WHEN CAN A BANK OR CREDIT UNION EXERCISE ITS SETOFF RIGHTS IN A CUSTOMER’S DEPOSIT ACCOUNTS?

Banks and credit unions accept deposits from and lend money to their customers. When customers fail to repay loans owed to the financial institution or become indebted to the financial institution for overdraft or other charges on their deposit accounts, the bank or credit union often seeks to recover monies owed to it by taking funds from the customer’s deposit account(s). This self-help recovery method is often referred to as a right of setoff. This setoff right can arise by operation of law and/or by agreement between the financial institution and its customer.

In Maine, financial institutions have a common law right of setoff which was first expressly recognized by Maine’s highest court in 1973. In the case of Joler v. Depositors Trust Company, 309 A.2d 871 (Me. 1973) the Maine Law Court recognized and adopted as Maine law the principle that “‘[w]hen . . . (the depositor) owes to the bank independent debts, already due and payable, the bank has the right to apply the balance of his general account to the satisfaction of any such debts of his.’” (Quoting National Mahaiwe Bank v. Peck, 127 Mass. 298, 300, 301 (1897)). Therefore, without advance notice to the customer, the financial institution can take funds from the customer’s deposit account to satisfy a debt owed to the financial institution.

The financial institution’s right to setoff is not without limitation, however. In the context of consumer debts covered by the Maine Consumer Credit Code, the financial institution must first give the customer a legally sufficient notice of right to cure which specifically includes a reference to the financial institution’s right to setoff against deposit accounts if the customer does not cure the default within the allowed cure period. Also, the financial institution may have limited or no rights to setoff funds held in special purpose accounts, qualified retirement accounts, and jointly held accounts. Federal law also prevents setoff to satisfy a credit card debt and most credit card agreements specifically incorporate this prohibition.

Before exercising setoff rights against a customer’s deposit accounts, a financial institution should carefully examine all of the facts underlying the proposed setoff including the contract documents giving rise to the setoff, the nature of the deposit account against which a setoff is to be processed, and the law applicable to the proposed setoff transaction.

If you are a financial institution in need of advice regarding setoff rights involving depositors with accounts located in the State of Maine, the attorneys at Gosselin & Dubord, P.A. located in Lewiston, Maine have extensive experience with creditor representation and stand ready to assist you. Please contact Attorney David R. Dubord at (207) 783-5261 (extension 212) or drd@gosselindubord.com.