Trade groups back Navy FCU’s appeal in breach-of-contract suit

Two leading credit union trade associations have both filed court documents in a case they argue could set a precedent for CUs across the country.

The Credit Union National Association and National Association of Federally-Insured Credit Unions this week both filed amicus briefs in support of Navy Federal Credit Union in a suit against LTD Financial Services and others.

In a March 18 court document, Navy – the world’s largest credit union – alleged it sold certain accounts to Advantage Assets II Inc., a debt-buying company, which subsequently re-sold those accounts to Debt Management Partners (DMP), a collections firm, in violation of the original contract between Navy FCU and AAII.

Navy further alleges DMP subjected those members to “unscrupulous debt-collection practices.”

Houston-based LTD is a debt-collection agency providing first- and third-party collection services to creditors. Navy’s suit describes LTD financial as an agent of AAII.

Navy FCU recently reached a $24.5 million settlement in a suit regarding its overdraft practices.

The U.S. District Court for the Eastern District of Virginia subsequently granted a request from DMP to dismiss the case, with DMP claiming the court “lacks subject matter jurisdiction.” Navy has appealed the dismissal.

CUNA’s amicus brief, filed Monday, emphasizes its support for federally chartered credit unions’ access to federal courts through diversity jurisdiction.
According to the Cornell Law School defines diversity jurisdiction as one of two methods for a “federal court to have federal subject-matter jurisdiction over a case.”

The trade group said the court’s decision “closes the federal courthouse door for a significant number of CUNA’s members” and that the ruling “wholly deprives federal credit unions of the ability to bring a diversity action in the first instance, or to remove a case to federal court based on diversity.”

The National Association of Federally-Insured Credit Unions filed a similar brief.

In a press release issued Tuesday, NAFCU said the court ruled that Virginia-based Navy FCU is not a “citizen” of Virginia or any other state based on statutory language that says federal credit unions are corporations. “This is contrary to how courts have long looked at this issue,” NAFCU added.

CUNA’s brief raised a hypothetical scenario along those lines: If a New York state-chartered CU was sued in California by a resident of that state, the credit union would have the right to move the case to federal court. However, if a federally chartered CU in New York was similarly sued it would not the right to move the case and would be “forced to litigate in a potentially biased and unfamiliar forum.”

The court’s ruling, CUNA argued, creates an “unwarranted discrepancy” between state and federal credit unions, adding “there is no basis in the text or legislative history of the [Federal Credit Union Act] to believe that Congress intended such disparate treatment of institutions otherwise treated equally in all material respects.”

“As NAFCU and CUNA observed, we think this is an important issue affecting federally-chartered credit unions,” Navy FCU said in a statement emailed to Credit Union Journal on Wednesday. “We look forward to further review in the U.S. Court of Appeals for the Fourth Circuit.”