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Set-Off Industry Standard Policies, Practices, Principles and Procedures Important in Banking Litigation


     By Don Coker Banking Consultant & Banking Industry Standard Procedures, et al., Expert Witness

PhoneCall Banking, Lending, and Mortgage Banking Expert Witness Don Coker at (770) 852-2286


Expert Witness: Don Coker
Renowned nationwide banking expert witness consultant, former high-level banker and governmental banking regulator Don Coker explains some important issues in the often misunderstood procedure of Set-Off as it arises in banking litigation. When a bank has a loan to a borrower, the borrower will not pay, and the borrower has money in a bank account that is held at the same bank, the lender may elect to use its right of Set-Off to seize funds in the bank account and use the funds to pay the debt.
Here is a sample of a typical Set-Off paragraph from a standard bank account Terms and Conditions statement used by many banks:

Set-Off

We may, without prior notice and when permitted by law, set off the funds in this account against any due and payable debt you owe us now or in the future, by any of you having the right of withdrawal, to the extent of such person's or legal entity's right to withdraw. If the debt arises from a note, "any due and payable debt" includes the total amount of which we are entitled to demand payment under the terms of the note at the time we set off, including any balance the due date for which we properly accelerate under the note. This right of Set-Off does not apply to this account if: (1) it is an IRA or other tax deferred retirement account, or (2) the debt is created by a consumer credit transaction under a credit card plan (but this does not affect our rights under any consensual security interest), or ( c) the debtor's right of withdrawal only arises in a representative capacity. We will not be liable for the dishonor of any check when the dishonor occurs because we set-off a debt against this account. You agree to hold us harmless from any claim arising as a result of our exercise of our right of set-off.

Here is another similar example:

Right of Set-Off – The bank may, without prior notice and when permitted by law, set off the funds in this account against any due and payable debt you owe us now or at any time in the future, by any of you having the right of withdrawal, to the extent of such persons’ or legal entity’s right to withdraw. If the debt arises from a note, “any due and payable debt” includes the total amount that the bank is entitled to demand payment of under the terms of the note at the time of the set-off, including any balance the due date for which we properly accelerate under the note.

This right of set-off does not apply to this account if it is an IRA, 401(k), 403 (b), or other tax-deferred retirement account, or if the debt is created by a consumer credit transaction under a credit card plan (but this does not affect our rights under any consensual security interest), or if the debtor’s right of withdrawal only arises in a representative capacity. The bank will not be liable for the dishonor of any check when the dishonor occurs because we set off a debt against this account. You agree to hold the bank harmless from any claim arising as a result of our exercise of our right of set-off.

Here is my synopsis from the viewpoint of an experienced banker (I am not an attorney) as to what the UCC has to say regarding set-off:

§ 1309.340. (UCC 9-340) Effectiveness of right of recoupment or set-off against deposit account.

(A) Except as otherwise provided in division (C) of this section, a bank with which a deposit account is maintained may exercise any right of recoupment or set-off against a secured party that holds a security interest in the deposit account.

(B) Except as otherwise provided in division (C) of this section, the application of this chapter to a security interest in a deposit account does not affect a right of recoupment or set-off of the secured party as to a deposit account maintained with the secured party.

(C) The exercise by a bank of a set-off against a deposit account is ineffective against a secured party that holds a security interest in the deposit account that is perfected by control under division (A)(3) of § 1309.104 of the Revised Code, if the set-off is based on a claim against the debtor.

The Official Comments clearly state that a bank may hold both a right of set-off against, and an article 9 security interest in, the same deposit account. By holding a security interest in a deposit account, a bank does not impair any right of set-off it would otherwise be able to use the funds in an account to apply toward a debt owed to the bank.

It is important to note that accounts evidenced by an instrument, e.g., certain certificates of deposit, are excluded from the definition of "deposit accounts" for purposes of set-off.

Here are some other interesting facts about the right of set-off:

● Banks have a right to use set-off, but they do not have a duty to do so.

● A bank has no duty to inform a customer in advance of a particular set-off planned by the bank since the customer would be able to remove the funds before the bank could affect the set-off.

● Funds on deposit in a corporate bank account may not be used to set-off the debt of an individual.

● Funds taken to effect a set-off are not considered to have been converted.

● There are some consumer credit transactions, such as where a consumer purchases goods or services paid for with a credit card and claims that there is a problem with the purchase, where the Truth in Lending Act prohibits set-off.

● Banks are not liable for bouncing checks written on an account where the bank has used its right of set-off.

● In bankruptcy, a bank who is owed money by a borrower who also has an account at the bank is viewed as a secured creditor. The bank account is effectively frozen by the filing of the bankruptcy until the bankruptcy court makes a decision.

● Set-offs often become a problem when there is more than one person on a bank account and the set-off is effected to reduce the debt of one of the people.

© 2012 by Nationwide Expert Witness Don Coker, Atlanta, Georgia, (770) 852-2286. Bankexpert@cs.com

ABOUT THE AUTHOR: Banking, Lending, and Mortgage Banking Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC.Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.

BA degree from the University of Alabama. Postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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