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#15571 - 04/17/02 12:49 AM Right of Offset
RobertT Offline
New Poster
Joined: Aug 2001
Posts: 8
Whittier, California, USA
Haven't run into this one....Mother and daughter both have separate individual checking accounts with our Bank. Mother writes daughter two checks which daughter deposits into her own individual checking account. Both checks are returned NSF and the daughter's balance isn't sufficient to cover the checks. My question is, can we tap the mother's account for the two NSF checks that she issued to her daughter, even though the mother's account is an individual account.

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General Discussion
#15572 - 04/17/02 01:49 AM Re: Right of Offset
Anonymous
Unregistered

Let me see if I understood this:

1. Mother issues two checks, payable to Daughter, drawn on your bank?
2. Daughter deposits the two checks in her account, also at your bank?
3. The next day Mom’s two checks are ‘cutback’ by your bank due to NSF in Mom's account and ‘returned’ (charged back) by the midnight deadline to Daughter’s account.
4. The charge back of Mom’s two checks to Daughter’s account won’t post due to NSF funds?
5. Your question is: can you setoff against Mom's account?

Is that correct? And, let me guess, the original two checks were mailed to daughter when you charged them back to her account, right?

If so . . . we’ve got trouble in River City.

If Mom's two checks are drawn on another bank (which, now that I look at this a little closer seems to be more likely) it appears, on its face, that you have no right of setoff against Mom's account with your bank. Why? Because there is no debt as between Mom and your bank and the existence of debt is a required element of the right of setoff. Mom wasn't a party to the negotiation and therefore gave no warranties of indorsement.

However, that said, if you're REALLY brave, you can setoff against Mom's account by reason that inasmuch as Daughter withdrew the proceeds of Mom's two NSF checks leaving your bank holding the bag as a holder in due course, the daughter's rights of recovery as against Mom pass to your bank (Tada! Debt!) and you can exercise your right of setoff to recover on that debt. What a stretch . . .

But remember, it's always easier to beg forgiveness than it is to ask permission. Also remember that this is just my opinion, I could be wrong (again, thanks Dennis Miller). It is not intended to be nor should it be construed as being 'legal advice.' Much to the contrary, it's probably worth exactly what you're paying for it -- nothing.

So, are you feeling lucky? Just to be safe, run this one by bank council, he probably will appreciate the work.

Rob Robinson
CAMELS' Eye Limited
Community Banking Specialists
http://www.camelseye.com

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#15573 - 04/17/02 02:17 AM Re: Right of Offset
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
Were the deposited checks drawn on your bank? If so, am I correct in assuming that the maker of the check still does not have sufficient funds to cover these checks? UCC 4-401 gives you the ability to charge the maker's account to pay the checks, even if it creates an overdraft. Additionally, UCC 4-301 only gives you until the end of the day after deposit to charge back against the depositor's account when the depositing bank and the paying bank are the same. As long as the check is properly payable, the fact that the maker's account is an individual account is irrelevant.

If the checks were drawn on another bank, I don't know of any law or reg which would allow you to tap into the makers other funds at your bank.
Last edited by JacFSB; 04/17/02 02:34 AM.
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#15574 - 04/17/02 01:56 PM Re: Right of Offset
GenerousLife Offline
Diamond Poster
Joined: Feb 2002
Posts: 1,466
USA
I must be missing something .... if the accounts are individual accounts, why would you look to the daughter's account to cover the Mom's checks in the first place? Why wouldn't you simply return the checks, showing Mom's account in overdraft plus OD fees and collect on her next deposit? How is it any different than a similar scenario of two unrelated individuals?
_________________________
"No problem can withstand the assault of sustained thinking." ~ Voltaire
"Sustained thinking gives me a headache." ~Me

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#15575 - 04/17/02 02:26 PM Re: Right of Offset
Anonymous
Unregistered

JacFSB:

You may want to take a look at UCC 4-210 for starters.

Rob Robinson
CAMELS' Eye Limited
Community Banking Specialists
http://www.camelseye.com

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#15576 - 04/17/02 03:28 PM Re: Right of Offset
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
Rob,
I looked at 4-210, and I don't see how it changes my answer. Suppose I have accounts at First Bank and Second Bank. I write you a check, drawn on my First Bank account, and you deposit that check into your account at Second Bank. If that check comes back, Second Bank has two choices: charge back your account or try to collect from First Bank. They have no setoff against my account at Second Bank because I am not the one providing the endorsement warranty to them.

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#15577 - 04/17/02 04:13 PM Re: Right of Offset
Anonymous
Unregistered

JacFSB:

UCC 4-210 is the ‘law or reg’ that probably permits the poster’s bank to exercise its right of setoff, relying on its security interest in the items payable to the Daughter.

When items are deposited for collection, in the overwhelming number of cases, the item will be paid. It is usually only a matter of time before the payment is realized. The customer, in turn, will be given a provisional credit, UCC 4-201(1) which will become final on payment.

Even before it becomes final, however, the bank may make advances against the item or in some way commit itself to payment in expectation that the items will, in fact, clear. If they do not, there are charge back and refund rights to fall back upon, 4-214 as well as rights based on a possible breach of warranty (4-207). There will also be rights based on the debt or commitment as well as remedies such as a banker’s lien or rights of setoff.

It is against this larger background (which the Code does not disturb) that 4-210 is to be read. It adds to the picture by granting the bank, under certain conditions, a security interest “in an item and any accompanying documents or proceeds.” The item in collection or its proceeds, assuming such a security interest is had, now serve as collateral.

This is important in its own right. An advance that is made, for example, without collateral is simply an unsecured obligation. Add collateral, i.e., a security interest, and the creditor, here the bank, has assets to fall back upon should this prove necessary.

Normally this is not likely to prove necessary since the bank has other more easily enforced remedies available, e.g., charge back.

However, there is always the possibility that a bank in the collecting chain, for example, the depositary bank, may have to recover on the instrument itself. When that happens, its need for holder-in-due-course status becomes extremely important. The element here that is likely to bar access to that protected status is the need for a “value” position 3-302(a)(1) and 3-303. To what extent has any bank in the collecting chain given “value” when it processes an item for collection? The answer is found in 4-210, which advances the idea that even where the collecting bank is serving as “agent” for the true owner it may nevertheless acquire a “value” position. To put it into Code categories, where the bank allows and advance, for example, against a provisional credit, it acquires a “security interest” in the item (or its proceeds) which constitutes “value.”

It is here that the security interest serves a second function in that it accords the bank a “value” position since a bank gives “value” by definition “to the extent that it has a security interest in an item.” (4-211).

Given the importance of the security interest 4-210 addresses the basic issues of (a) When it comes into existence (4-210(a)), (b) Under what conditions it continues in existence (4-210(b) and (c)), and (c) when it terminates, 4-210(c)).

This posting in not intended as legal advice nor should it be construed as such for any purpose.

Rob Robinson
CAMELS' Eye Limited
Community Banking Specialists
http://www.camelseye.com

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#15578 - 04/17/02 04:49 PM Re: Right of Offset
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
Rob,
I understand the concept of security interest. But the point I am making is that we can only exercise that interest against the depositor in this case.

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#15579 - 04/17/02 06:45 PM Re: Right of Offset
Anonymous
Unregistered

Well, JacFSB, I suppose we agree to disagree. The right to proceed as against Mom's account is, in all likelihood, provided as I discussed above. But then, that's why we have a court system isn't it? That's also why I recommended visiting with legal counsel.

This posting in not intended as legal advice nor should it be construed as such for any purpose.

Rob Robinson
CAMELS' Eye Limited
Community Banking Specialists
http://www.camelseye.com

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