When exercising a right of setoff for an overdrawn deposit account, can we include overdraft fees in the amount recovered? Is this permissible if the only amounts we are recovering are for overdraft fees? Also, is there a statute of limitations on recovering overdrawn balances? For example, if an account with a negative balance was closed and charged off but the customer currently has funds in other accounts with our bank, can we use these funds to set off the amount that was charged off?

Right of Setoff for Overdraft Fees

We recommend reviewing the terms of your account agreement to determine whether you have a right of setoff that includes the collection of overdraft fees.

In Illinois, the right of setoff can arise either contractually (when an 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 a matured debt to the bank). A contractual right of setoff in a deposit account can provide for a broader right of setoff than the common law right of setoff. Additionally, a contractual right of setoff does not require mutuality of the parties.

If your account agreement grants you a right of setoff that may be applied to any debts the account holder owes you, we believe you may exercise this right to collect any overdraft fees you are owed on the overdrawn account — even if the overdraft fees are the only amount being set off.

If your account agreement does not provide a contractual right of setoff, you still may be entitled to an equitable right of setoff under Illinois common law. As explained by an Illinois court, “the general rule in Illinois is that a bank may apply its depositor’s account for a debt he owes to the bank.” We believe that a debt owed to a bank would include overdraft fees, provided that your account agreement states that the account holder will be charged a fee when the account is overdrawn.

Statute of Limitations

In general, we believe that a ten-year statute of limitations applies when exercising a contractual right of setoff (one derived from your account agreement) — provided that the contract has not been terminated — for example, due to account closure. In Illinois, the statute of limitations on actions stemming from written contracts is ten years.

However, we do not believe you can exercise a contractual right of setoff with respect to an account that has been closed — unless your account agreement expressly provides that your right of setoff survives the account closure. As such, we recommend reviewing your account agreement to determine whether you have a contractual right of setoff that survives an account closure.

If your account agreement does not contain a right of setoff that survives an account closure, you still may be able to recover the overdrawn balance by filing an action in court to enforce the terms of the account agreement. You also may be entitled to an equitable right of setoff if mutuality exists between the parties — meaning the overdrawn account was held in the name of the same customer who owns other accounts at your bank. Mutuality would not exist if, for example, the customer’s other accounts are held in the name of a business or jointly held with other account owners who are not joint owners on the overdrawn account. We are not aware of a statute of limitations that would apply to an action based on a common law right of set off and recommend consulting with an attorney on that question.

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. The general rule in Illinois is that a bank may apply its depositor’s account for a debt he owes to the bank. The application of the deposit, which is called a setoff, is only proper when the debts are mutual between the parties.”)

Fisher v. State Bank of Annawan, 163 Ill.2d 177, 181 (1994) (“Plaintiff argues . . . that the bank could not set off Robert’s indebtedness against the CDs because no mutuality existed. However, this inquiry into equitable setoff is irrelevant where a contractual basis for a setoff exists. The contract between plaintiff, his sons, and the defendant bank provides an independent basis for a setoff.”)

Illinois Code of Civil Procedure, 735 ILCS 5/13-206 (“Ten year limitation. Except as provided in Section 2-725 of the ‘Uniform Commercial Code,’ actions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing and actions brought under the Illinois Wage Payment and Collection Act shall be commenced within 10 years next after the cause of action accrued . . .”)