Shady Characters, People Of Character, And Future Characters

March 28, 2008, 2:09 p.m. EDT 4 Min Read

An interesting question to ponder now that a state court has ruled that a credit union’s bylaws exist for a reason and boards cannot arbitrarily decide whether or not to follow them, is just how certain boards will now react.

In other words, for boards in the early stages of considering a charter conversion to mutual savings bank, what kind of advice will they now get from the consultants and lawyers who make their living selling what have always been backdoor deals with little regard for bylaws? Bylaws? It’s always been more like bye bye laws.

A Michigan court has ruled in favor of members of DFCU Financial in Dearborn who sued their credit union after it refused to hold a special meeting for members at which a vote would be conducted on recalling the board. The group, who called themselves DFCU Owners United, had complied with bylaws requiring that 500 member signatures must be collected in order for a special meeting to be called. DFCU Owners United was also seeking information on how the board had concluded there was a need to convert.

In response, DFCU Financial, which abandoned the plan to convert in 2006 and says it is committed to being a CU, simply ignored the opposition group, its 500 signatures, and its own bylaws. In the process it raised a question that had apparently never been dealt with before: who enforces credit union bylaws? As DFCU Owners United would come to discover, the answer wasn’t NCUA, which wanted to act but ultimately concluded it wasn’t empowered to do so. It wasn’t a federal court, which ruled a federal charter was one thing, but jurisdiction was another. Finally, a Wayne County (Mich.) Circuit Court took the case and handed down its ruling that the special meeting should be held. DFCU Financial, which said it is “disappointed” in the decision, said it is mulling whether to appeal.

On one hand, it’s all a moot point. Eight of the nine directors named in the board recall are no longer on the DFCU Financial board. But on the other hand, the decision is critical if not to the members of DFCU Financial, to members of other credit unions that may in the future consider a charter conversion and who will need the security of knowing their own bylaws are enforceable.

For it’s part, NCUA said the court decision only reinforces why the agency should have oversight of CU bylaws. The fact 88% of the DFCU board of 2006 is no longer around in 2008 and that it took so long for the court to rule only reinforces why the agency should have enforcement powers, according to a spokesperson.

The court decision and NCUA’s efforts are all good news for members. But there’s also a big “if” here. The consultants behind the charter conversions aren’t going to pack up their luxury cars and drive off contentedly into the sunset. They’ve made their living parsing language and will do so here, beginning with a new first step: change the bylaws on what’s required for members to hold a special meeting. After all, converting away from a credit union charter is a conversion away from democracy. And if you’re abandoning democracy, you begin by abandoning one of its fundamental tenets.

During a recent conference hosted by CU Journal Publisher SourceMedia in Ponte Vedra, Fla., Gary Furtado, president of Navigant Credit Union in Rhode Island, prefaced his remarks by asking bankers in the audience not to boo, before he noted his CU’s charter is open to anyone with “high moral character.” But he got a few groans of his own when he added that there are a few people ineligible for membership, including “Lindsay Lohan, Brittany Spears and Bill Clinton.”

Later, Furtado explained that the credit union had hired consultants to lead a rebranding, and observed, “We knew they were consultants. They were more than a hundred miles from us. They carried a briefcase. They told us what we wanted to hear, and they charged us a lot of money.” A story in Canada recently spent a bit of time in the headlines, before fading away. But it deserves a bit more attention, because what occurred in Western Canada may raise its head in the U.S. In this case, three credit unions in Alberta had made plans to merge when a bank holding company stepped in with an offer of its own to one of the CU’s members. Bank West offered $345 million in cash, shares and payments to members of Community Savings CU.

The bank did what banks do; it offered a premium to depositors to OK the deal, a premium those members won’t get in the CU merger. But Community Savings’ board voted not to forward the buyout offer to its members.

Given the number of mergers among CUs in the U.S., about one a day, it seems only a matter of time before some bank approaches CUs planning a merger with a premium deal of its own. After all, they’ll pay it out of the CUs’ own capital and acquire new customers at no cost. It’s a strategy already tried by one CU, Wings Financial, in attempting to merge with Continental FCU in early 2007.

Unlike the Canadian case, an American bank may not be willing to walk so easily from the table should the CU reject its offer, and may turn to the courts for the right to take its offer straight to members. And that will raise a tough question for CUs–what would your members do if offered a premium over their own deposits to vote in favor?