In Florida, it is well established that a bank has a common law right of set-off against funds held in a depositor’s account if the depositor has defaulted under a loan from the bank. This allows the bank the option to apply the funds in the depositor’s account as needed to pay the outstanding obligation provided the account against which set-off is applied is titled in the borrower’s name.
It is often the case that a delinquent borrower who has not been making payments to the bank is also not making payments to other creditors. These judgment creditors may also seek to collect money from the borrower by garnishing its bank accounts.
Recently, I encountered a case where a judgment creditor sought garnishment against a bank client for whom I was handling a foreclosure action. In that case, the bank had not realized it had an account in the borrower’s name until it was served a writ of garnishment from the third party creditor. The bank wanted to assert its claim for set-off and this resulted in both creditors vying for the same funds in the same account. Who had the priority claim and, therefore, the right to the funds? As it turned out, Florida courts have held that when deciding priority disputes between a bank with set-off rights and a judgment creditor with a writ of garnishment, the bank’s claim will prevail over that of the creditor when the depositor/borrower has defaulted under the terms of the agreement prior to the bank receiving service of the writ of garnishment. Put another way, as long as the depositor/borrower has defaulted under its obligation to the bank and the bank was not served with a writ of garnishment prior to the default, the bank will have a prior claim to the funds, even if it has not effected a set-off prior to being served with the writ of garnishment. Good news for banks!