Yes, we believe that your bank may place a hold on a deposit account when it has a valid right of setoff in the account funds. Under Illinois law, a valid right of setoff can arise contractually (when a note or deposit account agreement provides for a right of setoff) or under the common law when there is “mutuality” of parties (the deposit account is owned by the same party that owes the debt to the bank). However, Regulation Z prohibits banks from exercising setoff rights with respect to consumer credit card debts.

Further action would be required to actually exercise the bank’s right of setoff. The U.S. Supreme Court has held that “a setoff has not occurred until three steps have been taken: (i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the setoff.”

We are not aware of any notice requirements when exercising a right of setoff, but we recommend reviewing your account agreements for any contractual notice requirements.

For resources related to our guidance, please see:

• 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.)

• 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.)

• Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 19 (1995) (“The principal question for decision is whether petitioner’s refusal to pay its debt to respondent upon the latter’s demand constituted an exercise of the setoff right and hence violated the stay. In our view, petitioner’s action was not a setoff within the meaning of § 362(a)(7). Petitioner refused to pay its debt, not permanently and absolutely, but only while it sought relief under § 362(d) from the automatic stay. . . . a setoff has not occurred until three steps have been taken: (i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the setoff.”)

• U.S. v. Illinois State Bank of East Alton, 1986 WL 53405 at *1 (S.D. Ill. 1986) (“The bank urges that its matured debt was prior to the levy so it was entitled to exercise its right of setoff even after the levy. However, the law in Illinois does not provide for an automatic setoff. Rather, in order to effectively apply the deposit to a debt, the bank must perform an act which amounts to an appropriation of the deposit to itself and the mere notification to the depositor not to withdraw further checks against his account has been held insufficient.”)