Reasons Members Sue Credit Unions and Win Vary, But a Proactive Plan Can Thwart Financial Loss

CINCINNATI – It’s not the most popular topic of discussion for credit unions, but the “healthy” number of lawsuits members file can result in significant financial losses if a threat to sue is not taken seriously or even worse, ignored. Robert Rutkowski, an attorney with Weltman Weinberg & Reis, L.P.A. here in conjunction with the Ohio Credit Union League has been conducting a series of workshops across the state with the attention-grabbing title `Why Members Sue Credit Unions and Win.’ No credit union is immune, and Rutkowski said members that are successful in getting compensatory and punitive damages win because credit unions have made mistakes in their operational documentation, have failed to follow policies and procedures or “have tried to take the easy way out of a problem.” CUMIS Insurance Society, the insurance arm of CUNA Mutual Group doesn’t track the number of lawsuits filed by members said Phil Tschudy, CUNA Mutual media relations manager. CUMIS does track claims filed by credit unions involving a number of scenarios but because of the extensive breakout of claim categories, those figures were not available at press time. Rutkowski’s data, which was culled from national court cases, revealed that by far, repossessions are the number one reason members file suit, followed by truth in lending/defective documents and employment issues. Rutkowski represents nearly 300 Ohio credit unions as general counsel and is a member of the American Bar Association Credit Union Committee. The topic came up in a yearly brainstorming session, said Dave Shoup, OCUL’s director of research along with other risk management subjects. “Credit unions, like any other entities, are subject to lawsuits,” Shoup said. “They need to have their I’s dotted and T’s crossed. Rather than have a manual of rules, we thought by presenting actual cases, their outcomes and what credit unions could have done, would make for some interesting discussion.” So, what should management do if a member has said that he or she will file a lawsuit? Rutkowski advises keeping the emotions in check. “Credit unions should try to take a step back from the situation if a member threatens to sue,” Rutkowski said. “Review the total costs of the situation. Can we do something small to make the member happy now to avoid problems later or do we want to send a message to the member. Walking that line is crucial.” Contacting the credit union’s bonding company, which for many credit unions is CUMIS, is among the first steps, and the process usually involves the company taking the situation from there. One proactive piece of advice Rutkowski has shared with workshop attendees it to pay the extra cost to have a litigation rider to cover any unforeseen lawsuits. “Nothing is more frustrating for a credit union to be involved in litigation that results in $50,000 in fees and the credit union never budgeted for them,” Rutkowski said. “A litigation rider is extra insurance.” Indeed, some credit unions that have gone to a jury verdict were “completely wiped out” when punitive damages were awarded to a member. “I’ve seen it happen,” Rutkowski said. “All credit unions have seen claims and some of them are very serious.” Repossession, for instance, carries a myriad of twists and turns because of the legal issues involved in taking possession and accompanying regulatory compliance. Rutkowski said each state has its own respective law but the statutory requirement for the credit union generally involves sending a notice of sale, advertising the vehicle in a certain way, having the sale and sending notice of deficiency after the sale. “You just can’t miss any of those steps,” Rutkowski said. “Then the credit union may have to hire a repo agent and an auction (representative) and possibly a lawyer.” Throw in other collateral, protection and disability factors and the margin for error becomes even greater. Another sizeable slice of litigation comes from credit union employees, Rutkowski said, with claims ranging from wrongful discharge to duress. Again, taking a proactive stance is the key to minimizing financial straits. “Maintain a good employee handbook, document all issues that come up,” Rutkowski said. “If you intend to fight a case at the employment level, be prepared to fight it every step of the way.” Still, credit unions will typically try to do the right thing by their employees, Rutkowski said. “Boards aren’t generally capricious with managers. When a manager leaves, usually something went wrong. It’s important for credit unions to remember that if you’re going to take a strong position against a threat of a lawsuit, have the documentation to back up that stance.” – [email protected]