Federal Judge Delves Into DFCU Conversion Controversy

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A federal judge chastised DFCU Financial for withholding documents from its members, during a hearing in the lawsuit filed by two DFCU members against their credit union regarding DFCU's failed attempt to convert to a mutual savings bank.

Though U.S. District Judge Lawrence Zatkoff deferred to rule on one aspect of the case-the calling of a special meeting to oust the current board-in order to determine whether he had jurisdiction in that matter, the judge did hear arguments on some of the other aspects of the suit filed by longtime members Richard Sly and Raymond Ward. The suit seeks a court injunction forcing the credit union to provide all records related to the $1.8-billion DFCU's withdrawn application to convert to a mutual savings bank, hold the special meeting, and refrain from using credit union money to campaign on behalf of the board members in question

Bryan Walters, attorney for the plaintiffs, said his clients want to first review all documents, records and presentations related to the credit union's conversion plans so they can make an informed decision about whether the board acted on behalf of members' best interests or with possible personal interests for financial gain.

"Members are concerned that this board did not adequately conduct due diligence, but they won't know for sure unless they can inspect the documents," Walters told the judge.

Zatkoff later asked the defendants' attorneys, "Why won't you give them the board minutes and spread sheets?" When Daniel E. Loeb, attorney for the defense, argued that the plaintiffs have no evidence to back their suspicions, Zatkoff said, "They can't present any evidence because you won't give them the records."

Injunction On Funding Sought

Walters also asked the judge to issue an injunction that would prevent the credit union from funding the campaign out of credit union coffers.

"There was a period of time after the request (for the special election) was made-between April 18 and May 10-where the credit union was in fact campaigning actively against the recall campaign," Walters said.

Loeb argued that his clients "have a right to use corporate and credit union funds to defend their position" but did not provide an answer when Zatkoff asked whether he had documentation giving the CU that right.

Loeb said the lawsuit against DFCU and its board was part of a bigger battle against all credit unions that want to convert to banks.

"There are outside authorities opposed to the conversion of credit unions to mutual savings banks and feel they have to root out these people," he said.

Why CU Refused Special Meeting

When Zatkoff asked about why the special meeting was not held, Loeb said it would be illegal to have fewer than five board members in place at any given time, according to FCUA regulations.

"But the bylaws provide that you can have a meeting for a proper purpose," Zatkoff said.

Loeb responded, "We think it's not a proper purpose because it's illegal." He then said the members would have the right to vote for new board members at the credit union's annual meeting.

Walters countered, "Let's just say that all board members are in cahoots with some problematic issue-embezzlement, for example. Do we really think the members would be powerless to (vote them out of office) until the next annual meeting?"

When Loeb argued that there is no urgency to the plaintiffs request for preliminary injunctive relief, Zatkoff said, "If the credit union was being mismanaged, are you saying that six months isn't going to make a difference?"

Walters earlier explained the NCUA's stance that the supervisory committee can act as conservators until a new board is elected.

Ignoring Members' Petitions

Another reason for ignoring the members' petitions seeking a special meeting, Loeb said, was because CU officials were concerned that only the votes of those present at a special meeting could remove its officers-an argument that echoes some of the very same concerns that have been voiced by conversion opponents who have suggested that only a small number of members can vote to convert a credit union to a bank.

"At the most, there would be 1,000 members of this 160,000-member credit union (making the decision)," Loeb said. "That undermines the democratic organization to allow less than 1% to make that decision."

According to several of the two dozen members who either attended the hearing or waited in a holding room at the courthouse, the policy is the same for electing board members-only those present during the annual meetings can cast ballots. And one-a former board member-said the most votes he recalled anyone receiving to earn a seat on the board was 450.

Some 1,700 members signed the petition calling for the special meeting, and 500 signatures are required.

Zatkoff then asked Loeb, "Are you saying there should be a mail vote?"

Loeb responded by saying that this, too, would be a long and involved process that would leave the CU without a board until officers could be elected. According to the bylaws, the members would have 14 days to elect new officers.

"This credit union is ranked in the top tier of credit unions," Loeb said. "To be thrown into the ranks of conservatorship certainly is not going to do anything to enhance its standing."

Walters countered by reading an excerpt directly from the CU's bylaws that states that only those in attendance are eligible to vote during a special election.

"The bylaws themselves deal very specifically with who gets to vote," he said.

The judge did not address the plaintiffs' written request to allow Margaret Blohm to intervene as a plaintiff.

Blohm, a representative of DFCU Owners United-the members' group that opposed the conversion-was present in the courtroom but had no comment.

Zatkoff said he would review all documents presented to him and contact attorneys for both sides should he need them to present oral arguments.

(c) 2006 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.

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