Credit Union Legal Update – Fall 2010

    By Credit Union

    Contractor Selection Due Diligence Check List

    We are often asked by credit unions to draft contracts with contractors, architects and design-build entities. The contractor, architect or design-builder often are chosen by the credit union based on recommendations from other credit unions or after marketing visits by these service providers. We recommend our credit union clients perform certain due diligence on the contractors, architects and design-builders before a final selection is made. The following are actions that can be taken to perform this due diligence:

    Contractor License


    • Request capability and capacity for bonding based on current value of work to determine if a sufficient performance and payment bond can be obtained for your project.
    • Request a letter dated within the last 30 days from the contractors surety company licensed to do business in your jurisdiction. Surety companies should be listed on the US Department of the Treasurys Listing of Approved Sureties (Department Circular 570).
    • Have funds been expended by a surety company on the contractors behalf?
    • List of all surety companies that provided bonds for the company in the past 5 years


    • Name and contact information of contractors insurance broker.
    • Contractor should indicate whether it can provide adequate coverage for Workers Compensation, General Liability and Builders Risk insurance.


    • Number of years in business under current company name
    • Names of principals of the entity, length of service with the company, full or part time

    Size and Capacity

    • How many full-time permanent employees does the company employ?
    • If company has more than one office location, how many full-time permanent employees work for the company at the location which will serve the project?

    Office Locations


    • How many projects does the company currently have under contract or in progress and what is their total dollar value?
    • List the three biggest contracts currently under contract or in progress including name of project, owner and architect names and telephone numbers, contract dollar values, percent complete and currently anticipated completion dates.

    Quality Control and Administration

    • Describe quality control procedures including contractor inspection and approval process.


    • Request latest balance sheet and income statement if available (audited statements preferred).

    Litigation and Claims

    • List project dollar value, contract information for owner and architect, date of completion, explain nature of claim and/or delay and attach relevant documentation.
    • Has company ever failed to complete work awarded to it?
    • Has company ever failed to substantially complete a project in a timely manner?
    • Has company been involved in any suits, mediation or arbitration proceedings in the last 5 years and, if so, list.
      Are there currently any judgments, claims, arbitration proceedings or suits pending or outstanding against company, its officers, owners or agents?
    • Has present company, its officers, owners or agents been convicted of charges related to conflicts of interest, bribery or bid-rigging?
    • Has present company or its officers, owners or agents been debarred from bidding on any public work?

    Safety Record

    • List companys Experience Modification Rate (EMR), Incidence Recordable Rate (IRR) and Lost Day Case Rate (LDCR).

    Project-Specific Requirements

    • Project-Specific References – Identify at least 3 projects most closely reflecting the size and complexity of the type of work being requested for the currently proposed project. The similar projects should be completed within the last 10 years and at least one of which within the last five 5 years. Include:
    1. Name of project
    2. Dollar value for original and final contract
    3. Scheduled and actual completion dates
    4. A narrative describing the project and its similarity to the proposed project
    5. Performance on this project
    6. Any performance rating or letter of commendation from the owner
    7. Contact information for owner and architect

    Staffing and Organizational Structure

    • Staff Qualifications Describe how the firm would staff the project. Provide organizational structure reflecting authority, responsibility and proportion of time dedicated to the project for all key personnel and job descriptions. As attachments, include qualifications (resumes) of the project team key personnel to be assigned to the project. For each resume, include name, length of time employed with the company, proposed position, education and training, professional registrations/licenses, and affiliations, company and project-specific employment history.
    • Project-Specific Staff Experience Request project-specific employment history for key personnel for similar projects performed within the last 5 years. Information should include project size and description, time and budget performance, position held, authority and responsibilities, contributions made to project success, and include owner/architect contacts with telephone numbers. Provide evidence that the key personnel have worked together successfully as a team.
    • Staff Availability Are key personnel also proposed on any other projects for which bidding and contracting is pending? If yes, describe general availability and qualifications of potential substitutes.

    Contract Form

    • Credit unions should always use their own contract forms and not the forms from the contractor, architect or design-builder. Credit unions who issue a Request for Proposal should include their form contract with the Request for Proposal. The contractor, architect or design-builder then is aware of the terms of the contract prior to submitting its proposal which should eliminate negotiation of the contract terms.

    The Alphabet Game – DOR; LUA; or C&D

    One visitor from outer space would probably wonder about the language that is spoken by credit union officials. Many view it as alphabet soup. We have FAQ (Frequently Asked Questions). CAMEL (Capital Adequacy Asset Quality Management Earnings and Liquidity Asset-Management). There is even a DOR, an LUA and a C&D.

    The DOR (Document of Resolution) is sometimes viewed as the wish list for examiners. Examiners often use the DOR as a way of providing their recommendations with extra weight and extra tension. It is a list of items that they sought to have produced during an examination, but for one reason or another the credit union was not able to comply. In the past, the list was never written down and, if so, it was short and discretionary. Things have changed. The examiners are citing more and more credit unions with DORs with implications that they are non-negotiable, but that seems not to be the case. An examiner will usually accept a thoughtful and strongly ordered counter-proposal.

    The LUA (Letter of Understanding and Agreement) documents the heightened concerns with NCUA for safety and soundness issues. A LUA is viewed as a legal pleading which provides NCUA with broad authority to take whatever action it deems necessary, including the assessment of civil money penalties against credit union officials. They can and should be negotiated. The items tend to be serious in nature and the boards of directors and senior management of credit unions should take note and strive to timely fulfill each and every requirement in a LUA. NCUA has recently begun publishing some LUAs, and the items that appear in public should raise a level of concern to many. Before entering into a LUA, a credit union is encouraged to consult with their outside auditors as well as their legal counsel.

    The C&D (Cease and Desist) is NCUAs final power punch before the knockout punch, which could be liquidation, conservatorship or a forced merger. Any credit union that is provided with a C&D should get immediate help. A C&D can result in the removal of officials, the loss of staff, or conservatorship.

    Sex[t]ual Harassment – Do Employers Need A Text Messaging Policy?

    Sex[t]ing: (a combination of sex and texting) is the act of sending sexually explicit messages or photos electronically, primarily between mobile phones. Sex[t]ing seems to be an ever increasing phenomenon. Whether it be between Tiger Woods and one of his mistresses or Bob and Mary in Accounting, these messages are the new frontier in both flirtation and sex[t]ual harassment.

    As any texter knows, the beauty of the text message is that it is casual, abbreviated and immediate. Indeed, what is more informal than a message that reads What r u wearing? Seems harmless enough unless it is from a male supervisor to a female subordinate at 11:30 p.m.

    Much like when e-mail was first introduced, people tend to be more willing to say things via text message than they would in person. They also appear more willing to exchange sexually suggestive or explicit images and initiate communications outside of business hours after all, their phone is private, isnt it? If, at this point, you are thinking to yourself that, as a human resource professional, text messaging might create some headaches for you, you are not alone.

    The best defenses to claims of sex[t]ual harassment, as with other forms of harassment, are 1) an appropriate policy prohibiting the exchange of sexually suggestive and/or explicit texts or pictures amongst employees, and 2) immediate investigation and resolution of any complaints of sex[t]ual harassment. While an employer can certainly argue that its general policy against workplace harassment is sufficient to put employees on notice that sexually explicit text messages between supervisors and subordinates, or even co-workers, are inappropriate, given that much of such conduct can occur outside of both the workplace and normal business hours, it is prudent to include specific prohibitions on sexually suggestive and/or explicit text (or instant) messages between employees in your harassment policy.

    Investigations of sex[t]ual harassment claims need to be particularly prompt. Unless either the complaining party or the alleged harasser has saved copies of the messages to his or her phone or printed out copies of such messages, the messages are only maintained, by at least one major wireless provider, for five (5) days after being sent. Without such messages, the employer is left to investigate and resolve a classic she said, he said harassment complaint.

    By being proactive in amending workplace harassment policies to specifically prohibit sex[t]ual harassment, as well as promptly investigating any such claims so as to preserve evidence, employers can successfully limit their exposure to this high tech liability trap.

    For more information, K&C will be available to answer questions at its November 4, 2010 showing of the 27th Annual Employment Law Update.

    Is A Share Secure Loan 100% Secure?

    It may come as a surprise, but in certain situations, share secured loans may not be as secure as credit unions initially thought. There was a situation in Virginia where a credit union member, who also happened to be a non-custodial parent, was in arrears in child support payments. The state child enforcement agency came in and levied on the same funds used to secure the members share secured loan. Federal law is silent with respect to the priority of liens in this particular context. Generally, under most state laws, an existing properly-perfected lien has priority over a subsequent lien.

    Every state has a child support enforcement program. The child support enforcement program, among other things, is authorized to collect non-custodial parents past due child support. State child support agencies enter into agreements with financial institutions doing business in their state for the purpose of conducting a quarterly data match known as the Financial Institution Data Match (FIDM). The FIDM is used to identify accounts belonging to non-custodial parents who are delinquent in their child support payments. Once identified, these accounts may be subject to liens and levies issued by child support enforcement agencies depending on the laws of each state.

    Virginia is a state where a subsequent child support lien takes priority over a credit unions then existing properly-perfected lien on shares used to secure a share secured loan. This may or may not be the case in other states.

    Below is a snapshot of three states laws regarding the priority that is accorded to a child support lien. Out of the three states listed below, only Virginia accords a child support creditor a super-priority lien.

    Virginia: Virginia law accords the State Department of Social Services (the Department) priority over all other debts and creditors. However, the lien of the Department shall be subordinate to the lien of any prior mortgagee. In other words, Virginia accords the Department a super-priority lien other than with respect to a prior mortgagee. Thus, the Child Support Enforcement Division has the authority to seize the funds used to secure a share secured loan. The credit union at that point becomes an unsecured creditor.

    Maryland: Maryland law accords a child support creditor the priority of a judgment creditor.

    District of Columbia: The District of Columbia accords a child support creditor the priority of a secured creditor.

    As your Credit Union may be located in a state that is not mentioned above, we would recommend that you consult with your legal counsel in order to confirm whether or not your state accords a child support creditor a super-priority lien.

    Foreclosure Versus Deeds In Lieu of Foreclosure

    In todays troubled economic environment, more and more credit unions are confronting rising delinquencies in real estate mortgage loans. Sometimes the delinquency can be addressed with a loan modification. However, if the loan modification does not work, the credit union is also faced with a decision regarding foreclosure. A foreclosure is a time consuming and expensive legal process where the end result is often the credit union owning the keys to the home. Sometimes the borrower still occupies the home and might need to be evicted. Sometimes the home has been left in disarray.

    An alternative to foreclosure, is a deed in lieu of foreclosure. A deed in lieu of foreclosure is actually a process. The process commences when the borrower is no longer able to continue making payments to the credit union. Having defaulted under the loan, the member approaches the credit union with an offer to surrender the property in exchange for the credit union not foreclosing on the property. Usually, but not necessarily, the property is exchanged for the credit union accepting the value of the property in exchange for the members outstanding debt.

    The credit union can usually save time and money by utilizing a deed in lieu of foreclosure. However, they must carefully evaluate whether or not the credit union could obtain good and marketable title; whether the credit union can preserve priority of its mortgage lien against junior lien holders; and most certainly, whether the deed in lieu of foreclosure process is preferable to the costs and delays often associated with a foreclosure.

    If a credit union elects to proceed forward with a deed in lieu of foreclosure, the parties should memorialize the settlement agreement. Specific details as to the fair market appraisal or the assessed value should be included in the settlement agreement. Be precise about what is being released is it the full debt, or is it the difference between the debt and the price for which the property is later sold. Representations and warranties should be obtained from the member to determine whether, to the best of the members knowledge, the property is free and clear of any environmental hazards. Presumably, the settlement agreement will also include language as to whether or not the mortgage is being extinguished or canceled or that the members being released and held harmless from the underlying debt.

    Clearly, there are times when a deed in lieu of foreclosure can certainly be a benefit to a credit union. If a deed in lieu of foreclosure is contemplated, the credit union is encouraged to consult with legal counsel.

    Employee Entitled to Overtime Pay

    A Federal Circuit Court recently held that an employer cannot avoid the obligation to pay overtime simply by adopting a written policy prohibiting unauthorized overtime. The Court determined that a group of nurses were entitled to overtime pay for unauthorized overtime even though the employers policy requiring pre-authorization was clearly stated on its timesheets. The Court pointed out that the law requires employers to pay employees for any work that is suffered or permitted whether or not it is authorized.

    To avoid liability for unauthorized overtime, employers should carefully monitor their employees work to make sure they are not working unauthorized overtime. Employers should make sure they keep daily records of hours worked and re-assign shifts that would likely result in overtime. If such monitoring is difficult and/or employees continue to disregard the overtime policy, an employer may simply refuse to assign shifts to employees who violate the policy in addition to taking appropriate disciplinary steps against employees who work unauthorized overtime. When taking appropriate action to deter unauthorized overtime, employers should remember that if they are ever audited by the Department of Labor, it does not matter to the DOL that the employees requested to work longer hours and insisted that they not be paid for overtime.

    Software Acquisition Checklist

    Replacement of a business software system can constitute a major investment of both dollars and management time and entails the risk of disruption of ongoing processes facilitated by the software it if is not done well and on schedule. For these reasons advance planning is a must for any significant software upgrade. The following checklist is a summary of some of the more important advance planning points that should guide any software acquisition.

    1. If your internal IT resources/personnel are not sufficient, engage a software consultant to help guide you in the acquisition. The right consultant can be invaluable both to help assure that the software you are buying is what you need, and that it is installed, integrated and implemented properly.
    2. Determine what functionality you need the software to provide and how well (speed, accuracy, etc.) you need it to perform, and from this develop specific requirements based on functionality and performance. These will eventually provide the basis for the specifications the software vendor will agree to meet.
    3. Assess the environment within which the software will have to perform (including interfaces to existing equipment and other software products such as database management systems). These things will end up being your responsibility rather than the software vendors, but identifying environmental issues in advance will enable you to work with the software vendor to make everything work together properly.
    4. Identify your specific security and control requirements in order to assure that the software you are buying will meet them, or can be readily modified or augmented to meet them.
    5. Focus on scheduling as early as possible in the process, in order to be sure the software vendor can meet your timing requirements. It is important to keep scheduling realistic to avoid surprises. There will always be hiccups and delays in any but the simplest software replacement, but realistic scheduling will help moderate their impact.
    6. Determine early on what types and stages of testing you will put the new system through before accepting it, and work out with the software vendor the schedule and procedures for testing and acceptance.
    7. Plan for essential training by identifying what will be required and which of your personnel will be trained as operators of the software or to provide internal training to other users of the software.
    8. Be sure to focus on the ongoing maintenance to be provided by the software vendor, to be sure it provides what you need. Solid maintenance terms will include such things as guaranteed up time for the system and response time for handling of software problems.
    9. Spread your payment for the software and services provided by the vendor over the life of the project, both to keep the vendor motivated to perform and deliver and to be sure you have leverage throughout the process to keep them performing and delivering. If possible a significant portion of the software vendors license and service fees should be deferred until and linked to successful testing and acceptance of the installed system.
    10. You will want legal input and guidance not only for contracts and other documentation of your business deal with the software vendor, but also to help assure that the rights you get in the software are sufficient for your purposes and to help spot any lurking intellectual property issues or concerns with the vendors rights in the software.

    Etc., Etc., Etc.

    • Kaufman & Canoles, P.C. is featured on the National Law Journals 2010 Midsize Hot List, which named 20 law firms across the country that have demonstrated creative, innovative strategies to stay competitive.
    • One of our Credit Union team members was one of the featured speakers at the Maryland DC Credit Union Association summer meeting. His PowerPoint presentation entitled Due Diligence: A Necessity in a New Environment can be found by clicking here.
    • Interested in the definition of a key real estate term? Click here to go to Glossary of Real Estate Terms.
    • Dan Basnight, Frank Edgar and Laura Gross, all of Kaufman & Canoles, presented a complimentary webinar entitled Social Media in the Workplace. The webinar discussed developments in this rapidly-evolving field of employment law and offered recommendations for developing and enforcing workable and practical policies for employee use of social media in the workplace. A copy of the PowerPoint presentation can be found by clicking here. Click on here to view the archive of the presentation, then enter your name and email address and click Launch Presentation.
    • A Credit Union Team member was a featured speaker at the Credit Union Mortgage Associations special seminar entitled Mortgage Delinquency and Collections Conference. A copy of this PowerPoint presentation can be found by clicking here.
    • On a monthly basis, CUNA Mutual offers some exciting and thoughtful seminars that are aimed to help credit unions reduce losses or potential losses. You can register online at
    • A Kaufman & Canoles client, membersTrust Credit Union in Hampton Roads, continued its plans for expansion. Since their new headquarters building is just about complete, they undertook a sale and short-term leaseback of their existing headquarters building. Shortly thereafter, an opportunity arose where they could purchase the existing branch of Hampton Roads Postal Credit Union, and that transaction was successfully completed. Please feel free to contact Leon Davis, the President/CEO of membersTrust Credit Union, at for more details.
    • Transit Employees Federal Credit Union, a Kaufman & Canoles client, found a way to undertake a major renovation of their headquarters building at a considerable cost savings. For more information on how this credit union was able to save in their real estate projects, contact Rita Smith, the President/CEO of Transit Employees Federal Credit Union, at for more details.
    • Many credit unions have found that they can save time and money by registering for PACER (Public Access to Court Electronic Records). PACER provides access to complete bankruptcy filing and all federal lawsuits. PACER is available to anyone who registers for an account. Registration can be done by clicking here.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.