A former business customer has a loan that has been charged off. An ACH credit transaction came in this morning to the customer’s old business checking account, which is now closed. Can we use the ACH payment to offset the charged off loan? Or do we have to return the payment? The transaction was a corporate credit entry (“CCD”). The business customer’s checking account was closed at our request as part of the workout regarding the overdue loan. The business customer has been dissolved and no longer exists.

No, we do not believe that your bank may exercise a right of setoff in this situation. While your deposit account agreement and your loan agreement likely both provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has funds on deposit, precluding a right of setoff.

Under Illinois law, the right of setoff can arise either contractually (when a loan agreement or account agreement provides for a right of setoff) or under common law when there is “mutuality” of parties (the funds are owned by the same party that owes the matured debt to the bank). In either scenario, your bank would have to be lawfully holding some of the customer’s funds in order to trigger a right of setoff.

As a corporate credit ACH transaction (referred to in the NACHA rules as a “CCD”), this transaction is subject to Article 4A of the Uniform Commercial Code. Under Article 4A, your bank generally cannot accept the ACH payment if the intended recipient’s account has been closed. In addition, the NACHA rules require your bank to return all entries that are not credited or otherwise made available to the intended recipient’s account. Consequently, we do not believe that your bank lawfully can hold the ACH transaction funds, such that the funds would be subject to a right of setoff.

Note that because the intended receiving account has been closed, this transaction is not subject to the NACHA requirement to be returned by your ACH Operator’s deadline for the entry to be made available to the originating financial institution no later than the opening of business on the second banking day after the settlement date in the original entry.

For resources related to our guidance, please see:

Symanski v. First Nat. Bank of Danville, 242 Ill.App.3d 391, 396–397 (4th Dist. 1993) (“There are two bases on which defendant could assert a right of setoff . . . . Under common law, a bank has the power to apply the deposit to the payment of such depositor’s indebtedness only when there are mutual demands and debts between the parties, and this right of setoff arises at the time the depositor’s indebtedness to the bank has matured. . . . As evidenced by our previous discussion, parties can contractually agree to a right to set off.”)

Illinois UCC, 810 ILCS 5/4A-209(c) (“Acceptance of a payment order cannot occur before the order is received by the receiving bank. Acceptance does not occur under subsection (b)(2) or (b)(3) if the beneficiary of the payment order does not have an account with the receiving bank, the account has been closed, or the receiving bank is not permitted by law to receive credits for the beneficiary's account.”)

NACHA Corporate Credit or Debit and Corporate Trade Exchange Entries (CCD & CTX), pg. OG72 (“In addition to the applicable NACHA Operating Rules, wholesale credit transactions submitted as CCD and CTX entries are governed by Article 4A of the Uniform Commercial Code. As they are not consumer entries, they are not subject to Regulation E.”)

NACHA Rule 3.8.3.4 (“An RDFI must return all credit Entries that are not credited or otherwise made available to its Receivers’ accounts. The RDFI must Transmit such a Return Entry to its ACH Operator by the ACH Operator’s deposit deadline for the Return Entry to be made available to the ODFI no later than the opening of business on the second Banking Day following the Settlement Date of the original Entry.”)

NACHA Rule 3.8 (“An RDFI must Transmit a Return Entry to its ACH Operator by the ACH Operator’s deposit deadline for the Return Entry to be made available to the ODFI no later than the opening of business on the second Banking Day following the Settlement Date of the original Entry, except as otherwise provided in Subsection 3.8.3. . . .”)

NACHA Rule 3.8.3.1 (“An RDFI must Transmit a Return Entry relating to a credit Entry subject to Article 4A to its ACH Operator prior to the time the RDFI accepts the credit Entry as provided for under Article 4A, unless: (a) the Receiver of the Entry does not have an account with the RDFI; (b) the Receiver’s account has been closed