Legal win could position credit unions for more federal suits

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A recent court decision involving Navy Federal Credit Union could have long-term ramifications in the courtroom for other FCUs.

The U.S. Court of Appeals for the Fourth Circuit recently overturned a district court’s decision, ruling that federal charters, including as the $129 billion-asset Navy, can claim diversity jurisdiction when filing lawsuits in federal court.

Diversity jurisdiction allows litigants broader access to federal courts to avoid parties from differing states seeking a local advantage in their home state’s courts. In most situations, both parties must have a federal case or be citizens of different states to file in federal court.

The ruling is especially important for FCUs such as Navy that do business in various states or have multi-state branch networks, said Nicola Foggie, chief regulatory officer for the CrossState Credit Union Association, which serves CUs in Pennsylvania and New Jersey.

“This ruling aids federally chartered and state-chartered credit unions to better align as Congress intended [in the Federal Credit Union Act],” she said. “FCUs now have equal access to federal courts, which state-incorporated companies have enjoyed for decades.”

The primary issue under review was whether Vienna, Va.-based Navy, the largest credit union in the world, is a citizen of any state as a federally-chartered credit union. Despite being headquartered in Virginia, Navy successfully argued that based on statutory language classifying FCUs as corporations, it is not a citizen there or in any other state.

“In other words, a federally chartered credit union could not file suit in federal court under the diversity jurisdiction statute,” said Brandon Wilson, an attorney with Michigan-based Honigman LLP.

Wilson said Navy’s win is good for credit unions that want to have state-law claims resolved in federal court. He said the feeling used to be that federal courts were friendlier venues for financial institutions, although in recent years that feeling has dissipated a bit.

“Because credit unions are so community-focused, I actually think they can fare better in state court where judges and jurors are familiar with them and their local contributions,” he said.

Eric Richard, an attorney with CU Counsel PLLC, said the ruling increases federal credit unions' options for choosing a forum in any disputes that occur with citizens of other states. He said every lawyer believes "choice of forum" can determine the outcome of a case, depending on the precedents in each forum, the quality of the judges and other factors.

There will still be many situations in which credit unions operating across state lines prefer to be heard in a state court, added Richard. In a number of circumstances – such as collections, he said – state courts may offer faster, more efficient resolution of cases.

“My guess is that many federal courts would not welcome a massive new caseload of collections cases,” he said. “Each credit union will need to evaluate its individual situation and the specific kind of litigation that is involved.”

Richard suggested credit unions are probably among the least litigious financial institutions in the United States and most would generally rather find another solution outside the courtroom.

“Credit unions just don’t like to be in court at all...spending money on lawyers and investing management resources in an activity that isn't very comfortable for them,” he said. “This will limit the impact of the [Navy] case, though it's hard to say how much.”

Wilson said that for a contract claim such as the one Navy was asserting, the credit union’s venue preference would usually be federal court.

Intricacies of the court could still limit the extent to which FCUs utilize federal courts.

Phil Campbell, general counsel for $14.4 billion-asset First Tech FCU in San Jose, Calif., said the ruling isn’t likely to have much impact on large credit unions, as it is only limited to states within the Fourth Circuit’s jurisdiction. Other courts may have contrary opinions.

"So depending upon where you are located or sued, access to the federal courts may still not be permitted," he said.

However, turnabout is fair play, and credit unions can now also be sued in federal court under diversity jurisdiction in cases where perhaps they would prefer to be in state court.

“This may or may not be a good thing. With respect to overdraft fee litigation in particular, there is a pretty robust collection of federal case law that is favorable to consumers,” Wilson said.

Both the National Association of Federally-Insured Credit Unions and the Credit Union National Association filed amicus briefs in support of Navy FCU.

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