If your bank has a valid right of setoff against the customer, then you may exercise that right against a cashier’s check made payable to the customer — provided that the check is presented for payment at your bank by your customer. If instead the cashier’s check is presented by another party (for example, if your customer has endorsed the check to a third party), your bank should honor the cashier’s check as an obligation drawn on your bank.

Also, you should confirm that your bank has a valid right of setoff before setting off the cashier’s check. Under Illinois law, the right of setoff can arise contractually, when a deposit account or loan agreement provides for a right of setoff, or under common law, when there is “mutuality” of parties (the cashier’s check is owned and presented by the same party that owes the debt to the bank) and a matured debt (for example, a loan that has matured or has been accelerated).

We recommend reviewing your deposit account or loan agreements to confirm that the bank is authorized to set off funds owed to your customer. Even if the underlying agreement is silent on this issue, however, you may be able to exercise your common law right of setoff if the customer is the sole owner of the cashier’s check and owes a matured debt to your bank.

For resources related to our guidance, please see:

• Pope v. First of Am., N.A., 699 N.E.2d 178, 180 (3rd Dist. 1998) (This court held that a bank could exercise its contractual right of setoff for customer’s unauthorized withdrawals from another customer’s bank account.)

• Selby v. DuQuoin State Bank, 223 Ill.App.3d 105, 107 (5th Dist. 1991) (The common law right of setoff requires a mutuality of parties, meaning that the deposit account is owned by the same party that owes the debt, as well as a matured debt.)