OAKLAND, Calif. – A simmering battle over the one-time headquarters of defunct Kaiperm FCU is shining a rare light on the behind-the-scenes machinations involved in the sale – the so-called purchase and assumption – of failed credit unions.
A private real estate investment company called 625 3rd Street Associates LP that bought the 19,000 square-foot office building in the renovated section of this city’s Broadway has filed suit against NCUA and Alliant CU, which bought the remnants of the one-time $150 million credit union in a purchase and assumption deal at the end of 2008. The investors claim the credit union and its former CEO, Stan Abrams, knew when they entered into an $8 million 15-year sale-and-leaseback on the property that the 51-year-old credit union was in poor condition and wouldn’t be able to satisfy the terms of the lease.
Alliant CU last week filed suit against CUMIS Insurance Society to recover more than $1.2 million it eventually paid to settle claims by the disgruntled investors.
The drama being played out over the Kaiperm P&A is similar in some of its details to more than a dozen assisted merger deals engineered by NCUA. But NCUA, which traditionally made public all information about purchase and assumption agreements, recently stopped doing so. NCUA has declined several requests for information about P&A deals, prompting The Credit Union Journal to seek the once-public information through a Freedom of Information Act request.
The information has become increasingly important as NCUA in recent months has committed to hundreds of millions of dollars in assistance and guarantees as part of numerous P&As, including those for the failures of Kern Central CU, The Members Own CU, West Texas CU, High Desert FCU, Community One FCU, HeritageWest FCU and Clearstar CU, helping push down reserves for the National CU Share Insurance Fund.
Alliant, a $6 billion Chicago credit union, began negotiating to acquire Kaiperm in the spring of 2008, shortly after the troubled credit union agreed to the sale-and-leaseback of its new headquarters, according to court records. During the negotiations, Alliant entered into an unusual agreement to manage the troubled credit union and bought out Abrams’ contract, installing one of its own executives, Rudy Periera as interim CEO. But the future of the Broadway offices immediately became an impediment to an acquisition by Alliant. According to the investors, Alliant used the threat of an NCUA takeover and a repudiation of the lease as a bargaining ploy.
Kaiperm had opened the new headquarters, adjacent to the Paramount Theater on the Boraodway corridor in the heart of downtown Oakland, in 2007 to celebrate the credit union's 50 anniversary. But soon after, the credit union began to realize financial troubles and agreed to sell the offices to gain some quick cash, then lease the property back from the new owners. That deal was finalized in August 2007.
Alliant, which already had an estimated 25,000 members in the Bay Area, came along in early 2008 and began to negotiate an acquisition of the troubled credit union.
When negotiations broke down on Sept. 26, 2008, NCUA stepped in and liquidated Kaiperm and entered into a P&A with Alliant on the same day – under which the Chicago credit union giant acquired certain Kaiperm assets and liabilities, but not the lease. Four weeks later NCUA exercised its statutory powers and repudiated the lease.
Alliant eventually agreed to settle legal claims with the investors last November, according to its attorney, Nicole Auerbach. "The suit has been resolved," Auerbach told The Credit Union Journal on Friday.
Claims are still pending against Abrams and other former employees, who the investors allege agreed to the sale-and-leaseback knowing the credit union would not be able to fulfill the terms of the contract. "What you need to remember is Mr. Abrams was an employee of the credit union," said Auerbach.
In its suit against CUMIS, Alliant claims the $1.2 million it paid to settle the investors suit should be covered under the credit union bond; a Directors, Volunteers and Employees policy and a Supplemental Entity Litigation policy. The various polices, claim Alliant, should pay for defense and settlement costs for the lawsuit, as well as the alleged dishonest acts by Abrams and other employees who sold the property to 625 3rd Street Associates LP. "Alliant should have been covered under the ‘dishonest acts’ section based on the conduct of its employees or Kaiperm’s employees," says the suit.
CUMIS, a unit of CUNA Mutual Group, declined to comment on the Alliant suit.
A lawyer for Abrams could not be reached last week.
