WASHINGTON - Three judges of the U.S. Circuit Court of Appeals last week hashed over the meaning of 17 words in the Federal Credit Union Act to determine whether the government's expansion policy is legal.

The panel focused on a passage in the act that states, "Federal credit union membership shall be limited to groups having a common bond of occupation or association."

According to the American Bankers Association, which sued the National Credit Union Administration five years ago for letting a North Carolina institution expand, the article "a" means a credit union can serve only one group.

But the regulatory agency zeroes in on the word "groups," claiming a credit union can have multiple organizations so long as each has something in common.

The judges' questioning indicated they considered the passage a thorny one to interpret - which may be a good omen for the regulator, sources said.

If the judges decide the passage is ambiguous, it is likely the agency will win. The regulator's argument claims that its interpretation is a reasonable one that should be given deference.

After the hearing, NCUA attorney John Ianno said the judges "seemed very interested in the question of whether the meaning of the statute was ambiguous. I think if they look at the legislative history, they will find the statute is ambiguous."

Judge David S. Tatel asked both parties whether dismantling credit unions' memberships would be a messy business.

"Do you have any thoughts about how we could handle that so the system can be unraveled in an orderly way?" he asked. "Can we pick it apart, or does that require some thought?"

Chris Lipsatt, the Wilmer, Cutler & Pickering lawyer who represented the ABA, shrugged off the question. But Jacob Lewis, the Justice lawyer who represented the agency, portrayed a doomsday scenario.

"It is extremely difficult to think how you would unravel the financial relationships," Mr. Lewis said. "There are millions of people who would be affected."

Michael Crotty, deputy general counsel of litigation for the ABA, wouldn't comment.

Bankers in eight states have gone to court to challenge credit- union expansions. The North Carolina case is the oldest one.

So far, credit unions have come out on top in six of the seven cases where judges reached a decision.

The only case the industry has lost was one filed by Texas bankers. In May the U.S. District Court for the District of Columbia ruled illegal an expansion by Houston-based Communicators Federal Credit Union to serve 500,000 people.

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