Fight Breaks Out Over Eastern Financial Florida CU Loan Participations

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ORLANDO, Fla. – A new legal fight over loan participations has broken out in federal court here, raising issues about who is legally responsible for loans sold by a now-failed credit union.

Long Island-based Sperry Associates FCU, already victimized by the massive mortgage fraud at U.S. Mortgage Corp., has filed suit against Space Coast CU, claiming the credit union giant is responsible for almost $4.5 million in loan participations gone bad it bought from failed Eastern Florida Financial CU. Space Coast absorbed Eastern Financial last year in the biggest credit union merger ever. The loans were part of participations Eastern Financial, a one-time $2.4 billion Miami credit union, sold in speculative Florida real estate projects.

The suit could shed some light on who is responsible for the ongoing obligations of a credit union once it has failed. Similar suits over participations sold by subprime auto lender Centrix Financial and by three big credit union failures involved in the South Florida real estate bust raised similar questions in court but were settled under seal and not made public. NCUA has refused to disclose its role in these cases.

The Sperry Associates suit, filed in U.S. District Court here, says the New York credit union bought the loans based on the underwriting of CU Business Capital, the member business CUSO owned by Eastern Financial, and the loans have been significantly devalued because of the Florida real estate bust. The $345 million credit union asserts that Space Coast CU, as the successor to Eastern Financial, is responsible for any losses it has realized from the two loans.

The suit claims that Space Coast, as part of its purchase and assumption agreement acquiring the remnants of Eastern Financial, received cash from NCUA that it is legally bound to share under contractual agreements related to the loan participations.

The suit comes after Sperry Associates was forced by NCUA to charge-off $2 million in loan participations it bought from failed Cal State 9 CU, and is fighting to recoup millions of dollars from Fannie Mae in the U.S. Mortgage/CU National fraud. The troubled prompted NCUA to issue the credit union a supervisory order in June, directing it to address various deficiencies that caused a $5.7 million loss for 2009.

Lawyers for Sperry Associates FCU were not available for comment. Lawyers for Space Coast CU did not return a phone call.

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