I'm looking for opinion on a situation I have here. We are still feeling our way through this mess but we have come upon an issue where consensus has not been reached.

We have a type of merchant account that allows a merchant to link with a checking account at another institution (any checking account, consumer or merchant). Our agreement states we are allowed to pull funds from this other account (see verbiage below).

Right to Recoupment. We have the right of recoupment and set-off. This means that we may offset any outstanding/uncollected amounts owed to us from: (a) any amounts owed to you that they would otherwise be obligated to deposit into the Member Operating Account, (b) any other amounts we may owe you under this Agreement or any other agreement, and (c) the Checking Account which you may have associated with your ProPay Account in accordance with the Electronic Funds Transfer Agreement.

The merchant has committed $12,000 in fraudulent ATM transactions, putting the account into the red. How solid is this disclosure? I'm just now learning NACHA rules and on first glance I'm not sure this verbiage is allowed or what we would do if the other institution returns our ACH.

For $12,000, I would be asking this question of my legal counsel.

I did - they think the verbiage is sound from a legal perspective but our resident ACH expert quit recently (hence the reason I'm the newbie).

Well, if the propay account mentioned is at another bank, then I think you may be okay. However, if this is the only account they have and it is at your bank, I don't think you can pull from another account you have knowledge of, regardless of where it is. At least that is how I read your verbiage. As far as ACH rules go, you have no wording above that states you will originate an ACH debit, so I think you're on thin ice and in line for items being returned as unauthorirzed.