PLANO, Texas - The ongoing fight between the NCUA and the $1.4billion Community Credit Union and $1.2 billion OmniAmerican CreditUnion over their pending efforts to change their charters to thoseof mutual banks formally went to court last week when Community,the better known of the two Texas-based CUs, took the agency tocourt. In motions before the U.S. District Court for the EasternDistrict of Texas, the credit union argued that the court shouldforce the NCUA to approve its balloting to become a mutual bank andto return its deposit in the National Credit Union Share InsuranceFund. "It's amazing that despite approvals from three governmentagencies and growing concern expressed by members of Congress, NCUAcontinues to stand alone in its refusal to accept the overwhelmingdecision of our members based on a hypertechnical interpretation oftheir regulations," said Mark Hord, general counsel for the creditunion. The suit charges the agency used its concern over howCommunity's (and the $1.2 billion OmniAmerican Credit Union)disclosure packages were assembled as "subterfuge" to keepCommunity a credit union and keep hold of the share insurancedeposit. It also charged the agency with putting its current set ofdisclosure rules into place in an "illegal" manner in order toimpact Community's attempt to change charters. For its part, NCUAChairman JoAnn Johnson responded with a cryptic comment whichappeared to either signal the agency was open for an out of courtsettlement or that it was rearing for a fight. She also appeared tosignal that Community's leadership had not behaved in anappropriate way regarding its fiduciary responsibility toward itsmembers. "The nation's credit unions have a governanceresponsibility to provide full disclosure to their members,"Johnson's statement read, continuing: "Disclosures inform andprotect credit union member-owners and consumers and are a vitalelement in credit union conversions. Unequivocally, credit unionmembers have the right to choose the charter of their choice. Thehistory of NCUA in approving conversions speaks to this fact. "TheAmerican credit union system, founded in the very fabric of ademocracy, recognizes members have the right to be informed of theconsequences of their decision when voting to convert thenot-for-profit financial cooperative to a mutual savings bank. Inthe spirit of ownership, credit union members count on their creditunion executives and boards of directors for that leadership andwise stewardship. Where NCUA finds that a credit union's leadershiphas not fulfilled its fiduciary responsibility to their membershipin an open, fair and consistent manner, the NCUA will not waver inupholding its statutory duty. "NCUA has attempted to assist andinform Community Credit Union in how the credit union may complywith the rules. We now look forward to resolving this unfortunateconversion process in the near future." Seventy-one percent of theroughly 15% of the credit union members who participated in thecharter change balloting voted in favor of making the switch,though NCUA has argued that a narrow majority of members who votedafter the credit union corrected its final disclosure mailing toreflect 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 JudgeDon Bush for July 21, but NCUA sources said the agency hadsucceeded in getting that date postponed. Currently the NCUA has topresent its briefs by August 2 and there is a hearing scheduled forAugust 17. Because it is arguing that it should not have to conducta re-vote and that NCUA should recognize the previous balloting,Community is arguing that the court should grant it a preliminaryinjunction forcing the agency to do as it asks. The credit unionwill face a challenge in this area, however, because a preliminaryinjunction has to satisfy four standards and it is not clear thatit can do so. First, the party seeking injunctive relief has toprove that it will prevail on the merits of the case. Second, thatthe party will suffer irreparable damage unless the injunction isgranted. Third, that the damage the party will suffer would begreater than the damage the other party would suffer from theinjunction and, fourth, that the injunction will not do harm to thepublic interest. The credit union appears to face significantproblems in each of these areas. For example, in making the casethat it can expect to prevail on the merits, the credit unionargued simultaneously that the NCUA's position relies on an"alleged oral understanding" between its lawyers and those for thecredit union in reaching its decision and that the "material factsunderlying each of these claims.is undisputed." NCUA spokesman NickOwens pointed out that there the central fact in dispute is whetherthe credit union had complied with the disclosure regulation andNCUA steadfastly maintains that it did not. It is also unclear howthe credit union would be irreparably harmed by any delay inbecoming a mutual bank. "CCU is neither fish nor fowl," the creditunion argued in its brief for how it is being harmed. "The membershave 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 andotherwise enjoy the benefits of a mutual savings bank, solelybecause NCUA arbitrarily refuses to certify the vote." But sourcesin the credit union legal community who have been following thecase pointed out that, contrary to the assertion that it is neitherfish nor fowl, CCU remains a credit union until it satisfies theNCUA's procedures for changing charters. "They have been a creditunion for decades," noted one lawyer who would not comment for therecord because it was not his case, "it's hard to see how theywould be injured irreparably if they end up having to remain acredit union for a few more months." CCU can be expected to pushhard for the injunction because it has made the calculation thatfighting the NCUA in court will be faster and cheaper than sendingout another round of disclosures and holding another ballot. Butlegal observers aren't sure whether the tactic will succeed sincethere appear to be genuine disagreements about the facts of thecase and determining those facts may well require taking testimonyand other costly, drawn out, procedures. Then there is the wholequestion of the deference that the courts have generally grantedfederal regulators in similar disputes in the past. "That may beamong the biggest obstacles that Community's case faces," saidRichard Garabedian, a partner with the Washington, D.C. law firm ofLuse Gorman Pomerenk & Schick and expert in charter changeissues. "For example, will the courts dismiss the case on thegrounds that Community has not appealed the NCUA's RegionalDirector's decision to the NCUA Board, which is their right. Itcould appear to the Court that the credit union has not exhaustedits administrative remedies." -

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