Yes, we believe that your bank may exercise a valid right of setoff with respect to the sole proprietor account. 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 account is owned by the same party that owes the matured debt to the bank).

We recommend reviewing your checking account agreement to see if you are authorized to set off a deposit account against monies owed to the bank. Having said that, even if your account agreements are silent on this issue, we believe you can exercise your common law right of setoff. A sole proprietorship has no legal existence apart from its individual owner. Consequently, the individual owing the debt to your bank is the owner of both accounts, making them eligible for setoff. 

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.)