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Under Florida law, a lender may enter into an agreement with a borrower or guarantor to obtain a lien on and security interest in any accounts that the borrower or guarantor holds at its institution. Such an agreement typically will contain a clause that expressly authorizes the bank to “set off” any amounts it is owed by the borrower or the guarantor with the funds in their accounts without any prior notice. Including the right of setoff can be a valuable tool for lenders, but a certain degree of tact should be exercised in order to safeguard against liability to third parties.

In an effort to avoid becoming liable for triple damages to third parties in the course of setting off a borrower or guarantor’s account, we recommend that lenders take the following steps. First, notify the borrower or guarantor immediately (e.g., by telephone or e-mail) that the bank will be setting off his or her account(s) against the debt owed. More formal notice may be sent by mail for record-keeping purposes. Once the borrower or guarantor has been notified that the account has been setoff, he or she will be charged with knowledge that any subsequent checks that are written from the account could be rejected. Then, simultaneously with providing such notice, “flag” the account(s) so that any checks that come in can be scrutinized.

“Flagging” the account(s) instead of simply setting it off entirely is recommended because a lender can ascertain whether checks that come in were written (1) prior to when notification was given to the borrower or guarantor, and (2) to pay a legitimate third-party debt (e.g., rent, utilities). Checks that meet this criteria should be allowed to be paid from the account in order to reduce any potential liability to third parties in the event that the account was improperly setoff. Of course, any checks that are written after notice was given to the borrower or guarantor or to a non-legitimate third-party (e.g., the account holder’s company, family or him or herself) can be denied.