I. INTRODUCTION
A frequently fielded question is “Do I have to continue maintaining a deposit account relationship with this customer?” As a general rule, the answer is “there is no law (yet!) that requires a bank to continue to do business with a depository account customer.”
Although no state or federal “banking” laws or regulations require a bank to maintain a deposit account relationship with a customer, the common law of contracts will apply, which should be kept in mind when addressing account closure issues. Generally, the deposit account relationship between a customer and a bank is conducted on an “at will” basis, i.e., the relationship may be terminated at any time and for any reason at the will of either party.
II. ISSUES TO CONSIDER
Of course, there are some caveats that an institution should consider: (1) the purpose of closing the account is not done for a discriminatory purpose involving any protected class or classes; (2) the closing is does not violate bank rules and is in compliance with bank policy and procedures; and (3) the bank deposit agreement does not provide for a certain amount of time for the account to remain open prior to closing, does not prohibit closing the account without the customer’s consent or does not make provision for any particular notice to the customer or notification period prior to closing the account.
The typical relationship between a bank and its customer will normally involve a signature card, bank policy, rules of the bank and a deposit contract. These documents are or may be construed as contractual agreements between the bank and the customer, in a debtor-creditor relationship, and the terms of agreement may modify the general “at will” rule. It would be prudent to review any or all of these relevant documents prior to taking action on an account. This review is necessary to ensure that if there are provisions addressing account closure, those provisions are followed “to the letter” of the contract. Particular attention should be given to any “notice” requirements to the affected customer.
There is no law that provides for a depository institution to provide the customer with the reason(s) for an account closure, however the bank may specifically provide for customer notification under certain conditions. A notification provision or procedure might be found in the bank’s rules, bank policies or in the deposit agreement itself. In most cases, an institution may want to provide adequate time in order for outstanding items to clear, rather than further burdening the customer with a large number of check return fees. Some institutions believe that it is better to give the customer a reason for account closure, in addition to any required notification prior to account closure, for the simple reason that if the bank does not disclose why the account was closed, the customer may make up reasons that may be less favorable to the bank in the eyes of a jury or the community.
Institutions are also advised to use sound business judgment prior to closing an account. If the closing is the result of a bank employee’s emotional or personal problems, a customer-officer personality conflict or in retaliation for the customer’s conduct in another business relationship with the bank (e.g., lending relationship, trust services, affiliate transactions), there may be potential of fall-out on the bank’s reputation in the community or on the institution’s credibility before a jury.
III. GOOD “CAUSE” FOR CLOSING DEPOSIT ACCOUNTS
There are several reasons why there may be “good cause” to close an account relationship. The following is a list of the most common:
A. Unsatisfactory Account History
This is a generic term that may describe customers who are continually negligent in leaving their checkbooks on store counters and report missing checks, who never balance their checkbooks and have two months’ worth of insufficient funds checks or who give away their PINS and allow non-account-holders to access their accounts via ATMs. Rather than give specific reasons for account closure, the bank may avoid accusatory, judgmental or confrontational language by stating “unsatisfactory account history.”
B. Unacceptable Conduct Aimed at Bank Employees
This also is a generic term that may describe those customers who harass, verbally abuse or otherwise engage in unsocial conduct targeted at bank employees or other bank customers. Again, rather than give an emotionally-charged, subjective or confrontational reason by being too specific, the bank might consider using the term “unacceptable conduct.”
C. Kiting Scheme
Check kiting constitutes illegal conduct and immediate account closure may avoid even greater losses. Although the institution closes the account due to actual or suspected illegal activity, it may consider using the “unsatisfactory account history” reason in notifying the customer in order to avoid the potential litigation issue of defamation of character or libel by labeling someone as committing a crime that he or she has not yet to be charged with by law enforcement authorities.
D. Suspicious Illegal Activity
There may be certain conduct or activities requiring the depository institution to file a Suspicious Activity Report (SAR). The bank may desire to do no further business with the customer. Since a customer is not informed of the fact that a SAR is filed, the stated reason should not be accusatory of criminal conduct or even suspected criminal conduct, but might state “recent pattern of transactions.”
E. Repeated Overdrafts
If the account does not allow for overdraft privileges or the customer is not part of the depository institution’s overdraft protection program, an overdraft is considered an unauthorized loan of the bank. This activity may not only violate the rules of the bank or the account agreement, but may also violate the law.
F. “High Maintenance” Accounts
These are the types of accounts with transactions that do not involve any illegal activity, but the transactions themselves may involve a high risk for the bank or are time-consuming for bank personnel. Examples include accounts in which the depositor generates “paper drafts” that are often returned as “unauthorized,” accounts where the depository bank acts as the originating bank for ACH debits; or accounts for a person or business that handles a large volume of third-party checks.
G. Violation of Bank Rules
In these situations, the customer may refuse or ignore requests for compliance with particular account requirements, such as failure to supply a TIN, failure to complete signature card requirements or issuing items with one signature where the account agreement requires two signatures.
H. Lost or Stolen Checks
A customer may report either missing checks or theft of checks to the bank. As a loss-prevention measure, the bank may advise that the account be closed (perhaps after a certain period of time when the account may receive ACH credits or debits and when there may be outstanding checks that need to be manually processed) and a new account opened in its place.
IV. “NOTICE” TO CUSTOMER PRIOR TO CLOSING ACCOUNT
Although there is no statutory or regulatory notice requirement that an institution is required to give a customer prior to closing an account, the provision of adequate or reasonable notice to a customer minimizes the risk of bank liability for potential customer claims, avoids surprise to the customer and allows the customer to prepare for the closure. The provision of “notice” to the customer prior to closing an account will vary from customer to customer or account to account, due to various fact situations, such as documented illegal activity, suspected illegal activity, risks associated with noncompliance of bank rules or the volume of undesirable transactions. There may be issues involving outstanding checks, ACH debits, direct deposits, government payments or other outstanding transactions to consider.
Except in cases that demand immediate account closure (such as a kiting scheme), an institution should consider giving a notice period that is adequate or reasonable to leave the customer with enough flexibility to accommodate the situation. In most cases, from 10 to 15 days should be adequate for most accounts with outstanding checks, ACH debits or direct deposit arrangements while 30 days may be adequate for accounts that receive government payments (e.g., Social Security or VA benefits) by direct deposit.
The language of the notice given to the customer should specify the specific date on which the account will be closed. If the account has transaction features, the customer should be advised to refrain from making further deposits or writing additional checks and to make new arrangements for future ACH payments or direct deposits.
V. CONCLUSION
Although there may be merit for an institution to “spell out”, in the deposit agreement, its right to unilaterally close the account, at any time and for any reason, the absence of terms regarding account closure does not preclude an institution from terminating its relationship with a customer. Regardless, the two “rules” that an institution should always follow when taking action to close an account is “reasonableness” and “good faith.” The customer is entitled to receive reasonable notice from the bank that the account will be closed so that the customer’s reputation and credit may be protected (or at least not further damaged) while making other financial arrangements. Otherwise, there is always the potential that a customer may claim civil damages based on any number of theories involving wrongful dishonor, breach of duty, loss of reputation or bad faith. It appears that many banks follow the procedure of calling and advising the customer that the account will be closed even before the official notice in writing is sent and certainly before the check for the balance on the account is mailed. Neither “reasonableness” nor “good faith” should be interpreted to mean that the bank needs a reason to close an account. Rather, the bank should avoid potential liability for damages in a lawsuit by attempting to minimize any injury to the customer when closing a troublesome account.