CUMIS ORDERED TO PAY
$406K TO DADE COUNTY FCU
MIAMI-A federal judge here ordered CUNA Mutual Group's CUMIS Insurance Society unit to pay Dade County FCU $406,000 to fulfill a faithful performance bond claim for an employee who doctored more than 500 delinquent Visa credit card accounts to make it appear the accounts were current.
The court battle was the second between CUMIS and a Michigan lawyer who won the biggest verdict against the credit union insurer, resulting in a $7 million payment in a dispute involving Michigan First CU's claims on indirect auto loans. CUMIS paid the big verdict after losing an appeal.
Despite the court's decision in the Dade County case, CUNA Mutual claimed the court order was a vindication of its position. In this case, the credit union and its lawyers filed a claim for $2.4 million; they said CUMIS maintained the amount claimed was significantly inflated. In the end, the jury agreed with CUMIS' position, finding that the credit union's covered loss was $348,183, plus interest, which is less than 15% of what was claimed.
"Unfortunately, in situations such as these the only real winners are the lawyers who often generate fees far in excess of any recovery," said John Christenson, associate general counsel for CUNA Mutual Group.
But Patty Corkery, a partner in Holzman & Corkery, the Southfield, Mich., firm that represented Dade County FCU, said the CU abandoned the $2.4 million request when the jury trial began and was eventually asking for $1.3 million, even though it believes its losses in the case were closer to $2.4 million. "My clients were extremely troubled by the fact that this was their business partner for more than 25 years and here they were rejecting what they believed was a legitimate claim," she said.
The CU claimed its former employee acted in conscious disregard of established and enforced lending policies by concealing the delinquencies and failing to submit the accounts for charge-off. CUMIS disputed each element of coverage and further asserted that the loss incurred by DCFCU was not a loss resulting directly from the former employee's policy violations.
The court, prior to trial, concluded that any loss incurred by the CU was in fact covered under the bond. CUMIS initially denied coverage, in part, because the policy at issue was a collection policy and not lending policy.
The court asserted that CUMIS does not define lending in its bond but that "lending" is premised upon an expectation of collection of the money lent and that "lending" encompassed the collection of money loaned. Therefore, the opinion clearly did not let CUMIS denial stand simply because the policy at issue in the faithful performance bond claim was a collection policy.
The court disagreed with CUMIS claim that policies were not enforced. The court found that simply because some "red flags" were not detected was not evidence of lack of enforcement supporting denial of the CU's claim.
JP MORGAN DENIES NCUA CLAIMS
IN SUIT OVER FAILED CORPORATES
WICHITA, Kan.-JP Morgan Chase rebutted claims in an NCUA lawsuit it misled four failed corporate CUs into buying $1.5 billion of risky mortgage-backed securities, and pointed the finger-as NCUA's own internal reviews have-at the management of the failed corporate and NCUA's own examiners.
"Despite warnings from the offering documents, the news media and even the (NCUA) Board itself, the credit unions made the informed decision to plunge the majority of their assets into residential mortgage-backed securities at the height of the housing bubble," the Wall Street bank said in documents asking a federal court to dismiss an NCUA suit seeking damages for the failed investments. "That investment strategy-which even the (NCUA) Board has condemned as 'aggressive,' 'excessive' and 'unreasonable'-backfired when the housing bubble burst. The credit unions lost their 'unreasonable' wager and subsequently collapsed."
JP Morgan Securities, a unit of the banking giant, is one of three Wall Street firms, along with RBS Securities and Goldman Sachs, being sued by NCUA over the failure of an estimated $50 billion of MBS bought by five corporate credit unions-U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.
In its suit against JP Morgan, NCUA alleges violations of federal and state securities laws and misrepresentations by Morgan in the sale of $1.5 billion of MBS to four of the five failed corporates. The suit is filed in U.S. District Court in Kansas, which has jurisdiction over Lenexa, Kan.-based U.S. Central.
Morgan claims the multitude of risks of the MBS it sold the corporates were clearly spelled out in offering documents and that the corporates were blinded by their greed, a claim corroborated by comprehensive material loss reviews conducted by NCUA's own Inspector General. "Ignoring its own assessment of what actually happened, the (NCUA) Board now seeks to blame defendants for the credit unions' losses," says Morgan.
In fact, JP Morgan notes NCUA claims in a separate civil suit that gross negligence by management and directors of WesCorp in allowing the one-time $34 billion to load up on risky MBS was the cause of the WesCorp failure.
But Morgan says its offering documents disclosed the very risks that NCUA alleges were concealed. For example, NCUA claims that the offering documents were misleading because some underlying loans in the MBS did not comply with the applicable underwriting guidelines. But the offering documents disclosed that there would be noncompliant loans in the pools and provided an express mechanism by which such loans could be repurchased or replaced.
In fact, says Morgan, "the credit unions were major players in the mortgage industry; they oversaw and provided financial services to a network of credit unions that originated the same types of mortgage products, using the same type of reduced documentation programs that are the subject of the (NCUA) Board's allegations. "
Morgan notes that the failed corporates "themselves purchased tens of millions of dollars worth of actual mortgage loans originated by member credit unions." It refers to activities by WesCorp, Members United and U.S. Central, through its Charlie Mac secondary market conduit, buying low-document subprime mortgages originated by credit unions. "In connection with those activities, the credit unions received several direct warnings from (NCUA) concerning the risks associated with the type of loans backing their RMBS investments," says Morgan.
"Indeed, until it decided to sue the JP Morgan Defendants, the (NCUA) Board itself publicly attributed the poor performance of the credit unions' RMBS portfolio to market factors," says the Wall Street bank. "For example, in an Internet video presentation entitled 'Corporate Credit Unions; How Did We Get Here,' the NCUA explained that the global economic crisis caused the decline in value of the Credit Unions' RMBS. To understand what happened to cause the losses associated with the private-label mortgage-backed securities that were held by corporate credit unions we need to now take look at the overall global economic crisis that emerged in 2007 and 2008."
