INDEMNIFICATION AGREEMENT

We had a member that was check kiting. The account with us is now negative over $5,000. We received an Indemnification Agreement from the other bank involved requesting that we release to them the amount of the last check deposited at their bank written from the account with us over $10,000. At this time we do not have the funds. We have knowledge that money will be deposited into the account with us over $40,000 (from a loan). We don't know when the loan will be completed and the money deposited. What if anything do we need to do with the other bank?

If you are looking to assist the other bank, I would not recommend releasing any funds based solely on the indemnification agreement. You'll want something in addition to the agreement.

Since this is a check kite, I assume the other bank is sitting on some items that you had returned to them unpaid. As such, ask them to send you the returned items on a collection basis. Then, if the loan goes through and funds become available, you can post those checks and pay the other bank at that time.

This is an important CYA step, as the underlying debit to your customer's account is strictly a result of your negotiation of an enforceable instrument.

Let no funds go until you have collected available funds and your losses are covered. Let the other banker (yes we do like each other but) fend for themselves.