RICHARD H. BENSON, Associate Justice:
At issue in this matter was whether the manner in which the plaintiff Bank of the FSM exercised its right of setoff when the defendants' loan went into default was proper. The defendant filed their brief on the setoff issue on June 26, 2001. The Bank filed its opposition on July 7, 2001. At the call of the case on July 19, 2001, the parties submitted the issue without further argument. The court then concluded that the Bank was within its rights to calculate the setoff in the manner in which it did. This order memorializes that ruling and sets forth the court's reasoning.
On October 15, 1997, the defendants, Henry Asugar and Maggie Asugar, borrowed $41,675.57 from the plaintiff Bank of the FSM and signed a promissory note for the money. About six months later, after Henry Asugar took early retirement from the national government, the Asugars stopped making the $1,160.01 monthly payments. Starting June 4, 1998, the Bank, as each monthly payment came due and was not paid, exercised its right of setoff and deducted that amount from the Asugars' checking and savings accounts with it. These payments kept the loan current. Eventually, that money was exhausted. The loan was charged off, and this lawsuit ensued.
The Asugars contended that, once they stopped paying, the loan was in default and that the Bank, instead of taking monthly setoffs, should have setoff the entire amount in the Asugars' accounts against the loan and thereby reduced the amount now due because more of the principal would have been paid off earlier. The difference is substantial. If the Bank had done it the way that the Asugars suggest it should have, $21,323.47 (including a $15 late fee) would have been due as of July 3, 2001,
[10 FSM Intrm. 342]
instead of the $26,597.36 actually due then.
The Asugars asserted that the Bank's method of setoff is barred by 33 F.S.M.C. 929. That statute reads in pertinent part: "(1) Not more than forty or less than twenty days prior to foreclosing on the property, the creditor shall cause written notice to be given to the debtor of the creditor's intention to foreclose. . . ." That statute is inapplicable. It applies to foreclosures, not to setoffs. Foreclosures and setoffs are very different things. A foreclosure is "[a] legal proceeding to terminate a mortgagor's interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property." Black's Law Dictionary 658 (7th ed. 1999). A setoff is "[a] debtor's right to reduce the amount of a debt by any sum the creditor owes the debtor; the counterbalancing sum owed by the creditor." Id. at 1376. Generally, money deposited in a bank account is a debt that the bank owes to the depositor) the bank is obligated to repay the money to the depositor, either on demand or at a fixed time. See 10 Am. Jur. 2d Banks §§ 336, 337 (1963). Money deposited in a bank account is thus not property mortgaged to the bank. In this case, the Bank reduced its debt to the Asugars ) their bank accounts ) by setoff every time a monthly installment payment came due and was otherwise unpaid.
Banks generally have a common law right to a setoff against depositors. Id. § 666. But in this case, the Bank also had a contractual right to setoff as well. The promissory note contains a provision granting the Bank a right to setoff. In that provision, the borrowers authorize the Bank's use of setoff. Borrowers are thus on notice that if payments are not made that the Bank may exercise a setoff against the borrower's bank deposits. Furthermore, the note provides, in its general provisions section, that the Bank may forgo or delay enforcing any of its rights or remedies without losing them.
The court accordingly concluded that the Bank was within its rights to setoff sums in the Asugars' bank accounts against the monthly payments as each became due and remained unpaid instead of declaring the loan in default and accelerating payment of the entire amount.
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