Minding Payable-On-Death Accounts

Payable-on-death account designations are useful tools for customers of Ohio’s financial institutions. Upon death, the funds in a customer’s account transfer to the designation’s beneficiary without court approval or the probate process.[1] But what happens if the financial institution pays an estate by mistake instead of the beneficiary? Can the institution reclaim the money? Possibly, according to a recent case from Ohio’s Second Appellate District.

In Moyer v. Abbey Credit Union, Inc., a customer created a payable-on-death account with Abbey Credit Union.[2] After that customer died, Abbey issued a check for the account funds to the customer’s estate rather than the account’s payable-on-death beneficiary. The estate’s executor then opened an account with Abbey, deposited the check, and began to use the account to administer the estate.

After some time, Abbey realized its error and seized the check funds from the estate’s account. In response, the estate sued and won, but Abbey appealed.

On appeal, the court considered two primary arguments from Abbey: setoff and mistake. The credit union first argued that it had the right to setoff the funds from the estate’s account because it had a right to the funds. The court disagreed.

Setoff “is an extrajudicial self-help remedy based on general principles of equity. It allows a bank to apply general deposits of a depositor against a depositor’s matured debt. Courts have found that this right arises from the contractual debtor-creditor relationship created between depositor and bank when an account is opened.” As a result, a creditor my setoff funds when three elements are present: “(1) the existence of mutuality of obligation, (2) the debtor’s ownership of the funds used for setoff, and (3) the ripeness of the existing indebtedness for collection at the time of the setoff.” Setoff was unavailable to Abbey because the first element, mutuality, didn’t exist.

Mutuality exists when a financial institution and its customer each owe the other money. It usually arises when a customer has money on deposit and a loan with the institution. But in Abbey, the estate didn’t owe money to the credit union. That Abbey mistakenly paid the estate rather than the payable-on-death beneficiary didn’t create a debtor-creditor relationship. As a result, Abbey had no right to setoff the funds.

Abbey also claimed that it had a right to “charge-back” the funds because the check was paid by mistake under Article 4 of Ohio’s Uniform Commercial Code. The appellate court rejected that argument as well because that theory didn’t resolve the case. Instead, the court found that it was unlikely that the estate could succeed because there was no evidence that it suffered any loss. That is, the money at issue didn’t belong to the estate—a fact no one contested. As a result, even though the credit union may have had no legal right to seize the funds, the estate probably couldn’t successfully sue Abbey because it didn’t experience a loss. In the end, the appellate court remanded the case to the trial court to address whether any damages existed.

What does Abbey teach? First, be mindful of how customers own their accounts. Designations like payable-on-death create a contractual right vested in a beneficiary on death that’s greater than any interest in an estate may have. Failing to pay that beneficiary created a claim against Abbey in favor of that beneficiary.

Second, thoroughly analyze whether setoff rights exist before invoking them. Improper setoff can create significant liability based on breach-of-contract and other claims. It can also create expensive and time-consuming litigation that’s otherwise avoidable.

In the end, consult experienced legal counsel with questions about setoff and account-ownership issues before taking action that could result in financial-institution liability.

[1] R.C. 2131.10. Transfers are, of course, subject to liens.

[2] Moyer v. Abbey Credit Union, Inc., 2nd Dist. Montgomery No. 28759, 2020-Ohio-5410.