Credit Union Files Suit Over Merger Approval

Banks are not alone in griping about liberal membership expansions at credit unions.

Metropolitan Service Federal Credit Union in Philadelphia has sued the government for allowing Sun Federal Credit Union in Toledo to merge with Defense Supply of Philadelphia Federal Credit Union.

Metro Serve, as the credit union is known, charged in a suit filed in U.S. District Court in Philadelphia that the National Credit Union Administration broke the law when it approved the merger because members of Sun and Defense Supply do not share a common bond.

It cited the July AT&T Family decision by a federal appeals court in Washington, which ruled that all members of a credit union must share a single common bond. Also, it noted that a federal judge in Washington has barred NCUA from allowing credit unions to broaden their fields of membership.

Industry lawyers said this is the first time a credit union has challenged the authority of another credit union to broaden its membership base.

"It is not only bankers that are adversely affected by the illegal actions of NCUA," said Michael F. Crotty, deputy general counsel at the American Bankers Association. "This is not a one-sided thing with the Wall Street capitalist warmonger bankers on one side of the street and the poor downtrodden American consumers on the other."

An NCUA spokeswoman declined to comment on the case, except to say that the agency will file documents with the court by the end of January explaining its position. Metro Serve lawyer Robert A. Nicholas, a partner at the Philadelphia firm of Reed, Smith, Shaw & McClay, declined to comment.

The Metro Serve case began when the federal military base closing commission decided in 1993 and 1995 to shutter operations at the Defense Personnel Support Center in South Philadelphia, home to Defense Supply.

The credit union, realizing its days were numbered, agreed in 1995 to merge with Sun, which was originally chartered to serve employees of the oil industry giant.

Metro Serve protested the merger, saying that it should be allowed to take over Defense Supply because all of the credit union's members are being transferred to its home at the Navy Inventory Control Point in northeast Philadelphia.

The credit union also questioned how Sun is going to serve Defense Supply's customers. It noted that the AT&T Family decision prevents Sun from opening a branch or adding new members at the northeast Philadelphia branch.

Metro Serve may accept Defense Supply's customers, but they won't be able to transfer their loans from Sun. That causes a problem for Metro Serve, which will have to provide expensive transaction accounts but will not make money off Defense Supply's former borrowers.

"Metro Serve and its long-standing, as well as new, members will be irreparably harmed by a surge in members' deposits with a destruction and loss of corresponding members' equity," Metro Serve officials said.

This case is the latest twist in a six-year battle between the banking and credit union industries over NCUA's decision to allow occupation-based credit unions to add employees from unrelated companies.

The federal appeals court in Washington sided with the bankers in July, ruling that NCUA broke the law when it let 3,586 credit unions add groups of unrelated employees to their fields of membership. The Supreme Court is expected to decide Friday whether it will review the appeals court decision.

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