or

other amounts in or attributable to any Deposit Account, and (d) any and all

proceeds of any of the foregoing;

 

      WHEREAS, in connection with such financing arrangements, Agent and Lenders

require that Bank and the Company enter into this Agreement to establish certain

rights and benefits with respect to the Deposit Accounts;

 

      NOW, THEREFORE, in order for the Company to comply with the requirements

of Agent and Lenders under their financing arrangements with the Company, the

Company, Bank and Agent agree as follows:

 

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      1. Deposit Account Collateral. Bank hereby represents, warrants and

covenants with and to Agent and Lenders that: (a) Bank has established and will

maintain the Deposit Accounts and has identified the Company as the sole owner

of the Deposit Accounts, subject to the rights of Agent therein as provided

herein; (b) the records of Bank do not reflect, and it has not received any

notice of, any assignment or pledge of, or security interest in the Deposit

Accounts or any of the other Deposit Account Collateral (other than the pledge

and security interest of Agent referred to herein), or any notice of any adverse

claim with respect to any of the same; (c) Bank has not entered and will not

enter into any agreement with any person other than Agent by which it is

obligated for any reason to comply with instructions from such other person as

to the disposition of funds in or from the Deposit Accounts or with respect to

any other dealings with any of the Deposit Account Collateral; (d) Bank will not

agree that any person other than the Company or Agent is the Bank's customer

with respect to any Deposit Account; (e) Schedule 1 is a correct and complete

list of the Deposit Accounts as of the date hereof and each of them constitutes

a "deposit account" as such term is defined in the UCC; (f) effective as of the

Effective Date (as hereinafter defined), the title of the Collection Account

shall be changed to "Hancock Fabrics, Inc. -- Wachovia Bank, National

Association as Agent Blocked Account"; (g) Bank acknowledges that it holds and

will hold possession of the Deposit Account Collateral consisting of instruments

and money as bailee for Agent and for the benefit of Agent; and (h) Bank is

hereby irrevocably authorized and instructed to change the designation of the

customer on any Deposit Account to Agent upon the request of Agent and Bank

shall so change the customer promptly upon such request by Agent.

 

      2. Control.

 

            (a) Notwithstanding any other term or provision of this Agreement or

any other agreement between Bank and the Company or otherwise, Bank is hereby

irrevocably authorized and directed to, and Bank agrees that it will, comply

with instructions originated by Agent directing the disposition of funds from

time to time in any Deposit Account or as to any other matters relating to any

Deposit Account or any of the other Deposit Account Collateral without further

consent by the Company (which instructions may include the giving of stop

payment orders for any items being presented to a Deposit Account for payment).

 

            (b) Effective upon the receipt by Bank of written notice from Agent

that Agent is exercising exclusive control over any Deposit Account (each such

notice being referred to as a "Notice of Exclusive Control"), Bank shall not

permit the Company or any of its affiliates to withdraw any amounts from, to

draw upon or otherwise exercise any authority or powers with respect to the

Deposit Account and all Deposit Account Collateral related thereto specified in

any such Notice of Exclusive Control and Bank shall not at any time honor, any

instructions with respect to the such Deposit Account and Deposit Account

Collateral, other than those approved in writing by Agent. Until the receipt by

Bank of a Notice of Exclusive Control, the Company shall be entitled to present

items drawn on and otherwise to withdraw or direct the disposition of funds from

the Deposit Accounts.

 

      3. Remittance of Funds. Unless and until Bank shall receive written

instruction from Agent to the contrary, effective as of the Effective Date, all

checks, money orders, drafts, instruments, electronic funds transfers and other

items and forms of remittances received for deposit in the Collection Account