DENVER In a case with ramifications for future purchase and assumption deals, a federal court here last week dismissed a suit by Security Service FCU against First American Mortgage Funding over alleged fraudulent mortgages it made for New Horizons Community FCU.
Horizons Community FCU was a Denver-based failure acquired by the Texas credit union giant as part of the “Millionaire University” scandal that claimed three separate credit unions.
In dismissing the case, the judge ruled that a 2007 purchase and assumption deal Security Service signed with NCUA to acquire the one-time $300-million credit union did not give it the authority to pursue the failed credit union’s legal claims and that authority continues to reside with NCUA, which liquidated New Horizons Community.
The court’s ruling has broad ramifications for other purchase and assumption deals, with which NCUA often induces healthy credit unions to acquire failed credit unions by assigning the right for any subsequent legal claims to the acquiring credit union.
New Horizons Community, along with Fort Collins, Colo.-based Norlarco CU and Michigan’s Huron River Area FCU, were among a handful of lenders who financed a get-rich-quick scheme near Fort Myers, Fla., in which buyers from all over the country were induced to purchase speculative plots for home construction with the promise of high returns and the ability to quickly resell the homes at a big profit. When the scheme, called “Millionaire University,” went bust with the collapse of the Florida real estate boom, the three credit unions failed, leaving NCUA with more than 1,000 plots in the two Florida developments, hundreds of which it is still trying to sell.
In its suit, Security Service alleged that fraud occurred in 26 loans New Horizons Community originated to so-called straw borrowers who fronted for actual borrowers. The suit also names as defendants Orange Coast Title Co. of Southern California and Stewart Title of California.
In Friday’s ruling, U.S. Judge Wiley Daniel said Security Service is not the proper plaintiff in this case. He cites a clause in the July 2007 P&A agreement NCUA entered with the $7-billion credit union stating, “Except as otherwise specifically provided for in the Agreement, the parties agree that the Liquidating Agent [NCUA] retains, for the benefit of the liquidation estate of the Liquidating Credit Union [New Horizons], the sole right to pursue claims (through arbitration, litigation, insurance claims, bond claims or otherwise) and to recover any and all losses incurred by the Liquidating Credit Union prior to liquidation.”
Security Service argued that NCUA could not possibly retain any claims against future defendants for losses incurred by New Horizons if it assigned and transferred all evidence e.g., loan documents, deeds, and mortgages, that could be used to pursue litigation for such claims.
But the judge referred to language in the P&A that states, “Upon reasonable notice and during regular business hours, the Assuming Credit Union [Security Service] agrees to provide the Liquidating Agent, NCUA, and other federal, state or local law enforcement agencies unconditional access to said files, books, records, and supporting documents within the bounds of any applicable law or regulation, and to permit said documents to be copied at the NCUA’s expense.”
In addition, “The Assuming Credit Union [Security Service] agrees to cooperate in any investigation of the activities of the Liquidating Credit Union [New Horizons] conducted by the Liquidating Agent, the NCUA, or their agents, or by other federal, state or local law enforcement agencies. The NCUA agrees to reimburse the Assuming Federal Credit Union for reasonable expenses associated with the Assuming Credit Union’s responses to such requests.”
The P&A also says, “The Assuming Credit Union [Security Service] agrees to assist the Liquidating Agent [NCUA] in documenting any bond claim the Liquidating Agent may file in connection with losses sustained by the Liquidating Credit Union [New Horizons]. This assistance will include, but is not limited to, research and document production of various files, records and documents of the Liquidating Credit Union that have been transferred to the Assuming Credit Union under the provisions of this Agreement.”
“After careful consideration of the parties’ filings and their arguments before me in open court, I find that Security Service is not the proper plaintiff in this action and lacks capacity to bring this suit,” wrote Judge Daniel.
