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PLANO, Texas – The ongoing fight between the NCUA and the $1.4 billion Community Credit Union and $1.2 billion OmniAmerican Credit Union over their pending efforts to change their charters to those of mutual banks formally went to court last week when Community, the better known of the two Texas-based CUs, took the agency to court. In motions before the U.S. District Court for the Eastern District of Texas, the credit union argued that the court should force the NCUA to approve its balloting to become a mutual bank and to return its deposit in the National Credit Union Share Insurance Fund. “It’s amazing that despite approvals from three government agencies and growing concern expressed by members of Congress, NCUA continues to stand alone in its refusal to accept the overwhelming decision of our members based on a hypertechnical interpretation of their regulations,” said Mark Hord, general counsel for the credit union. The suit charges the agency used its concern over how Community’s (and the $1.2 billion OmniAmerican Credit Union) disclosure packages were assembled as “subterfuge” to keep Community a credit union and keep hold of the share insurance deposit. It also charged the agency with putting its current set of disclosure rules into place in an “illegal” manner in order to impact Community’s attempt to change charters. For its part, NCUA Chairman JoAnn Johnson responded with a cryptic comment which appeared to either signal the agency was open for an out of court settlement or that it was rearing for a fight. She also appeared to signal that Community’s leadership had not behaved in an appropriate way regarding its fiduciary responsibility toward its members. “The nation’s credit unions have a governance responsibility to provide full disclosure to their members,” Johnson’s statement read, continuing: “Disclosures inform and protect credit union member-owners and consumers and are a vital element in credit union conversions. Unequivocally, credit union members have the right to choose the charter of their choice. The history of NCUA in approving conversions speaks to this fact. “The American credit union system, founded in the very fabric of a democracy, recognizes members have the right to be informed of the consequences of their decision when voting to convert the not-for-profit financial cooperative to a mutual savings bank. In the spirit of ownership, credit union members count on their credit union executives and boards of directors for that leadership and wise stewardship. Where NCUA finds that a credit union’s leadership has not fulfilled its fiduciary responsibility to their membership in an open, fair and consistent manner, the NCUA will not waver in upholding its statutory duty. “NCUA has attempted to assist and inform Community Credit Union in how the credit union may comply with the rules. We now look forward to resolving this unfortunate conversion process in the near future.” Seventy-one percent of the roughly 15% of the credit union members who participated in the charter change balloting voted in favor of making the switch, though NCUA has argued that a narrow majority of members who voted after the credit union corrected its final disclosure mailing to reflect what NCUA said were its regulations voted against it. Johnson declined requests for interviews to clarify her statement. Community was granted an initial hearing before Magistrate Judge Don Bush for July 21, but NCUA sources said the agency had succeeded in getting that date postponed. Currently the NCUA has to present its briefs by August 2 and there is a hearing scheduled for August 17. Because it is arguing that it should not have to conduct a re-vote and that NCUA should recognize the previous balloting, Community is arguing that the court should grant it a preliminary injunction forcing the agency to do as it asks. The credit union will face a challenge in this area, however, because a preliminary injunction has to satisfy four standards and it is not clear that it can do so. First, the party seeking injunctive relief has to prove that it will prevail on the merits of the case. Second, that the party will suffer irreparable damage unless the injunction is granted. Third, that the damage the party will suffer would be greater than the damage the other party would suffer from the injunction and, fourth, that the injunction will not do harm to the public interest. The credit union appears to face significant problems in each of these areas. For example, in making the case that it can expect to prevail on the merits, the credit union argued simultaneously that the NCUA’s position relies on an “alleged oral understanding” between its lawyers and those for the credit union in reaching its decision and that the “material facts underlying each of these claims.is undisputed.” NCUA spokesman Nick Owens pointed out that there the central fact in dispute is whether the credit union had complied with the disclosure regulation and NCUA steadfastly maintains that it did not. It is also unclear how the credit union would be irreparably harmed by any delay in becoming a mutual bank. “CCU is neither fish nor fowl,” the credit union argued in its brief for how it is being harmed. “The members have approved its conversion to a federal mutual savings bank, along with the OTS, FDIC and TCUD [Texas Credit Union Department]. Yet CCU cannot move forward to raise capital for expansion and otherwise enjoy the benefits of a mutual savings bank, solely because NCUA arbitrarily refuses to certify the vote.” But sources in the credit union legal community who have been following the case pointed out that, contrary to the assertion that it is neither fish nor fowl, CCU remains a credit union until it satisfies the NCUA’s procedures for changing charters. “They have been a credit union for decades,” noted one lawyer who would not comment for the record because it was not his case, “it’s hard to see how they would be injured irreparably if they end up having to remain a credit union for a few more months.” CCU can be expected to push hard for the injunction because it has made the calculation that fighting the NCUA in court will be faster and cheaper than sending out another round of disclosures and holding another ballot. But legal observers aren’t sure whether the tactic will succeed since there appear to be genuine disagreements about the facts of the case and determining those facts may well require taking testimony and other costly, drawn out, procedures. Then there is the whole question of the deference that the courts have generally granted federal regulators in similar disputes in the past. “That may be among the biggest obstacles that Community’s case faces,” said Richard Garabedian, a partner with the Washington, D.C. law firm of Luse Gorman Pomerenk & Schick and expert in charter change issues. “For example, will the courts dismiss the case on the grounds that Community has not appealed the NCUA’s Regional Director’s decision to the NCUA Board, which is their right. It could appear to the Court that the credit union has not exhausted its administrative remedies.” -

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