Despite alleging different crimes, the three lawsuits targeting seized corporate credit unions have one thing in common: defendants are arguing plaintiffs don't have the right to sue because the charges are so-called "derivative claims."
A derivative claim varies from a direct claim in that shareholders must file suit in the name of the corporation against parties allegedly causing harm to the corporation. According to West's Encyclopedia of American Law, derivative suits enforce legal rights when the corporation itself is unwilling to sue its own officers or directors. If a derivative claim is successful, damages are awarded to the harmed corporation, not the individual shareholders who initiated the action.
In Corporate Central Credit Union's suit against U.S. Central Federal Credit Union, defendant NCUA cited a 1997 case, Lafayette Federal Credit Union vs. National Credit Union Administration, in its motion to dismiss, saying the CapCorp lawsuit was dismissed due to a "lack of standing" per federal law.
"It is with good reason Congress vested members' right to sue the NCUA as a conservator or the credit union under conservatorship exclusively in the NCUA," the regulator argued in the Jan. 15 motion to dismiss document filed in U.S. District Court. The NCUA is "expressly authorized and empowered" to take actions necessary to conserve a seized credit union's assets, attorneys argued.
Corporate Central alleges conversion, breach of contract and breach of bylaws because U.S. Central withheld the retail corporate's "excess investments," which resulted from a scheduled twice-annual recalculation of Corporate Central's required U.S. Central member capital account contribution. The Wisconsin-based Corporate Central alleges U.S. Central illegally confiscated more than $6 million in excess member capital it owed the corporate as of Dec. 31, 2008, and used the funds for the U.S. Central's own purposes.
After the NCUA placed U.S. Central into conservatorship, it supported the decision, which earned the regulator a spot on the defendant's list along with its failed institution.
"When the NCUA acts to conserve a failing credit union's assets, certain members will inevitably be disappointed by their inability to readily access their investment or receive distributions," NCUA attorneys argued. "If this were to form the basis of a lawsuit, the NCUA would be forced to expend considerable time and assets defending itself and the credit union under conservatorship from an influx of member suits."
That same defense strategy was also used by defendants in separate lawsuits brought against U.S. Central and Western Corporate Federal Credit Union, which was also seized by the NCUA in March 2009.
In a suit alleging negligence and breach of fiduciary duty against current and former executives and directors of WesCorp, the NCUA filed a motion Dec. 30 in Los Angeles Superior Court to intervene and replace the seven natural person credit union plaintiffs.
NCUA cited the CapCorp case in its WesCorp court documents, stating that "in dismissing the case, the district court held that in addition to failing to exhaust 27 administrative remedies, the plaintiffs lacked standing to bring the suit because only the board, and not the individual credit union members, could bring a derivative suit on behalf of the credit union."
The NCUA also cited the Financial Institutions Reform, Recovery and Enforcement Act of 1989 in the WesCorp case, which has been used by the FDIC in similar lawsuits against the banking regulator. FIRREA awards all rights, titles, powers and privileges previous due shareholders to regulators in the event of a conservatorship.
Attorney Kevin M. LaCroix, who is also a partner in the Beachwood, Ohio-based management liability broker OakBridge Insurance Services, said he's not sure FIRREA automatically applies to credit unions like it does banks.
"If the courts determine FIRREA applies to credit unions, that's very relevant," he said. "But if it doesn't, we're talking about an entirely different situation."
LaCroix stressed he hasn't tried a credit union case in 25 years but said the issue of shareholders suing institutions under conservatorship is also heating up in the banking industry. He said he "hadn't even uttered the word FIRREA in 15 years until last November" but has been writing about it since on his management liability blog, the D&O Diary (www.dandodiary.com).
"Everybody knows when things go bad, people are fighting over scarce resources, so FIRREA was a way for the FDIC to serve as sort of a traffic cop, giving it first right to those assets," he said. As a receiver, the FDIC has very strong and well-defined rights, including litigation rights.
"What FDIC is doing now is preserving their rights for later because, frankly, they are too busy closing down banks and have bigger fish to fry," he said. The FDIC is so busy, LaCroix said he thinks statute of limitations might eventually become a problem.
In Corporate America Credit Union's securities fraud case against former executives and directors of U.S. Central Federal Credit Union, CACU CEO Thomas Bond said his legal team anticipated defendants, which don't include the NCUA in this case, would argue the case was a derivative claim.
However, Bond said a derivative claim would be appropriate if the damages sought were the result of losses suffered by U.S. Central. Instead, CACU is alleging U.S. Central specifically defrauded the Alabama-based retail corporate, and CACU should be allowed to pursue a direct claim.
"This is a securities fraud complaint, and we're not alleging the defendants caused harm to U.S. Central, we're alleging they harmed us," Bonds said.
The NCUA declined comment on the lawsuits.