GoDocs’ loan documents do not include this type of Lien/Set Off provision as this type of provision could violate a state’s one action rule.
A typical Credit Union lien/setoff (Right of Set Off) provision may read as follows:
Right of Set Off. You agree that the Lender at all times retains the common law equitable right of set off against all deposit accounts with regard to any debt or obligation owed to us individually or otherwise, which right may be exercised by us without legal process or notice to any account owner.
This type of set off provision allows the lender to seize all of the borrower’s liabilities to lender, all deposits, credits and other property of borrower currently or later in the possession or control of the lender. A set-off clause is a legal clause that gives a lender the authority to seize a debtor's deposits when they default on a loan. A set-off clause can also refer to a settlement of mutual debt between a creditor and a debtor through offsetting transaction claims. This allows creditors to collect a greater amount than they usually could under bankruptcy proceedings.
GoDocs’ loan documents do not include this type of Lien/Set Off provision as this type of provision could violate a state’s one action rule. The one action rule varies by state but is generally a limitation of a lender's rights to enforce and collect debt that is secured by real property. A one-action rule typically requires a lender to complete a judicial or non-judicial foreclosure on the real property collateral before it can attempt to obtain a deficiency judgment against the borrower or take other action to collect against a borrower's assets. A one-action rule may prevent a lender from suing a guarantor under a guaranty if it is secured by the real property collateral.
We recommend that the Lien/Set Off or Right to Set Off provision never be used in specific loan documents. Doing so could violate the security first rule in a one action rule state, and a debtor could raise the security first rule as a defense and require a lender to amend its complaint to include all of the security before proceeding directly on the note.
If our credit union customers desire to have a right to set off provision for states where the one action rule does not apply, our primary recommendation is to include such a provision in the Credit Union membership agreement or in the other paperwork signed when the depository relationship is formed.
Please contact GoDocs if you would like to have further discussions regarding a Lien/Set Off or Right to Set Off provision.