DENVER NCUA told a federal appeals panel a lower court ruling invalidating provisions of its purchase and assumption agreement with Security Service FCU in the 2007 failure of New Horizons Community FCU could threaten all assisted-merger deals past and future if allowed to stand.
“This is no small threat,” wrote NCUA in an amicus brief filed last week with the U.S. Court of Appeals for the 10th Circuit. “Since 2007 over 124 credit unions have failed and the majority of those failures were resolved by use of purchase and assumption agreements using language that is the same as, or similar to, the [Security Service] Agreement.”
Horizons Community FCU was a $300-million Denver failure acquired by $7-billion Security Service as part of the “Millionaire University” scandal that claimed three separate credit unions, including Norlarco CU and Huron River Area FCU. Borrowers in the scheme were promised 14% per year returns from a TV pitchman if they invested in speculative Florida real estate, with the Midwestern credit unions putting up most of the loans.
In dismissing the case, the judge ruled that a 2007 P&A deal Security Service signed with NCUA to acquire the remnants of New Horizons did not give the Texas credit union giant authority to pursue the failed credit union’s legal claims, including defaulted loans, and that authority continues to reside with NCUA.
The judge cited a clause in the P&A agreement stating, “Except as otherwise specifically provided for in the Agreement, the parties agree that the Liquidating Agent (NCUA) retains, for the benefit of the liquidation estate of the Liquidating Credit Union (New Horizons), the sole right to pursue claims (through arbitration, litigation, insurance claims, bond claims or otherwise) and to recover any and all losses incurred by the Liquidating Credit Union prior to liquidation.”
Security Service has filed an appeal of the lower court ruling.
As NCUA points out in its brief, the court’s ruling has broad ramifications for other purchase and assumption deals, with which the credit union regulator often induces healthy credit unions to acquire failed credit unions by assigning the right for any subsequent legal claims to the acquiring credit union. At the least, the ruling could allow the members of New Horizons Community FCU to walk away from the remaining balance on their loans, as well as borrowers in dozens of other failed credit unions P&Aed by NCUA.
NCUA asserts the lower court erred and that the language of the P&A was meant to include all claims New Horizons may have had against members who had borrowed under the Millionaire U program. “NCUA not only transferred the Loans, but also “any and all rights or claims of New Horizons Community Credit Union to institute, prosecute, maintain, defend, intervene and otherwise participate in any and all actions, suits or other legal proceeds of New Horizons Community Credit Union related to these loans,” wrote the NCUA lawyers. “Thus, it was the clearly stated position of NCUA that on July 10, 2007, Security Service became the legal owner and holder of the Loans and all rights associated with the Loans.”
NCUA said its standard practice when acting as a liquidating agent is to transfer loans, and claims related to such transferred loans, whenever possible.
