Does The Money In Your Bank Account Really Belong To You?

Given the economic uncertainty caused by the current health crisis, many borrowers may be forced to default on loans or lines of credit they have with their banks. It is therefore an important time to understand the legal relationship between a bank and a depositor, and the bank’s right of setoff.

Take a look at the balance in your checking or savings account. How much of that money actually “belongs” to you? You may be surprised to learn that, in New York, the funds in a general bank account do not technically belong to the depositor. At the moment of deposit, the funds become the property of the depository bank.

Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.

As a result of this relationship, New York banking institutions have a long-established common law “right of setoff.” Under the right of setoff, where a borrower is indebted to the bank, the bank may deduct funds from the borrower’s savings or checking account to satisfy a matured debt.

For example, imagine that you maintain a checking account and a line of credit with the same bank. If you default under the line of credit, the bank can simply deduct the funds from your checking account – without any advance notice to you – to satisfy the balance due under the line of credit. The bank is only required to provide notice to you on the day the setoff occurs.

This scenario was played out in a seminal case twenty five years ago.* There, a customer took out a $40,000 unsecured line of credit with his bank, which was subsequently converted into a 90-day note. After the customer defaulted, the bank exercised its right of setoff and applied approximately $40,000 of funds in the customer’s account toward the balance due under the note. The customer asserted a claim against the bank, alleging that the bank’s exercise of setoff was unauthorized. The trial court dismissed the claim. Upon appeal, the decision was affirmed, with the court holding that the bank had “an absolute right to setoff,” that was properly exercised by advising the customer of the setoff “on the same day that the setoff occurred.”

*Fenton v. Ives, 222 A.D.2d 776, 634 N.Y.S.2d 833 (3d Dep't 1995).

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