What is Legal Recovery?
Legal recovery, also known as legal setoff, occurs when a creditor offsets a debt owed to a debtor against any amounts owed by the creditor to the debtor. It is common in auditor/independent contractor situations. Consider the following example: you engage a contractor to complete work at your home and they fail to complete it. In this scenario, you might have a legal claim against the contractor for the incomplete work, but the contractor also can claim a right of legal setoff to offset their compensation claim against you up to the amount of your damages.
There are several other examples of legal recovery. Mortgage debts often can be subject to legal recovery because of claimant’s rights in property. Bank debts also can be subject to legal recovery under certain circumstances. One purpose behind the imposition of the legal recovery right is to deter debtors from undertaking fraudulent or dubious schemes to defraud creditors.
Let’s assume that Bank A has an account for which Person B is a joint account holder. If Person B owes Bank A money pursuant to a personal loan and the loan is in default , Bank A can exercise its legal recovery rights to seize the funds in the joint account to offset the default on the loan. Similarly, if Person B wants to open a new checking or savings account with a different bank, Bank A can seek to block the new account if the official reason for doing so is non-payment of the loan by person B. This legal right also can be used by creditors against corporations, e.g., if the corporation becomes insolvent. For example, a creditor to a corporation in bankruptcy can claim a right of legal recovery under the Bankruptcy Act that would allow it to offset payments owing to it against any funds that the insolvent corporation might have when filing bankruptcy. While some states might have laws restricting the right of legal recovery, others do not have such laws. Further, a creditor seeking to claim a right of legal recovery is prohibited from seizing exempt funds or payments to which the debtor would have a legal right to claim an exemption.
What is Setoff?
Understanding Legal Recovery and Setoff at Wells Fargo
Setoff is a financial term that most commonly refers to a bank’s ability to offset or "take" money from a customer on deposit with that bank in order to pay a customer’s debt. It allows a financial institution to seize funds on deposit to satisfy mutual debts owed to the financial institution and to the customer. In other words, setoff allows a bank to recover debts it is owed by its customers – even when the customers have money currently on deposit with the bank. A setoff generally occurs in the context of a loan or line of credit, where the customer has made a deposit at a branch of the bank at which he or she also has an outstanding loan.
The setoff or recovery must be related to the deposit. Thus, if you had multiple business accounts with Wells Fargo and one was overdrawn, Wells Fargo could, if necessary, apply funds from your other accounts toward the overdrawn account. The setoff must also be authorized by the customer. A bank or financial institution may not take money for any debt. While Wells Fargo can freeze a bank account if a judgment is issued against a customer, it must have a judgment lien in place before the funds in the account are subject to setoff. Hall v. World Security Bank, 235 P.3d 1065 (Utah Ct. App. 2010).
In Utah, the right to setoff is generally governed by U.C.A. § 70A-2-403(2), which provides as follows:
Transfer of deposit in collections account.
(1) Any receiving bank that receives a funds-transfer credit to a collections account for which an intermediary bank or funds-transfer beneficiary is identified by name in the funds-transfer credit, is irrevocably authorized, before it pays the beneficiary of the funds-transfer credit, and without any further authorization from the beneficiary, to set off an amount of the funds-transfer credit under any security agreement for which the account is collateral and, to the extent of the amounts owing, against:
(a) any amount previously credited to the account; and
(b) any amounts transferred to the account for the beneficiary.
(2) A receiving bank shall provide notice to a beneficiary whose funds-transfer credit the receiving bank sets off under this section.
Wells Fargo’s Setoff Practices
Setoff is a specific legal concept that permits Wells Fargo to use money from one of its debtors to pay a debt owed to Wells Fargo. Put another way, Wells Fargo can take the funds it has on deposit for a customer to satisfy a debt owed by that same customer to Wells Fargo. A commercial setoff, referred to as an exercise of Wells Fargo’s contractual right of offset, might arise in the event a commercial customer owes money to one Wells Fargo division, such as a line of credit department. The funds subject to the setoff right may be held in another department, such as Wells Fargo’s treasury management division. Individual setoff rights, if any exist, are based solely on contract. The commercial customer agrees to the offset in the contract used to establish the commercial relationship with Wells Fargo.
Wells Fargo private banking setoff, along with Wells Fargo business account setoff, is a security interest rights agreement protecting Wells Fargo’s lending interests. It is a broad agreement that gives Wells Fargo the right to set off debts owed by the customer to Wells Fargo against funds held by Wells Fargo for the customer. If the customer has multiple accounts with Wells Fargo, such as a trust or pro-rata account, Wells Fargo can aggregate the funds held in those accounts and set off to the extent of the customer’s indebtedness to Wells Fargo. Similar conventions apply to other commercial relationships.
Setoff and Lawsuits
Understanding Legal Recovery and Setoff at Wells Fargo
Banks can face many potential legal challenges from customers who allege that they are improperly exercising their rights of setoff. These challenges often arise in the context of a contested probate or divorce matter, where the customer has not yet had an opportunity to fully address or accept the new circumstances of their situation, and therefore they seek legal remedies against the Bank, even when the Bank has acted within its rights. Both state law and Federal privacy law can also come into play with regard to a Bank’s ability to assert setoff rights.
State Law
For example, in some states, banks must give written notice to customers of their intent to exercise their right to setoff. If the bank has failed to provide written notice, the customer may be able to stop the set off by filing a lawsuit for damages (as most jurisdictions will only permit stoppage of the set off and will not permit the customer to force the Bank to release seized assets). Another potential claim is for the conversion of funds. A customer may allege that his account was actually frozen, requiring him to file an injunction to have funds released or to recover damages. In cases where probate or divorce is involved, the customer may file an application seeking emergency relief to prevent further setoff action.
Federal Laws
To complicate matters further, there are a number of Federal laws that impact a financial institution’s ability to execute a setof. The most common claims arise under the federal Fair Debt Collection Practices Act (FDCPA), where another creditor has sued a customer on an unrelated debt, and alleges that the Bank failed to act and to turn over customer funds. While FDCPA is clear that financial institutions are exempt from FDCPA lawsuits, some customers "make the claim" that the FDCPA applies to the set off versus the Bank as a collection agency. Other similar claims arise under the the Fair & Accurate Credit Transactions Act (FACTA). Similar to FDCPA, FACTA is often alleged in connection with other claims and it is clear that Banks and creditors are exempt from suing under FACTA.
If a customer is not satisfied with the response to their concern, they can demand arbitration, which is the most common type of dispute resolution for financial institutions. Most often, setoff actions do not lead to arbitration for a variety of reasons. First, customers may not seek arbitration if they believe that the court will take their challenge more seriously than an arbitrator. Second, arbitration charges are paid by the Bank, and may be significant, depending on the amounts at issue. A customer is unlikely to arbitrate in the face of these costs. Finally, most accounts held with Wells Fargo in the commercial banking world will be held in a treasury management type of account, eliminating contractual arbitration fees.
Fighting Setoff and How to File Objections
The language in the consumer lending documents for Wells Fargo Bank contain a modification of the common contractual right of setoff, and consumers and businesses seeking to understand this contractual language – and their rights – must also understand the legal rights Wells Fargo may have to apply funds in any account of a customer to the payment of any obligation of that customer. Wells Fargo has the right to freeze these funds as well, once demand for payment is made.
I have established through litigation that if Wells Fargo becomes aware that an account holder is represented by an attorney before making a claim for setoff, it may not contact the account-holder to make a demand for money that is in the account. Wells Fargo must move forward through its general counsel’s office when dealing with the accounts of clients represented by counsel. Wells Fargo may not call the business or consumer client, send correspondence requesting payment, or otherwise make a demand for payment while the matter is in dispute with the account-holder’s lawyer .
This does not mean that Wells Fargo cannot freeze funds following a demand. Wells Fargo has the right in certain circumstances to freeze funds and leave them frozen until the dispute is resolved. This effectively seizes the accounts and places them in limbo. The effect is similar to garnishment, and under certain circumstances, the bank can do it. Before you know it, your mediation, litigation or settlement strategy may be jeopardized.
The key to keeping a client’s rights secure in the face of a potential setoff is to have your lawyer intervene. Once he is aware of the claim and the potential for setoff, the lawyer can direct the client as to the proper course of action. It is, of course, key that the dispute be communicated to the Wells Fargo office handling the account as early as possible, and that the lawyer be engaged immediately, to avoid dilatory conduct on the part of Wells Fargo. Once the account is frozen, it’s unclear how long it will remain frozen, or whose account will be charged – the one that is subject to setoff, or all of them.
Recent Cases at Wells Fargo
There have been a number of cases in recent years that have involved issues of legal recovery and setoff at Wells Fargo. Some of these cases have been resolved with significant implications for the bank. Others have resulted in plaintiffs being directed to arbitration and away from courts.
One of the largest cases in recent history involving Wells Fargo was a decision rendered in January 2018 in a class action lawsuit in a Pennsylvania federal court. In that case, Judge Michael C. Fischer granted summary judgment to a group of three professional basketball players and ruled that Wells Fargo did not have a valid private agreement with two of the athletes. That decision made them and their representatives party to the group of plaintiffs in the class action. In that case, plaintiffs alleged that surcharges for ATM use were not adequately disclosed in non-Wells Fargo ATMs because they were not visible until the amount is deducted from the users’ accounts.
The other major recent case at Wells Fargo was a ruling in the company’s favor, resulting in plaintiffs being directed to arbitration in October 2017. That case, which also involved a group of professional basketball players, came out of the company’s private arbitration rules as they applied to the participants in the NBA. The plaintiffs in that case alleged improper fees for bank services.
When to Seek Assistance Regarding Setoff
If you find yourself in a setoff situation with Wells Fargo, it is important to know when and why you need to seek a qualified attorney to assist you with the recovery process. First, anyone who has an account frozen or garnished by Wells Fargo must understand that setoff is an elective remedy for Wells. In most instances, if setoff was a viable option for Wells, they would have already taken the money out of your bank account rather than waiting six months. Second, Wells will not roll over and let you take money out of the setoff account. Wells generally is going to fight for the right to setoff your account or to further pursue any remaining collateral on deposit with them. When that occurs, you are clearly going to need an experienced attorney to help cut through the red tape to get your money back .
In order to find the right attorney for you, you want to look for an attorney with experience in both banking and litigation, since setoff falls under both of these categories. When you go to hire that attorney, you are going to want to ensure you have the following documents in order: a copy of all bank statements, any notices you may have received, any previous pleadings that may have been served, and any other relevant documentation. You are also going to want a general timeline of relevant events. An attorney will require a retainer before accepting your case, and in many instances that retainer may be upwards of several thousand dollars. An attorney will be able to give you an estimate of time needed to complete the process, and make you aware of any deadlines you have, as well as the estimated costs of the process.