Judge Considers Injunction in Cal Coast-SDCCU Merger Fight

Judge Caietti is expected to render a ruling in April.

In determining whether to grant a preliminary injunction under California law, the burden is on the plaintiff, Cal Coast, which must show that it is likely to prevail on the merits of its case at trial. The credit union also must demonstrate what interim harm it is likely to sustain if the injunction were denied compared to the harm SDCCU is likely to suffer if the preliminary injunction were issued. In legal terms, this is called the "balance of harms," a test that courts use to determine which side would be harmed more when deciding whether to grant a preliminary injunction (PI).

"We have met our burden on this motion for a preliminary injunction. They have breached this contract. They violated the cure provision," Cal Coast attorney Blair Connelly said. "They had no basis for terminating, the balance of harms is decisively in our favor. We would lose this unique merger opportunity that cannot be rectified otherwise."

If Judge Caietti were to grant a PI it would preserve the status quo between now and a trial, which should happen quickly to alleviate claims of harm for SDCCU, Connelly said.

According to Cal Coast, the PI would mean prohibiting SDCCU from doing anything that would prevent the consummation of the merger.

Without that injunction, Cal Coast contended SDCCU may take actions such as disposing of assets or altering member relationships that could change the credit union in ways that would make the bargained for consolidation unattainable and impossible for the court to award full relief.

But a PI that would force the merger agreement to move forward would not work, attorneys for SDCCU argued.

"Can you imagine how dysfunctional that board will be?" attorney Michael Carlinsky said. "There is mistrust, there is animosity, there's acrimony. And how is this board going to function when these two entities are both incompatible?"

SDCCU attorneys also noted that Cal Coast would be in a position to sabotage and handicap SDCCU.

But Connelly dismissed that argument.

"We want them to be successful so that we will both be successful together," he said. "We will be reasonable."

However, in its court filing, Cal Coast also argued that it faces imminent harm because SDCCU had access to highly sensitive, proprietary information obtained during the integration process, providing detailed insights into Cal Coast's business that could be leveraged by SDCCU to compete with Cal Coast if the merger agreement is terminated.

Aside from the balance-of-harm issues, it was during the merger's integration process that SDCCU grew concerned about Cal Coast's alleged lack of controls and non-compliance problems regarding its technology, auto and QCash loans. SDCCU also alleged Cal Coast had deficient policies for unfair, deceptive or abusive acts or practices.

According to SDCCU, it had the right to terminate the merger agreement after learning that Cal Coast's warranties allegedly proved to be false regarding its compliance with applicable laws, regulations, rules, agency orders and the accuracy of its regulatory filings. SDCCU court filings enumerated at least 10 different regulatory issues. The credit union said it spent months trying to cooperate with Cal Coast to remediate these alleged regulatory failures.

However, those regulatory issues did not violate any laws, according to Connelly. He noted for 11 consecutive years, Cal Coast received the highest ratings from regulators following audits.

"There's been no evidence of any adverse regulatory findings," he said. "There has been no evidence of even a complaint from a customer or any harm to any customers."

But the most important argument for Cal Coast was that SDCCU allegedly breached the merger agreement by instituting a work stoppage on the merger's integration process before the end of the mandatory 30-day cure period that would have given Cal Coast the opportunity to address or fix any material breach alleged by SDCCU.

SDCCU stopped all workstreams, instructed third-party advisors to pause their work, and stopped certain payments of professional fees, which breached its obligations to consummate the merger, according to Cal Coast.

By Nov. 14, SDCCU served a demand for corrective action/termination notice, providing Cal Coast 30 days to cure its alleged violations of the merger agreement.

"And that termination notice claiming material breach was based on the very same policies and practices that had been disclosed to them [SDCCU] during the due diligence process and that they understood going in were going to be addressed during the integration process," Connelly said.

During the integration process, Connelly said the credit unions had extensive discussions about how they would reconcile Cal Coast's legacy practices with SDCCU's policies.

"At no time during that process did SDCCU give Cal Coast any notice that they believed that there had been a breach of the agreement or that they might not be able to close even though the merger agreement required that they give prompt written notice of either of those things," Connelly said.

SDCCU said it would be willing to proceed with the merger if Cal Coast agreed that SDCCU would hold the majority on the board of directors and that SDCCU President/CEO Teresa Campbell would lead the combined credit union. Initial plans included establishing a credit union board with a 5-5 split of legacy directors from SDCCU and Cal Coast, plus an 11th board seat that would be designated for Cal Coast's President/CEO Todd Lane, who would lead the consolidated cooperative.

"What SDCCU said is [that] we need to change the leadership structure in order to have corrective action," Derek L Shaffer, one of SDCCU's lawyers, said. "We weren't walking away from the deal. What we were trying to do was to fix the compliance issues. And we asked Cal Coast, 'Are you willing to do this?' And the answer that came back was an adamant no; we will not do any of it. And when we told them that that would mean that this deal was being terminated, and that we weren't going to be able to continue performing, they sued us."

Peter Strozniak can be reached at peter.strozniak@arc-network.com.