Counselor's Corner

by Mark Hargrave, Esq.

Question: When a customer becomes overdrawn, do we have the right to close the account without notice? If we don't, how many times and/or what kind of notice do we have to supply?

Answer: The traditional view is that a deposit account reflects an "at will" relationship that may be terminated by either party at any time.

However, the cases generally require a "reasonable" notice to be given when an account is going to be closed. See, e.g. Weber v Western Bank, 336 N.W. .2d 653 (S.D. 1983) and C-K Enterprises, Inc. v Depositors Trust Co., 438 A.2d 262 (Me. 1981). The theory of these cases is that the notice gives the depositor a chance to make other arrangements and for checks in the pipeline to clear.

Thus, while you may have the right to close an account that is habitually overdrawn, you run the risk of wrongful dishonor liability if you do it without giving the customer prior notice. Moreover, wrongful dishonor liability is one of the few areas where the UCC allows the recovery of consequential damages. This can be especially problematical if you have regularly covered overdrafts in the past and may be seen as "pulling the plug" on the customer.

Many banks try to address this issue by provisions in their deposit agreements. These provisions take many forms.

Some go so far as to say the account can be closed without prior notice in any circumstance. We believe these provisions are too aggressive and would not recommend them.

Others say how much notice is reasonable in closing an account as a general matter. We believe these provisions are a good start and that a well-drafted deposit agreement should have one.

A few deposit agreements go on to deal with special situations in which it may be reasonable to close the account without any prior notice. These situations usually involve kiting or other wrongdoing that may be occurring in the account and, occasionally, they deal specifically with the issue of overdrafts. The provisions in this last category deal with the issue in terms of the number of overdrafts in a given period of time, the continuous overdrawn status of the account for a specified period of time or in similar ways.

While not guaranteed to satisfy every plaintiff's attorney or court, we believe that banks that use these provisions have gone a long way toward developing a reasonable framework for closing accounts.

Mark is a partner with Shook, Hardy & Bacon L.L.P., Kansas City. His practice focuses on the law of financial institutions, with special emphasis on issues involving commercial paper, bank deposits, collections and regulatory compliance matters. Questions for the Counselor's Corner can be forwarded to the BANKERS' HOTLINE editorial office, Fax: 610-872-6231; email: hurst@bankersonline.com

Copyright © 1998 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 8, No. 3, 3/98