No, we do not believe that your bank may exercise a right of setoff in this situation. While your deposit account agreement likely provides for a right of setoff relative to the deposit account, your former customer no longer has a deposit account or other funds held at your bank and is not attempting to deposit this check at your bank.

Because this individual is no longer a customer, your bank is not obligated to cash the check and may refuse to do so. However, under the Uniform Commercial Code, such a refusal would constitute a wrongful dishonor of what we presume to be a properly payable check. The wrongful dishonor would result in potential liability to your current customer who issued the check, not to the individual who is attempting to cash the check. In other words, your former customer would lack standing to sue your bank for refusing to cash the check, but your current customer would have this standing.

It is possible that your current customer who issued the check would seek to hold your bank liable for wrongful dishonor of the check (for example, if this customer suffered some loss due to your bank’s refusal to cash the check for the payee). In light of this possibility, your bank should consider cashing the check in full, as your current customer would expect, in order to avoid potential legal or even reputational risks relating to your current customer.

We should note that in the unlikely event your former customer were to agree that your bank may withhold the funds owed to it from the check amount, then your bank may retain the necessary funds from the check amount and pay the balance in cash. If you do ask this of the former customer, and the former customer agrees, we recommend obtaining the consent to the setoff in writing.

For resources related to our guidance, please see:

• UCC, 810 ILCS 5/4-402(a) (“Except as otherwise provided in this Article, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it had agreed to pay the overdraft.”)

• UCC, 810 ILCS 5/4-402(b) (“A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. . . .”)

• Johnson v. First Banks, Inc., 382 Ill.App.3d 907, 908–909 (5th Dist. 2008) (“[P]ursuant to the plain language of the Code, the plaintiff, who does not have an account with the defendant, is not a ‘customer’ and therefore lacks standing to pursue a cause of action against the defendant for a wrongful dishonor.”)