Sperry Assoc. FCU Files Suit to Recover Participation Loans Under Defunct Eastern Financial Florida CU
Three months after Sperry Associates Federal Credit Union signed a letter of understanding and agreement with the NCUA to repair troubles within its loan program, the cooperative has filed a lawsuit against the defunct Eastern Financial Florida Credit Union to recoup losses it claimed came through failed participation loans.
According to the Aug. 20 suit filed in the U.S. District Court for the Middle District of Florida, the Garden City Park, N.Y.-Sperry Associates FCU purchased $4.5 million in participation loans from EFFCU, which merged with Space Coast Credit Union in June 2009.
Sperry contends that a $22.4 million land deal agreement occurred between Eastern Financial and South Florida Properties on October 2006. An undivided participation worth nearly $3 million was sold to Sperry. The 120.7 acre property in St. Lucie, Fla. was appraised at $40 million in 2007. Sperry was sold an undivided participation totaling nearly $3 million in the SFP loan. According to the complaint, Sperry was paid $1.5 million on another $15 million participation loan involving EFFCU and King Credit Facility.
Sperry said SCCU is required to turn over the portion of the participation loan allocations. "As a result of the merger, Space Coast succeeded to the rights, interests, obligations, duties, responsibilities, representations, warranties and liabilities of Eastern Financial," Sperry wrote in its complaint.
SCCU and Sperry did not respond to requests for comment.
Sperry also named CU Business Capital LLC in its suit. Launched in 2005 by EFFCU, the business services CUSO underwrote Sperry's participation loans. When Credit Union Times attempted to contact CUBC for comment, it was discovered that the CUSO's website did not exist and a phone number was not listed. In March 2009, the Florida Office of Financial Regulation issued a cease and desist order against EFFCU for engaging in a series of unsound and unsafe practices. At the time, the OFR requested a review of business loan workouts conducted by CUBC. According to Sperry's complaint, Small Business America in Linthicum, Md. is CUBC's successor and is named in the suit.Over the past few years, EFFCU had been hammered by loan losses. The NCUA placed the financially troubled CU in conservatorship in April 2009. After reviewing findings from an Oct. 6, 2008 exam report, Florida's OFR concluded that the CU had engaged in 15 unsound and unsafe practices, including not possessing adequate loan underwriting standards or a loan review program that evaluates risks and excessive concentration in member business loans.
In its lawsuit, Sperry said the NCUA made a payment to SCCU on the participation loans during EFFCU's conservatorship. The loans were in default at the time of the merger, Sperry claimed, adding SCCU must now turn over the portion of the participation loan allocations.
On June 11, the NCUA entered into a letter of understanding and agreement with Sperry. The LUA identified corrective actions needed at the CU in the areas of declining capital, participation lending losses, potential unrecognized investment losses, inadequate due diligence and inadequate testing of high risk areas.