Court Bars Arbitration Bid In CU Dispute Over Life Insurance Loans

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INDIANAPOLIS – Michigan’s DFCU Financial this week asked a U.S. Appeals Court to overturn a lower court ruling and compel FORUM CU to submit FORUM’s claim over $6 million of loan participations backed by life insurance policies to binding arbitration.

In a March 29 ruling, the U.S. District Court for the Southern District of Indiana said DFCU had not shown that FORUM’s claim is legally subject to binding arbitration. The ruling clears FORUM, of Fishers, Ind., to pursue its suit against DFCU, of Dearborn, Mich.

In its suit, FORUM claims DFCU is obligated to buy back the failed loans FORUM bought in 2007 from Capital Community CU, which DFCU acquired in 2009, because the loans were purchased under a recourse clause in the $6 million participation deal.

The loans were made by CapCom to trusts set up by elderly members and wealthy individuals to fund high-value life insurance policies. The loans were intended to pay the first few years’ premiums, after which they would be sold on the secondary market. CapCom projected the proceeds from the sales would be enough to repay the loans plus interest. The borrowers stopped paying premiums on the policies in 2008 and defaulted on the loans.

FORUM claims the contract requires DFCU, as the successor to CapCom, to repurchase the loans if they go bad, which they eventually did, according to the suit.

In the dispute over arbitration, DFCU claims the arbitration clause in the participation deal requires binding arbitration for any issues involving the contract. But FORUM insists that arbitration is only required when the dispute surrounds “processing and maintaining” of the loans. But the lower court judge sided with FORUM, and denied DFCU’s request for binding arbitration.

 

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