Credit Union Legal Update – Summer 2014 – 2nd Edition
By Lender Representation Credit Union
Funds in Child’s Joint Account with Father Properly Seized to Satisfy Fathers Debt
A credit union seized $46,523.34 from its member’s savings account to satisfy his father’s debt that arose due to an unpaid note. The member sued the credit union for breach of contract, breach of trust, fraud and conversion. While he was a minor, the son had signed a membership application and joint share account with his father for the savings account. The court found that the savings account was not a custodial account and that the father was a joint owner. Therefore, the credit union properly seized the funds from the joint savings account to satisfy the father’s debt. Buehner v. Evansville Teachers Federal Credit Union.
Account Held as Tenants by the Entirety Subject to Garnishment to Satisfy Debt of One Spouse
The United States obtained a writ of garnishment directed to Navy Federal Credit Union (“NFCU”) in order to partially satisfy a criminal restitution order. The criminal defendant had a joint account with his wife, as tenant by the entirety, at NFCU. Under state law, creditors were prohibited from levying against tenants by the entireties property to satisfy the debt of only one spouse. A restitution order in favor of the United States, however, is treated like an IRS tax lien. Under federal law, an IRS tax lien attaches to property even if the property is held by the entireties and state law prohibits levy on entireties property. The court valued each spouse’s interest in the funds as equal one-half shares. Therefore, the court allowed the United States to garnish one-half the funds in the account, which represented the husband’s entire interest in the funds. United States v. McArthur.
Judgment Against Auto Wholesaler Who Failed to Deliver Title Dischargeable in Bankruptcy
An automobile wholesaler obtained a loan from Gulf Coast Community Federal Credit Union to purchase an automobile through a dealer. The wholesaler was supposed to provide the dealer with the title to the vehicle to give to the credit union. The wholesaler, however, failed to tender the title and did not make payment on the vehicle. The vehicle subsequently was imported to Belgium and could not be recovered. Gulf Coast obtained a judgment against the wholesaler and the dealer. The dealer filed for bankruptcy and obtained a discharge. Gulf Coast objected to a discharge of its judgment. The bankruptcy court concluded that the wholesaler did not know at the time he submitted the title application or accepted the proceeds that he would not be able to give Gulf Coast a perfected lien on the vehicle. Thus, he had not committed actual fraud or made any false representations. Nor had he made a materially false and intentionally deceptive written statement of his financial condition. Therefore, the judgment against the wholesaler was dischargeable in bankruptcy. Gulf Coast Community Federal Credit Union v. Whorton.
Failure to Investigate Red Flags on Loan Application Preclude Credit Union from Excepting Debt from Bankruptcy Discharge
A credit union attempted to preclude a member’s loan from discharge in bankruptcy because the member allegedly supplied inaccurate information on his loan application. In particular, the statement of debts was not completed, which the credit union argued indicated that the member represented he had no other debts. The member also denied that there were any legal proceedings against him. A credit report obtained from TransUnion before making the loan, however, revealed existing debts and the credit union also learned of a suit against the member. The bankruptcy court noted that a creditor normally does not have to investigate statements on a credit application unless it doubts some of the information. When, however, an application seems incomplete, a creditor must look for anything that would warn an ordinarily prudent lender that there is inaccurate information. In the opinion of the court, the failure to list other debts should have prompted an ordinarily prudent lender to examine further as to the existence of any debts. This was particularly true where the credit report, which the credit union may have failed to review, included information that contradicted the loan application with regard to other debts and the member’s current address and current employer. The court determined, therefore, that due to all the discrepancies it was unreasonable to solely rely on the loan application and the credit union had a duty to investigate further before making a loan to the member. The effort by the credit union to except the loan from discharge failed. LaPorte Community Federal Credit Union v. Wisenbaugh.
Banana Lady Loses Appeals
In 2011, Catherine Conrad performed a singing telegram at the CUNA Management School dressed in a banana costume. Conrad agreed to perform on the condition that no photographs or videos of her performance be posted on the internet without payment of a licensing fee, claiming that her character was protected under federal copyright and trademark laws. After the conference, Conrad learned that videos and photos were posted to the internet without her permission. She complained, and the School sent an e-mail to all attendees reminding them to remove photographs and videos that had been posted without Conrad’s permission. An attendee sent a complaining e-mail to Conrad, prompting her to file a lawsuit in state court against the attendee, his employing credit union and several other defendants alleging defamation and invasion of privacy as well as violations of copyright and trademark laws. The trial court dismissed her suit for failing to state a claim. The Court of Appeals agreed because the e-mail contained only non-defamatory opinions. None of the defendants used the photographs or videos for advertising purposes, and the photographs and videos could not confuse or deceive consumers into believing that there was a connection between the Banana Lady and any of the defendants. Rigsby v. AM Community Credit Union.
Conrad (a/k/a the banana lady) also filed suit in federal court. The federal district court dismissed her case, noting that most of her claims were precluded by her loss of the suit she brought in state court. Undaunted, Conrad appealed to the United States Court of Appeals for the Seventh Circuit. The Seventh Circuit noted that Conrad implausibly believed that the attendees’ personal use of photographs and videos, which would not violate trademark and copyright laws, excluded posting photographs on Facebook. The Seventh Circuit also expressed doubt about the validity of her copyright.
The Court concluded its analysis by noting that Conrad had abused the legal process by filing numerous lawsuits, eight in federal court and nine in state court, many of which were frivolous and resulted in awards and sanctions against her. Thus, it suggested that the federal district court enjoin her from filing any further suits in federal court until she satisfied her prior litigation debts. Conrad v. AM Community Credit Union.
False Statements on Auto Loan Application Preclude Debt from Being Discharged in Bankruptcy
To obtain an automobile loan, a member made false statements about her employment on the loan application and fabricated a paystub and bill of sale. She then obtained the funds but did not purchase the automobile. After the member filed for bankruptcy, the credit union filed a motion to have its debt declared non-dischargeable. The bankruptcy court concluded that the member made intentionally false material statements that the credit union reasonably relied upon in connection with the making of the loan. Accordingly, the court ruled that her debt to the credit union was not dischargeable in bankruptcy. Delta Community Credit Union v. Greene.
Claims Regarding Escrow Account and Application of Partial Payments Dismissed
A member obtained a home loan governed by a note and deed of trust from Navy Federal Credit Union (“NFCU”). The deed of trust included escrow funds in each monthly payment in order for NFCU to pay his real estate taxes and insurance. The taxing authority improperly assessed $20,451.13 in back taxes on the property and increased the amount of taxes owed. When notified of the taxes owed, NFCU paid them and then notified the member. The member contacted the taxing authority and the error was corrected. The borrower, however, decided to pay the taxes and insurance himself and began subtracting the escrow amounts from his monthly mortgage payment. NFCU placed each monthly partial payment in a suspense account and reported the reduced payments to the credit bureaus. The member responded by filing suit against NFCU for breaching the terms of the deed of trust, for an accounting, for intentionally damaging his credit and for defamation. The trial court dismissed the breach of contract claim, finding that NFCU acted as permitted under the deed of trust when it placed the partial payments in a suspense account instead of crediting them to the balance owed. The court also determined that NFCU owed no fiduciary duty to the borrower and dismissed the claim for an accounting. The court declined to dismiss the claims related to the alleged improper credit reporting and defamation, however, because it needed additional information and explanation from NFCU regarding the credit union’s mathematical calculations. Once that information is supplied to the court, it will decide whether to also dismiss the remaining two claims. Haynes v. Navy Federal Credit Union.
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 2023.