Credit Union Legal Update - Winter 2013
By Brian O. Dolan
No Private Right of Action Against Credit Union for Violating Bylaws
Real estate investors obtained purchase and construction loans from a lender that immediately assigned the loans to Huron River Area Credit Union ("Huron"). After Huron was placed into involuntary liquidation by NCUA, the investors defaulted and NCUA initiated foreclosure. The investors defended the foreclosures alleging that the loans were obtained through fraud in the inducement, and that the assignments to Huron violated the credit union's bylaws, which only allowed loans to members, and were void. The trial court ruled in favor of NCUA. The appellate court affirmed, concluding that the Federal Deposit Insurance Act, 12 U.S.C. § 1823(e), precluded the investors' fraud defense that there was no private right of action against a credit union, under either federal or state law, for breaching its bylaws. Conlen v. National Credit Union Administration Board.
Illegal Reconveyance Fee Claim Under Consumer Protection Statute Not Preempted by Federal Law
A member obtained a HELOC secured by a deed of trust that required payment of a "reconveyance fee" and recordation costs when the loan was paid off. In connection with refinancing the HELOC, the member received a payoff statement from the credit union that included a non-itemized $85.00 "Release Fee (Reconveyance)." That fee was comprised of $32 for recording costs, a $27 fee charged by the credit unions processing agent and the credit unions own $26 processing fee. In her lawsuit, the member alleged that the $85 fee was not specifically identified or authorized by the deed of trust and that the credit union's $26 processing fee was an unfair and deceptive practice in violation of the Washington Consumer Protection Act ("WCPA"). In addition to requesting damages for breach of contract, unjust enrichment and her WCPA claim, the member sought certification of a class of members who were charged the same fee. The credit union argued that the deed of trust specifically authorized its charges and that the WCPA claim was preempted by the Federal Credit Union Act ("FCUA") and NCUA regulations. The trial court ruled in favor of the member on her WCPA claim with respect to the credit union's $26 reconveyance fee, entering judgment in her favor and 428 other class members.
The Court of Appeals of Washington reversed the trial court's award on the WCPA claim. It first embarked on a lengthy preemption analysis but ultimately rejected the credit union's argument that the FCUA and NCUA regulations preempted the WCPA claim. However, it determined that because the deed of trust did not include a definition for the "reconveyance fee" it was unclear whether the reconveyance fee included the processing agent's fee, the credit union's fee, or both fees. As such, there was a question of material fact as to whether the "Release Fee (Reconveyance)" included a fee not secured by the deed of trust. Peterson v. Kitsap Community Federal Credit Union.
Setoff Against Direct Deposit Disability Payment to Satisfy Judgment Violates Social Security Act and Constitutes Unfair Trade Practice
A member who had a checking account linked to her share account co-signed for a loan for her husband. They both signed a security agreement and a disclosure statement. After the husband defaulted on the loan, the credit union obtained a judgment in the amount of $18,443.96 against the member. Thereafter, the member applied for social security disability benefits and requested direct deposit to her checking account but without providing the two-digit suffix associated with her checking account. She then closed her checking account, but not her share account, before receiving any benefit payments.
When the United States Treasury attempted to make a direct deposit of retroactive disability benefits in the amount of $13,801 through the ACH network, the credit union redirected the payment to the member's share account, which was still open, and applied the funds to partially satisfy its judgment against her. The member filed suit alleging conversion, civil theft and a violation of the Connecticut Unfair Trade Practices Act ("CUTPA"). According to the member, Section 407 of the Social Security Act prevented an assignment or transfer of her future social security payment and its seizure by legal process. The credit union argued that it did not resort to legal process to enforce its judgment and that it had a statutory lien against the disability funds pursuant to the loan agreement the member had signed and 12 U.S.C. § 1757, which states in part: "A Federal credit union shall have succession in its corporate name during its existence and shall have power . . . (11) to impress and enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him. . . ."
The court agreed with the credit union that it had a statutory lien, noting however, that the Code of Federal Regulations precluded the lien from attaching to the extent prohibited by federal or state law. The court also concluded that neither federal law nor the loan agreement authorized the credit union to satisfy its judgment by setoff against the disability payment. Because the setoff was unauthorized and improper, the court ruled for the member on her claims of conversion and civil theft. Additionally, the court held that the member was entitled to an award on her CUTPA claim because the credit union was aware that the funds were social security funds, that the funds were sent for deposit to a closed account and was notified that the funds could be exempt from setoff before redirecting the funds and setting off against them. The credit unions actions harmed the member, who was unable to use the funds to bring her mortgage payments current and who lost her house in foreclosure. Odell v. Wallingford Municipal Federal Credit Union.
Member's Post-Discharge Default Leads to Award of Additional Attorney Fees for Credit Union
In response to a foreclosure action filed in state court by a Wyoming credit union, a member filed a Chapter 13 bankruptcy petition. The bankruptcy court eventually confirmed a plan that cured the members default, without discharging the debt, and required the member to continue making post-discharge payments directly to the credit union outside his plan payments. After receiving a discharge, the member defaulted and the credit union again sought to foreclose in state court, claiming an unpaid principal balance of $36,024.94 and $34,079.55 in attorney fees and costs. The member filed a motion in bankruptcy court to re-open his bankruptcy case and to hold the credit union in contempt for assessing attorney fees in violation of the Bankruptcy Code and his plan confirmation order. The bankruptcy court entered an order denying the member any relief. The credit union then revised its request for attorney fees in state court downward to $21,623.94, to exclude fees incurred during the bankruptcy proceedings and which it already had been awarded. The state court granted the credit union's request for the revised amount.
On appeal, the member argued that the Bankruptcy Rules preempted the credit union's fee request. The Wyoming Supreme Court disagreed, finding that the Bankruptcy Rules only governed attorney fees sought from the bankruptcy estate. The credit union was requesting fees to be paid out of the foreclosure sale proceeds. The bankruptcy court had concluded that the foreclosure proceeding was proper and did not violate its discharge order. Also, the note and mortgage the member signed gave the credit union the right to reimbursement for attorney fees from foreclosure proceeds. The Wyoming Supreme Court therefore affirmed the credit unions award of attorney fees. Broderick v. WYO Central Federal Credit Union.
Award on Breach of Contract Claim for Credit Card Debt Reversed Due to Lack of Evidence
A Texas credit union filed suit to recover $12,444.30 plus interest on a member's credit card debt. The credit union introduced the members approved credit card application which listed a credit limit of only $2,000.00. It also submitted an affidavit from its records custodian stating that the member was in default and the amount owed. The credit union, however, did not introduce any evidence explaining how it calculated the amount owed. The trial court entered judgment in favor of the credit union.
The appellate court reversed, noting that there was nothing in the record to indicate how a credit card with a $2,000.00 limit allegedly had a principal balance greater than $12,000. In order to sustain the award for the credit union, the credit union was required to provide evidence, such as monthly statements, providing an explanation of the cost of credit and its methodology for calculating the balance, i.e., showing charges, payments and interest. Colvin v. Texas Dow Employees Credit Union.
Credit Card Application and Disclosures Failed to Establish Basis for Security Interest Resulting in TILA Violation for Illegal Offset
Two members filed suit in federal court against Montgomery County Teachers Federal Credit Union ("MCT") and also sought class-action certification over its Delinquent Loan Transfer Program ("DLT Program"), which automatically withdrew funds from members' share and checking accounts to pay delinquent credit card balances. In this particular case, MCT had withdrawn $145 to satisfy a credit card payment. The affected members claimed that MCT's offset violated TILA and Regulation Z. MCT argued that it had merely enforced a consensual security interest in the funds.
The federal court noted that although at common law a bank had the right to offset funds, Regulation Z extinguishes that right with respect to credit card issuers. A card-issuer must instead show some independent source of its right to the deposited funds. Thus, the existence of such a right is an affirmative defense and MCT had the burden of proof to establish that it had a consensual interest in the members' share and checking accounts. MCT had only an unsigned credit card application. The court also was unswayed by two disclosures provided to the members. Not only did MCT provide the disclosures after granting the credit card account, neither disclosure complied with the requirements of the Federal Reserve Board's Official Staff Commentary, which outlines the necessary procedures for obtaining a security interest. Therefore, the court ruled in favor of the members on their TILA claim. Gardner v. Montgomery County Teachers Federal Credit Union.
Federal Arbitration Act Does Not Preempt State Law, But Mandatory Arbitration Agreement with Branch Supervisor Enforced
A branch supervisor of a California credit union signed an arbitration agreement with her employer. She later filed suit against the credit union asserting individual wage and hour causes of action and a class action claim. The trial court compelled her to submit to arbitration for her individual claim and dismissed her class claim. On appeal, the appellate court rejected the credit union's argument that the Federal Arbitration Act preempted California's class action appeal laws, but agreed with the credit union that the arbitration agreement did not contain a provision authorizing an employee to file a class action lawsuit. Rocha v. Kinecta Federal Credit Union.
Worth Watching: Recently Filed Lawsuits and Hot Topics
ATM – The flurry of lawsuits alleging violation of the Americans with Disabilities Act continues:
- Wilson v. United Heritage Credit Union (W.D. Tex. Dec. 11, 2012);
- Klaus v. New Cumberland Federal Credit Union (M.D. Pa. Dec. 17, 2012);
- Rivas v. Coastal Community and Teachers Credit Union (S.D. Tex. Dec. 21, 2012).
Class-Action Waiver Provisions Contained in Mandatory Arbitration Clauses – Following its groundbreaking 2011 decision in AT&T Mobility, LLC v. Concepcion, the United States Supreme Court, has decided to review American Express Co. v. Italian Colors Restaurant, to address the following question presented: "Whether the Federal Arbitration Act permits courts, invoking the 'federal substantive law of arbitrability,' to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim." Oral argument is set on February 27, 2013. Depending on the outcome of the case, credit unions may want to revisit their business decisions about whether to include in their agreements mandatory arbitration provisions that specifically waive class arbitration.
Residential Mortgage-Backed Securities – The NCUA Board has filed several recent suits in the United States District Court for the District of Kansas, as the liquidating agent for numerous credit unions, against underwriters, sellers and issuers of RBMS purchased by those credit unions:
- NCUAB v. Barclays Capital Inc., et al., 9/25/12;
- NCUAB v. Credit Suisse Securities (USA) LLC, et al., 10/4/12; and
- NCUAB v. Bear, Sterns & Co., et al., 12/14/12.
Alleged Patent Infringement –
- Pi-Net International v. My Credit Union (N.D. Cal. Nov. 7, 2012) - transaction processing and control over public and private networks;
- Sonic Industry, LLC v. Citizens Equity First Credit Union (N.D. Ill. Nov. 28, 2012) - accessing or using a software system on a remote device to enter and verify selection and limit parameters for equities trades;
- Wolf Run Hollow, LLC v. Suncoast Schools Federal Credit Union Retirement Association, Inc. (M.D. Fla. Dec. 12, 2012) - methods and systems for transmitting secure messages across an insecure network.
- Compass Bank v. Big Spring Community Federal Credit Union (N.D. Tex. Dec. 13, 2012) - breach of warranties, negligence, conversion, unjust enrichment and employee fraud claims.
- Derrig v. Suncoast Schools Federal Credit Union (M.D. Fla. Dec. 19, 2012) – Fair Credit Report Act claim related to auto loan default settlement without deleting from credit report.
- Garcia v. Carpenters Federal Credit Union (Minn. Dec. 18, 2012) – Fair Debt Collection Practices Act claim related to automobile repossession.
Kaufman & Canoles Forms Credit Union Team
Kaufman & Canoles is pleased to announce that E. Andrew Keeney and Dustin H. Devore have been selected to co-chair the firms Credit Union team. The Kaufman & Canoles Credit Union team was formed to respond to a growing credit union industry, where regulations are constantly changing and credit unions are expanding their reach geographically.
"As credit unions grow, their need for new legal services increases," said Keeney. "They require a broader range of legal services than ever before. Until now, those needs were not being entirely met. At Kaufman & Canoles, we've established a team with the depth and experience to meet those needs. Im thrilled about this opportunity for the firm and our clients."
To meet our credit union clients' needs, Keeney and DeVore have organized a team of attorneys with expertise in credit union governance, employment, real estate, intellectual property, vendor contract review, regulation and consumer and commercial finance.
Members of the Kaufman & Canoles Credit Union team include: Marc E. Darnell, Erin Deal, Brian O. Dolan, Alfred M. Randolph, Jr., and Meagan J. Thomasson.