Federal Court Turns Back Members of DFCU Financial

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Last week's federal court ruling dismissing a challenge by DFCU Financial members to the credit union's enforcement of its own bylaws has brought the issue of the legal force of bylaws into question.

But legal experts insist that credit union bylaws are legally binding.

Bruce Jolly, a long-time credit union attorney now practicing with the Washington firm of Venable LLP, said credit union bylaws, whether for a federal or state charter, are considered a matter of state corporate law to be adjudicated by state courts. "Even though it's a federal charter," said Jolly, who said the federal courts usually defer on matters of corporate law to the state courts.

That's what the U.S. District Court in Michigan did last week when it dismissed the case brought by members of DFCU Financial, who charged that the credit union's board violated the DFCU bylaws by rejecting a petition urging a special meeting to recall the directors, - even though the members collected more than three times the number of names required by the bylaws. In his ruling, Judge Lawrence Zatkoff said the members did not claim any violation of federal law, so the court had no jurisdiction.

But Jolly suggested the judge could have found federal jurisdiction because NCUA sets the bylaws under the Federal CU Act. "This is enough to give federal standing," said Jolly.

Seeking Legal Remedy

Guy Messick, a Philadelphia lawyer and general counsel for the National Association of CUSOs said credit union bylaws are legally binding, "but the question is, which forum do you need to take it to."

"The legal remedy is to go into state court," said Eric Richard, general counsel for CUNA, saying that a credit union's bylaws amount to a contract between the credit union and its members. "State court and state law applies to how you interpret a contract."

In the DFCU case, NCUA refused to intervene in the bylaws dispute, asserting it only does so when a credit union's safety and soundness may be threatened. NCUA stated that a credit union's bylaws are not agency regulations. Judge Zatkoff cited NCUA's position in asserting lack of federal jurisdiction in the DFCU case.

There is very little case law on the matter of credit union bylaws because court challenges have been few. That's because directors are all volunteers and because members usually have very little financial incentive to file a suit.

Ironically, one of the few bylaw cases brought in federal court also involved DFCU Financial, then known as Dearborn FCU. The federal court ruled in favor of the credit union in the 1996 case, but neither party raised the issue of whether case was properly in federal court.

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