Collection Issues: Foreclosure, Bankruptcy and Repossessions

STATUTORY LIEN/RIGHT OF SET OFF

Angela McGowan, Esquire

STATUTORY LIEN/RIGHT OF SETOFF

? The right of setoff is one of a credit union's best collection tools. Such right enables a credit union to use the balance in a member's deposit account. Generally, this right can be a quick remedy for a credit union when a member defaults on a loan.

? It is really an extraordinary remedy because it is more expeditious and advantageous than having to pursue an action against a member.

? What is commonly referred to as the right of setoff or offset can really refer to three separate rights which will be further explained today. ? The statutory lien under the Federal Credit Union Act and the Pennsylvania Credit Union Code. ? The common law/equitable right of setoff - essentially the idea that a lender can satisfy the debt of a borrower from the assets of the borrower which the lender holds. ? A consensual lien contained in the credit union's loan documents.



The Statutory Lien

? Legal Authority

? FEDERAL

? The Federal Credit Union Act at 12 U.S.C. ? 1757(11) establishes the right. The Regulation set forth at 12 C.F.R. ? 701.39 further explains the right.

? STATE

? Under the Pennsylvania Credit Union Code, credit unions have an automatic lien on the share or share certificates of a member for any sum due it from such member or for any loan endorsed by him. 17 Pa.C.S.A. ?505.



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THE FEDERAL CREDIT UNION ACT

? The Federal Credit Union Act gives federal credit unions the power to impress and enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him.

? The right in or claim to a member's shares and dividends is equal to the amount of that member's outstanding financial obligation to the credit union as such amount varies from time to time. The lien is a "floating lien" as outstanding obligations and account balances vary from time to time.



Priority of the Statutory Lien

? The statutory lien gives the federal credit union priority over other creditors when claims are asserted against a member's account(s).

? In most instances, The Federal Credit Union Act preempts state law.

? Perfection occurs the moment the loan is originated. EXCEPTIONS

? An IRS tax lien takes priority unless the lien is enforced prior to the notice of levy of the tax lien. If there is a reason that a credit union believes it has a superior right, it will have to raise a claim with the IRS.

? A secured creditor with a properly perfected security interest in a share certificate would also have a superior claim.



Impressing the Lien

? To impress the lien means to attach to a member's account and is the act which makes the lien enforceable against that account.

? This is important because the idea of a statutory lien can be misleading. It seems that it arises by nature of the statute alone; however, the credit union must take certain affirmative steps to gain the rights of the lien.

? How is the lien impressed? ? Account records ? by giving notice thereof in the member's account agreement(s) or other account opening documentation; ? Loan documents ? in the case of a loan, by giving notice thereof in a loan document signed or otherwise acknowledged by the member(s); or ? By-law or policy ? through a duly adopted credit union by-law or policy of the board of directors, of which the member is given notice.



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Notice

? Notice in each of the above means written notice to the member disclosing, in plain language, that the credit union has the right to impress and enforce a statutory lien against the member's shares and dividends in the event of failure to satisfy a financial obligation, and may enforce the right without further notice to the member. Such notice must be given at the time, or at any time before, the member incurs the financial obligation.



Sample Notice Language

? "If you owe us money as a borrower, guarantor, endorser, or otherwise, we have a lien on the account funds in any account in which you have an ownership interest, regardless of their source, unless prohibited by law."

? "You agree that We have the right to impress and enforce a statutory lien against Your present and future shares and deposits in the Credit Union in the event of Your failure to satisfy any financial obligation to Us and We may enforce such right without further notice to You. "



Enforcing a Statutory Lien

? Except as otherwise provided by federal law, a federal credit union may enforce its statutory lien against a member's account(s) by debiting funds in the account and applying them to the extent of any of the member's outstanding financial obligations to the credit union.

? A federal credit union may enforce its statutory lien against a member account(s) only when the member fails to satisfy an outstanding financial obligation due and payable to the credit union.

? A federal credit union need not obtain a court judgment on the member's debt, nor exercise the equitable right of set-off, prior to enforcing its statutory lien against the member's account.

? In other words, the lien gives the credit union automatic rights upon a default without the need to pursue any court action.



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LIMITATIONS ON STATUTORY LIEN

? A credit union cannot use its statutory lien if a member has past due loans with other lenders and the credit union believes that could affect the member's ability to repay the loan with the credit union.

? A loan has to be currently in default. Cannot enforce the lien for past defaults which no longer exist.

? However, a member's failure to meet a financial obligation as required under the lien could be other than a repayment obligation and encompasses nonmonpillearatugahtr.coym obligations.

STATE or FEDERALLY CHARTERED CREDIT UNIONS

? As stated above, if a credit union is federally chartered, its lien rights arise under the Federal Credit Union Act.

? If state chartered, a credit union's lien rights arise under the Pennsylvania Credit Union Code.

? So the relevant body of law would have to be looked to, but practically speaking, both grant the statutory lien so no real practical difference.



Right of Set Off/Off Set

? What is often referred to as the right of set off is the equitable remedy at common law. It is an equitable lien right that is enforceable right of a financial institution to hold in its possession any money or property belonging to a customer and to apply it to the repayment of any outstanding debt owed to the financial institution, provided that, to the financial institution's knowledge, such property is not part of a trust. ? The principal at law is that the right of set off permits entities owing money to one another to apply these mutual debts against each other thereby avoiding the absurdity of making A pay B when B owes A.

? The common law principal holds that immediately upon the maturity of a debt owed to a financial institution, the institution's right to set off, by operation of law, extinguishes the depositor's/member's rights to the account.

? Set off is appropriate under Pennsylvania law if: 1. Mutuality of obligation between credit union and member 2. The funds against which set off was exercised belonged to the member. 3. The funds were deposited by credit union into a general account (i.e. not a trust account or other account where credit union is holding funds for the benefit of a third party) 4. The debt owed is mature.



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Right of Set Off ? Consensual Lien

? The right of set off is also granted via a contractual right that is created based on the terms and conditions of a contractual agreement between the credit union and member.

? The right arises when there is an event of default. So, could potentially be some priority issues as it often will not prevail against a lien, levy or garnishment that arises prior to the time that a credit union actually exercised the right of setoff.

SAMPLE SET OFF LANGUAGE

? "The credit union may use funds in the member's account to repay any debt which is due without notice to the member (other than indebtedness incurred through the use of a credit card). The credit union will not be liable for dishonoring items where the exercise of the right of setoff results in insufficient funds in an account. The funds in a joint account may be used to repay the debts for which any one of the account owners is liable, whether jointly with another or individually. The credit union is authorized at any such time to charge any such debt against the account, without regard to the origin of deposits to the account or beneficial ownership of the funds."



Comparison of Right of Set Off and Statutory Lien

? An important distinction between the right of set off/ and statutory lien is the time of vesting.

? Statutory lien vests when the loan is originated. ? Right of set off arises when there is a default.

? Right of set off is based on common law rights and contractual rights-not any of the rights in the Federal Credit Union Act.

? The statutory lien only applies to indebtedness to credit union.



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