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Summit Bank v. Boyd

A-2508-97T3 (N.J. Super. App. Div. 1998) (Unpublished)

BANKS; LOANS; SET-OFF—A bank may exercise the right of set-off against its customer’s checking account if the loan agreement so provides, even if the ultimate result is to cause an overdraft.

A home equity loan agreement gave the lender the right to set-off all money and property on deposit or in possession or control of the bank to the extent permitted by law. It specifically stated that “[t]he right of set-off means that, under certain conditions, [the bank] can apply any funds from any account or items of [the borrower] in [the bank’s] possession to pay off what [the borrower] owes [the bank].” When the borrower failed to make a mortgage payment on time, the bank deducted funds from the borrower’s bank account. Six days later, the bank honored an ATM purchase of airline tickets, which caused an overdraft on the borrower’s account. When the bank sought a judgment to collect the amount of the overdraft, the borrower complained that the deposit that it had made into its checking account was “to go to the plane tickets, not for a deficit,” and that the deposit became “restricted funds,” and “funds for a special purpose” which could not be used for any other purpose. In the borrower’s counterclaim, it claimed that had the late payment not been taken from its checking account, the account would not have been overdrawn, and that the reputation and credit of the borrower would not have been adversely affected. The Court held that the bank had the right to set-off its borrower’s indebtedness from the checking account and could close the account and seek collection of the overdraft when its customer did not reimburse the account for the overdraft. In addition, the Court reasoned that the bank had honored the ATM charge and thereby honored the restricted use of the funds deposited for that purpose.


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