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In Credit Union Litigation, Time is Money

Why credit unions shouldn't be defensive when it comes to litigation.

Fair warning:ducking from litigation can be hazardous to your credit union’s financial health.

When in litigation, a credit union is typically viewed as the party in defensive mode because of some alleged committed wrongdoing. But If that is the picture that first comes to your mind, it’s time to adjust your mindset.

As the following cases illustrate, credit union litigation counsel should always look for ways to go on the offensive and obtain early dismissal of a case brought against the institution. Likewise, there are times where it may be preferable, perhaps necessary, for a credit union to initiate litigation. Often, it can substantially reduce the life-span of a lawsuit by litigating proactively and investing resources early in the litigation process, . As a result, it should realize substantial savings in litigation related fees and costs.

Taking a wait-and-see approach, by contrast, will result in litigation that can go on for months or years and involve extensive and costly discovery and trial proceedings. When it comes to litigation, time is money your credit union’s money. Keep the big picture in mind. Investing resources to obtain an earlier resolution of a lawsuit is often the least expensive route.

Claims Regarding Escrow Account And Application Of Partial Payments Dismissed

Haynes v. Navy Federal Credit Union:

A member obtained a mortgage from Navy Federal Credit Union ($58B, Merrifield, VA) (NFCU). In order for NFCU to pay the real estate taxes and insurance, the deed of trust included a requirement to make an escrow. The taxing authority improperly assessed $20,451.13 in back taxes on the property and increased the amount of taxes owed.

When notified of the taxes owed, NFCU paid and then notified the member. The member contacted the taxing authority and the error was corrected. However, the borrower decided to pay the taxes and insurance himself and began subtracting the escrow amounts from his monthly mortgage payment. NFCU placed each monthly partial payment in a suspense account and reported the reduced payments to the credit bureaus. The member responded by filing suit against NFCU for breaching the terms of the deed of trust, for an accounting, intentionally damaging his credit, and defamation.

The trial court dismissed the breach of contract claim, finding that NFCU acted as permitted under the deed of trust when it placed the partial payments in a suspense account instead of crediting them to the balance owed. The court also determined that NFCU owed no fiduciary duty to the borrower and dismissed the claim for an accounting. The court declined to dismiss the claims related to the alleged improper credit reporting and defamation, however, because it needed additional information and explanation from NFCU regarding the credit union’s mathematical calculations. Once that information is supplied to the court, it will decide whether to also dismiss the remaining two claims.

Judgement Against Auto Wholesaler Who Falied To Deliver Title Dischargable In Bankruptcy

Gulf Coast Community Federal Credit Union v. Whorton:

An automobile wholesaler obtained a loan from Gulf Coast Community Federal Credit Union ($83M, Gulfport, MS) to purchase an automobile through a dealer. The wholesaler was supposed to provide the dealer with the vehicle title to give the credit union. The wholesaler, however, failed to tender the title and did not make payment on the vehicle. The vehicle subsequently was imported to Belgium and could not be recovered. Gulf Coast obtained a judgment against the wholesaler and the dealer.

The dealer filed for bankruptcy and obtained a discharge. Gulf Coast objected to a discharge of its judgment. The bankruptcy court concluded that the wholesaler did not have any knowledge at the time he submitted the title application or accepted the proceeds that he would not be able to give Gulf Coast a perfected lien on the vehicle. Thus, he had not committed actual fraud or made any false representations, nor had he made a materially false and intentionally deceptive written statement of his financial condition. Therefore, the judgment against the wholesaler was dischargeable in bankruptcy.

Banana Lady Loses Several Appeals

Rigsby v. AM Community Credit Union;Conrad v. AM Community Credit Union:

In 2011, Catherine Conrad performed a singing telegram at the CUNA Management School, dressed in a banana costume. She agreed to perform on the condition that no photographs or videos of her performance be posted on the internet without payment of a licensing fee, claiming her character was protected under federal copyright and trademark laws.

After the conference, Conrad learned that videos and photos were posted to the Internet without her permission. She complained to the CUNA Management School, which sent an e-mail to all attendees reminding them to remove photographs and videos posted without Conrad’s permission. An attendee sent a complaining e-mail to Conrad, prompting her to file a lawsuit in state court against the attendee, along with his employing credit union and several others. The lawsuit alleged defamation and invasion of privacy as well as violations of copyright and trademark laws.

The trial court dismissed her suit for failing to state a claim. The Court of Appeals agreed to the dismissal of the lawsuit because the e-mail contained only non-defamatory opinions. In addition, the Court found that none of the defendants used the photographs or videos for advertising purposes. The Court also found that the photographs and videos did not confuse or deceive consumers into believing that there was a connection between Conrad and any of the defendants.

Conrad also filed suit in Federal Court. The Federal District Court dismissed her case, noting that most of her claims were precluded by her loss of the lawsuit she brought in state court. Undaunted, Conrad appealed to the United States Court of Appeals for the Seventh Circuit. The Seventh Circuit noted that Conrad believed the attendees’ personal use of photographs and videos excluded posting photographs on Facebook. The Seventh Circuit also expressed doubt about the validity of her copyright on the costume. The Court also found that her performance was not copyrightable. The Court concluded its analysis by noting that Conrad had abused the legal process by filing numerous lawsuits 8 in federal court and 9 in state court many of which were frivolous and resulted in awards and sanctions against her. Thus, it suggested that the Federal District Court enjoin her from filing any further suits in federal court until she satisfied her prior litigation debts.

About the Author:
Brian Dolan
, a member of Kaufman Canoles’ Credit Union Team, can be reached at (757) 873.6311 or bodolan@kaufcan.com.


This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
July 14, 2014

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