Whose Money Is It Anyway? A Bank’s Right to Setoff Against Joint Accounts

Monday, January 1st, 1996 at 12:00 am by Paul Laurino
Paul Laurino, Whose Money Is It Anyway? A Bank’s Right to Setoff Against Joint Accounts, 1996 Colum. Bus. L. Rev. 61

The State Bank of Annawan had a problem. One of its customers, Robert Fisher, had filed for bankruptcy while still owing the bank over $61,000 in outstanding loan payments. The bank saw an opportunity to swiftly recover that loss by setting off Fisher’s defaulted debt against the balance of five “certificates of deposit” Fisher had with the bank. There was, however, a potential snag: the CDs were not solely Fisher’s. Both Fisher’s brother and father were co-signatories, but not debtors to the bank. Nonetheless, the bank setoff the funds. Not surprisingly, Fisher’s father protested in court, charging the bank with illegally seizing the father’s own funds. The bank’s action was upheld at trial, then invalidated on appeal. Ultimately the Supreme Court of Illinois sanctioned the bank’s use of setoff, although over one justice’s bitter dissent. This Illinois decision — with its reversals and dissents — is indicative of the tangled law and policy issues with which a panoply of state decisions have wrestled. Should a bank be able to setoff against joint accounts when only one account holder is a debtor of the bank? Setoff is a powerful tool whereby a bank can avoid absorbing loan defaults and other debts owed to it by customers. Despite the importance of setoff, the legislation and case law that has developed in various states betrays a striking lack of agreement among lawmakers and courts regarding what policy and legal issues dictate the use of setoff as against joint accounts. There appears to be great difficulty in articulating a consistent, principled approach to the topic. When there is not a statute directlyon point, courts, in attempting to extrapolate answers both from the little authority that exists and from their own assessment of policy goals involved, have handed down decisions which are confusing to banks seeking clarification and are sometimes perplexingly contradictory to the purposes of already highly developed banking laws and property doctrines. The intent of this note, then, is twofold. Section II at tempts to clarify the current state of the law regarding setoff of joint accounts. This has not been done in existing literature of the last decade. Major policy issues underpinning the different statutes and court decisions will be highlighted. Section III suggests how incongruities in the law within and among the states might be resolved to balance more equitably two interests at odds, namely, the interests of joint depositors versus those of the banking community. Broadly stated, this note proposes that to level the playing field between banks and customers on this thorny problem is not to dilute the banks’ rights to contract for setoff. That strategy has only led to confused case law and abrogation of settled doctrine. Rather, courts and legislators should encourage banks to make information about the various types of joint accounts more accessible and comprehensible to customers. Further, legislators should follow the lead of states who have enacted comprehensive codes regulating multiple-party accounts.

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