A federal appeals court, ruling against the banking industry, has allowed a Michigan credit union to expand its membership base dramatically.

The decision -- by the U.S. Court of Appeals for the Sixth Circuit -- comes from the highest court yet to rule on the controversial "common bond" question. It also makes Michigan the third state in which bankers have failed to block credit union growth.

Bankers have sued the National Credit Union Administration in six states and state regulators in two, charging that they have too liberally defined who may join a credit union.

In the Michigan case, four banks challenged the NCUA after it had permitted a Portland, Mich., credit union to widen the area from which it could admit members. The institution's base of potential members shot to 48,000 from 16,000.

Last week's ruling came as a big blow to the banks.

"I'm very, very disappointed," said Ronald D. Story, president of Ionia County National Bank, one of the plaintiffs. "I had hoped the court of appeals would have looked at it differently, to put some control on the uncontrolled growth of the credit union movement."

Banks vs. Credit Unions

States where banks have sued over credit union expansion

1. North Carolina

2. Michigan

3. Utah

4. Nebraska

5. Montana

6. Tennessee

7. Texas

8. Maine

The other plaintiffs were Community First Bank, Lansing; Independent Bank, Ionia; and Union Bank, Lake Odessa.

Mr. Story said he didn't know whether the bankers would appeal the decision. "I'm not over the shock of it yet to know what the next move might be," he said.

But Steve Widerman, staff attorney for the NCUA, applauded the decision.

"Perhaps the lesson of the Sixth Circuit decision is that while banks may enjoy standing to sue NCUA, the bottom line is that courts recognize NCUA has the authority to set community common-bond policy," he said.

While the Sixth Circuit, based in Cincinnati, is the first appellate court to address the common bond question, the Court of Appeals for the District of Columbia Circuit ruled in April 1993 that banks have the right to sue NCUA.

The D.C. circuit will be the next appeals court to rule on an NCUA credit union expansion decision. That court is handling an appeal from a group of North Carolina banks that lost their common bond case against NCUA in September.

A Utah district court judge ruled in March that the Utah Bankers Association lacked standing to sue the regulator for allowing credit unions to serve more than one county.

The Michigan case began in March 1993, when the NCUA permitted Portland Federal Credit Union to accept new members from much of Ionia County.

Bankers sued in May 1993 and a districut judge ruled in favor of NCUA in August. The four banks, with the financial backing of the Michigan Bankers Association and the Michigan League of Savings Institutions, appealed.

The definition of a community was the point of contention. Under NCUA regulations, a credit union can serve a community only if it is "clearly defined" and if the residents identify it as a distinct area.

Bankers wanted a narrower interpretation, like "a small city or town, such as the City of Ionia." They argued that the expanded area included many distinct communities and pointed out that the enlarged territory consisted of three congressional districts.

The court shot down the bankers' arguments.

"There is a common bond involved," wrote Judge Harry W. Wellford in a the conclusion of a 10-page decision. "The NCUA's regulations defining community constitute a permissible definition."

The four banks also tried to argue that the agency had acted capriciously because its chartering policy has changed since the Federal Credit Union Act was passed in 1934.

The court rejected that as well.

"It is not surprising that the agency may have changed its policies several times since 1934, since the national economy, and the composition of communities, has changed substantially over the years," the decision said.

Despite three staight losses, the banking industry is determined to keep fighting.

"It's a bad day," conceded Michael Crotty, deputy general counsel for litigation at the ABA, but he insisted that there was a bright spot in the ruling.

Bankers can take solace in the court's decision to grant standing, upholding the precedent set by District of Columbia Circuit Court of Appeals last year, he said.

Also important is the decision's conclusion, which says the legality of community charters must be judged on a case-by-case basis, Mr. Crotty said.

"The court was quite clear we lost this one on the facts," he said. "They aren't granting authority to NCUA to do whatever they want to do."

The decision may not hurt bankers in other lawsuits because four of the other cases involve the ability of credit unions to serve unrelated groups of people, not communities.

Paul H. Stock, executive vice president and general counsel for the North Carolina Alliance of Community Financial Institutions, said the issue will be decided by the Supreme Court after the cases work their way through the appeals courts.

"I think this is a matter which will be passed to the Supreme Court," he said. "We'd like to win every decision, but if we did the credit unions would appeal. This is a battle that has to be fought at the appellate level."

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