Topic: Right of Setoff
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Does Illinois allow for the right of offset to a customer’s account when their loan is deficient?
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Under Illinois law, the right of setoff can arise contractually (when the deposit account agreement provides for a right of set-off) 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). We recommend checking your deposit account agreement…
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A father and son co-signed on a $2500 loan. The loan is secured by a certificate of deposit that is solely owned by the father. We obtained an assignment of CD in connection with the loan. The loan is current. However, the son is now engaging in fraudulent activity in his personal checking account that has made his account overdrawn. Can we use the CD to offset the son’s overdrawn account?
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In our view, the bank may not use the CD to offset the son’s overdrawn account. Under Illinois law, the right of setoff can be asserted under the common law if there is “mutuality” of parties — where the deposit account is owned by the same party that owes the debt to the bank. Because…
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We have a business loan that is now overdue. The loan was personally guaranteed by the president of the business. The business deposit account is empty, but the president’s personal deposit account does contain some funds. Can we offset the business loan with the president’s personal deposit account?
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Yes, we believe that your institution has a valid right of setoff in the president’s personal deposit account, since he is the guarantor of the business debt. Under Illinois law, the right of setoff can arises under the common law if there is “mutuality” of parties — where the deposit account is owned by the…
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Over two years ago, we returned a remotely created check that our customer reported as unauthorized. Recently, the company that initiated the remotely created check contacted us and provided a signed copy of its agreement with the customer authorizing the check. The company is asking us to return the amount of the check and has threatened litigation. Can we offset the customer’s account for the amount of the check?
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First, because the company that initiated the electronic check has threatened litigation against your bank, we highly recommend consulting with bank counsel going forward. In your discussions with bank counsel, we would note that Illinois law does permit a bank to exercise its right of setoff against a customer’s deposit account in this situation. Under…
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We have two checking accounts with the exact same ownership. One of the accounts is overdrawn and will soon be charged off. Can we set off the overdraft with funds deposited in the other account, or do we have to wait until we have charged off the overdrawn account? Our account agreements permit us to setoff deposited funds for debts owed to the bank.
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Yes, you may exercise your contractual right of setoff in the funds deposited in one account to pay the overdraft on another account held by the same owner, since the overdraft is a debt owed to your bank. It is not necessary to wait until the overdrawn account has been charged off. Several Illinois cases…
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Does the Department of Defense (DoD) Interpretive Rule #18 regarding Section 232.8(e) of the Military Lending Act (MLA) mean that we can still use a right of setoff on covered transactions?
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The DoD’s rule and interpretive guidance are subject to multiple interpretations on this point. In our view, the more reasonable interpretation is that the rule does not prohibit a bank’s right of setoff. Section 232.8(e) prohibits a creditor from using “a check or other method of access to a deposit, savings, or other financial account…
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A former deposit customer’s account was charged off and closed due to an unpaid overdraft. However, the former customer provided our bank’s information for a deposit of U.S. Department of Veterans Affairs (VA) education loan proceeds. Can we exercise our right of offset under our account agreements to cover our losses on the deposit account that was charged off?
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No, we do not recommend reopening the account for purposes of setting off the VA loan proceeds. Because the account is closed, we recommend returning the deposit for that reason. When the deposit account closed, your account agreement with the customer expired. Because your right of setoff stemmed from the account agreement, it is likely…
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We over-credited a customer’s deposit account by $4,000. Our account agreements provide for a right of setoff in this case, as “permitted by law.” Can we exercise our right of setoff? The erroneous credit was not associated with a credit card plan.
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Yes, your bank may offset the customer's account for the $4,000 amount, pursuant to both common law and your contractual right of setoff (based on your description of the customer's account agreement). In cases where funds are held in the account in trust for an innocent third party, the question of the right to setoff…