Notice to the Depositor

Notice to the depositor

Are you required to send notice to the depositor either before or at the time you set off against his or her account? The answer is generally “no” (although see the California and New York statutes that we will list). However, it is our opinion that you are well advised to do so as soon as possible after you actually set off—even if you are not required to do so. A customer who is unaware that you have set off against his or her account may continue to write checks on the account. If those checks bounce because of the setoff, the customer may suffer some significant damages, including everything from a damaged reputation to possible criminal liability. If a simple notice to the customer about the setoff would have prevented the customer from writing the checks that subsequently bounced, then the customer is likely to feel that your failure to notify him or her about the setoff is the cause of whatever problems the customer is suffering. So, in short, you can do your customer a favor and save yourself even more problems with the customer than you already have if you send a notice of setoff as soon as possible after you set off.

While the Uniform Commercial Code (UCC) does not require a notice after setoff, it does require a notice in a similar situation. Section 4-214(a) of the Revised Article 4 says that an institution must notify its customer that it did not obtain final payment on an item deposited by the customer. For example, if a customer deposits a check in his or her account and that check is later returned unpaid to the depositary institution, the depositary institution must notify the customer of the return. The depositary institution must either return the item to the customer or send notice by its midnight deadline or “within a longer reasonable time after it learns the facts.” Regulation CC, the funds availability regulation, also requires such a notice. [12 CFR 229.33(d)] The rationale behind both of these notice requirements is that the depositary institution, with the minimal effort needed to send notice, can save the depositor a lot of headaches by letting him or her know that the check has been returned and the balance in the account has been reduced by the amount of the check. The same reasoning applies when an institution sets off against a customer’s account. A simple notice of setoff can save the depositor a lot of problems. We would not be surprised to see a court view the notice requirements for returned items as establishing a general standard of care on depositary institutions and impose that standard when an institution sets off. In other words, the court could decide that an institution which does not notify its customer reasonably soon after it sets off could be acting negligently and, therefore, could be responsible for whatever damages the failure to notify caused the customer.

We are familiar with two state statutes that require notice upon setoff. One is found in the Banking Law of New York, Section 9-g, and requires that notice of the setoff and reasons for the setoff be mailed prior to or on the same business day as the setoff. Section 864 of the California Financial Code requires that a notice of setoff and a customer response form be sent within one day of the setoff. There may be other state statutes such as these, and you should be sure to check your own state laws for such a requirement. If you find one, also determine whether the statute requires any particular form of notice, or any certain information to be included in the notice, or any unusual timing requirements for the notice.

To sum up, although we know of no requirements that you send notice when you set off (other than the New York and California statutes we just cited), we can think of many reasons why you should. The notice should probably state the account or accounts from which you set off, how much you set off from each account, and the remaining balances in the accounts from which you set off. It might also be a good idea to refer to the debt against which you are setting off the accounts (e.g., loan number, date of note, etc.) and what the remaining balance on that debt is after the setoff. You should send the notice as soon as possible after you set off. The notices required by the UCC and Regulation CC we mentioned earlier are required to be sent by the institution’s midnight deadline (midnight of the banking day following the banking day on which the check is returned or the institution receives notice that it will be returned). However, those notice requirements are triggered by an event outside the depositary institution’s control—namely, the return of the check. In the case of setoff, the event triggering the notice is an action of the institution itself, and so an earlier notice is, perhaps, reasonable.