(605) 336-2880 info@dehs.com
  • Facebook
  • linkedin
  • Facebook
  • linkedin
Davenport, Evans, Hurwitz & Smith, LLP
  • Home
  • About Us
  • Our Lawyers
  • Practice Areas
  • Events
  • News
  • FAQ
  • Community Involvement
  • Contact
  • Search
Select Page

The Right of Setoff: 5 Documentation Tips for Protecting Your Bank

by dehs | Sep 29, 2020 | Financial Institutions, Litigation, Recent News

Bank Deposit Document Window

Davenport Evans Anthony Hohn“Setoff” is the right of a depository bank to appropriate funds in a deposit account it controls to satisfy debt owed by a customer to that depository bank. The right of setoff is derived from common law principals of law and equity, and has long been recognized in court decisions. The Uniform Commercial Code—which South Dakota has adopted—acknowledges the right of setoff and provides rules governing obtaining a security interest in deposit accounts and the perfection of such security interests. While there are several aspects to setoffs, an oft-overlooked element is how such rights are actually set forth in the bank’s documentation.

Davenport Evans lawyer Anthony Hohn provides 5 documentation provisions to include in the bank’s deposit agreements to help protect your bank’s right of setoff.

1. Grant the right of setoff. The customer must affirmatively grant the bank the right of setoff, and the scope of such right should be defined. For example, the provision should state that the bank may take or setoff funds in any or all of the customer’s accounts for “direct, indirect, and acquired obligations” the customer owes the bank.
2. Grant a broad security interest in the deposit account. The agreement should grant the bank a consensual security interest in addition to the right of setoff. For example, the provision should provide the bank has the right of setoff for any debt owed by the customer, and that the customer grants the bank a security interest in all accounts to secure the debt.
3. Include personally guaranteed debt. The provision should grant the bank the right of setoff for debts personally guaranteed by the customer. The agreement should define “debts” to include “amounts owed to the bank by another person or entity if you have guaranteed you will pay their debt,” and that if the debt is due or overdue, the bank “may use the funds in any of your accounts to pay all or part of the debt.”
4. Grant the right of setoff in joint accounts. If the customer has a joint account, the agreement should grant the bank the right of setoff against joint account funds to cover the debts of any account holder.
5. Include a waiver of liability for dishonor. The agreement should set forth the consequences of dishonor and waive liability for wrongful dishonor. For example, the agreement should provide the bank will not be liable for dishonoring items where the bank’s exercise of the right of setoff and enforcement of its security interest results in insufficient funds in the account.

In addition to these basic provisions, a bank should be sure to refer to and incorporate the right of setoff in other bank documents, as necessary. For example, security agreements and personal guarantees should acknowledge the right of setoff, and the scope of such right, as set forth in the deposit agreement. Following these simple documentation guidelines will provide added protection when setoff becomes necessary.

Questions? Contact attorney Anthony Hohn at ahohn@dehs.com or 605-357-1258. To discuss additional banking law needs, contact a Davenport Evans lawyer at 605-336-2880, info@dehs.com, or visit www.dehs.com.

Protect What You've Built

Contact Us
605-336-2880

News

  • Business Law
  • Community Involvement
  • Employment Law
  • Estate Planning
  • Events
  • FAQ
  • Financial Institutions
  • General
  • Lawyer
  • Litigation
  • Practice Areas
  • Recent News

Recent Posts

  • 2021 Estate Gift Tax Exclusions
  • Davenport Evans Announces New Partner Joel Rische
  • Louis and Dorothy Hurwitz: Honoring the Past, Planning for the Future with the SFACF
  • FFCRA Leave Expires December 31, 2020
  • Davenport Evans Sponsors Christmas Families Through Presentation Sisters Caminando Juntos Ministry

Archives

  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • Facebook
  • linkedin
Disclaimer © 2019 Davenport Evans. All Rights Reserved.