Since there are sufficient funds in the account, we believe that your bank may place a hold for the tax levy and exercise a contractual right of setoff under your loan agreement, provided that your loan agreement permits you to exercise a right of setoff before the loan has gone into default.

Under Illinois law, the right of setoff can arise either contractually (when a loan agreement or deposit account agreement provides for a right of setoff) or under common law when there is a matured debt and a “mutuality” of parties (the funds are owned by the same party that owes the matured debt to the bank).

In this case, it appears that a common law right of setoff is unavailable — the loan has not matured, nor has an event of default occurred that would permit your bank to accelerate the debt, unless the receipt of a tax levy constitutes an event of default under your loan agreement. But your bank may be able to rely on its contractual right of setoff under your loan agreement. For example, one Illinois case relied on setoff language permitting the lender to exercise its right of setoff “at any time before or after Default.” If your loan agreement has similarly permissive language, your bank should be able to exercise its right of setoff in your customer’s remaining deposit account funds.

For resources related to our guidance, please see:

• Selby v. DuQuoin State Bank, 223 Ill.App.3d 105, 108 (5th Dist. 1991) (“The general rule is that a bank cannot apply the deposit of a debtor to an unmatured indebtedness in the absence of an express authority to do so. . . . Although the maturity date on the August 1, 1989, note and security agreement was July 31, 1992, the note provided that in the event of a default the Bank could elect to accelerate the due date of the note. Because Norman Smith’s death was a specified event of default, the Bank had the power to accelerate the indebtedness and thus Smith's loan with the Bank matured on the date of his death along with the Bank's right of setoff.”)

• Bonhiver v. State Bank of Clearing, 29 Ill.App.3d 794, 804 (1st Dist. 1975) (“A bank cannot withhold payment of a fund on deposit with it on the ground that it holds a note which will mature at some future date. It has also been stated that as a general rule ‘a bank cannot apply the deposits of a debtor to an unmatured indebtedness in the absence of express authority so to do.’ . . . ”)

• Fisher v. State Bank of Annawan, 163 Ill.2d 177, 179–182 (1994) (“The loan documents Robert signed all contained a provision for setoff similar to the following: ‘SET-OFF: Lender may, at any time before or after Default exercise its right to set-off all or any portion of the indebtedness of the Lender to the Borrower (whether owned by the Borrower alone or in conjunction with any other person or entity, provided that the Borrower has a beneficial interest therein) without prior notice to the Borrower. . . .’ The contract between plaintiff, his sons, and the defendant bank provides an independent basis for a setoff. . . .”)