NCUA Formally Invalidates Community's Vote; Court Action Appears Inevitable

ARLINGTON, Va. – The chances that the dispute between the $1.4 billion Community Credit Union and NCUA over the credit union’s attempt to change its charter to that of a mutual bank will wind up in court went up sharply last week as the agency formally invalidated the credit union’s vote and the credit union vowed it would not conduct its vote again. The credit union regulator’s final refusal to validate the credit union’s vote cannot have come as a surprise since the agency has declared it would do so since mid-May, when it formally sent a letter to Community and the $1.2 billion OmniAmerican Credit Union, announcing that it would invalidate both the Dallas area credit unions’ votes based on how the credit unions had packaged their disclosures. But in the 10-page letter o Robert Freedman, partner in the Washington law firm of Silver, Freedman & Taff, (SFT) Jane Walters, regional director of NCUA’s Region IV, told the credit union that it would have to conduct the balloting again and appeared at some points to almost lecture the credit union about its actions. “Instead of correcting the disclosure violation,” Walters wrote, “when brought to its attention, CCU chose to continue with the conversion process that I had already deemed flawed. CCU expended large sums of member money to continue the flawed conversion process.” Walters reiterated the conditions that NCUA says it set on the credit union using a rebuttal statement to its boxed disclosures, namely that the boxed disclosure must be the first thing the member sees after the Dear Member letter. But she also suggested that May 26 conversation between NCUA Chairman JoAnn Johnson and Community CEO Gary Base further solidified the agency’s position. In the conversation, Walters contends that the credit union said it “thought long and hard” about how to fold the disclosure documents because it was aware that the folding would impact the way members saw the disclosures. What’s In A Phone Call? The dispute between the two credit unions and the NCUA hinges on NCUA’s contention that the credit unions had both violated the agency’s regulations concerning the disclosures that they sent to members and that they had done so because they violated an agreement struck between the credit union’s lawyers and the agency over how the credit unions would handle a “rebuttal” statement that they wanted to include with the disclosures. In a footnote on page 3, Walters outline the agency’s view of one of the phone conversations surrounding the dispute: “In its June 29, 2005 letter, SFT stated that Mr. Fleisher and OGC [Office of General Counsel] Staff Attorney Frank Kressman discussed SFT’s proposal to place [NCUA's] boxed disclosures after the Dear Member letter with CCU’s rebuttal on the reverse side of the boxed disclosures,” Walters wrote. “SFT also stated that Mr. Kressman stated that he thought this would be acceptable but would need to consult with his superiors and others at NCUA. This is not entirely accurate. Mr. Kressman was uncertain about what NCUA’s position would be regarding placing the boxed disclosures/rebuttal behind the Dear Member letter, but he did not believe NCUA would approve placing the rebuttal on the reverse of the boxed disclosures. “NCUA agrees that there was a conversation between Mr. Fleischer and Mr. Kressman and that Mr. Kressman did consult with others at NCUA about the conversation, but Mr. Kressman did not state to Mr. Fleischer that he thought placing the rebuttal on the reverse of the boxed disclosures would be acceptable to NCUA as he did not believe it would,” Walters wrote. Walters wrote that the agency made it clear in subsequent phone conversations between Kressman and Fleisher the agency would approve putting the credit union’s rebuttal on the back of the boxed disclosures only if NCUA’s statement would be the first thing that the member saw after the Dear Member letter. Ironically, Walters wrote that NCUA had not dictated the type of fold the credit union should use because the agency wanted to give the credit union more flexibility. The agency did not care how the page was folded, Walters said, so long as the requirement about what members saw first was met. Walters noted, however, that by choosing the fold it did “it is difficult to imagine CCU finding a better way to fold the document to showcase its rebuttal.” Would It Have Made A Difference? CCU supporters have decried NCUA’s actions as little more than a regulator enforcing a technicality, but Walters’ letter argued that the evidence from the charter change voting argued that the outcome of the vote would have been different had the credit union followed its instructions. According to Walters, 72.5% of CCU members who voted in response to the credit union’s first two ballots, where the agency says the credit union’s disclosures were incorrect, voted in favor of conversion whereas 51% of the credit union members who voted after the third disclosure package, which had been corrected in the agency view, voted against the conversion. “This dramatic shift in voting also suggests that members who voted based on the first two flawed mailings may have been disadvantaged by not necessarily having the information provided in the boxed disclosures,” Walters wrote. “Those members may have wished to change their votes as a result of considering the boxed disclosures in the third mailing.” Although as of press time the credit union board has not yet made its final decision, it’s almost certain Community will go to court since, according to its General Counsel, the credit union refuses to conduct the re-vote that NCUA has demanded as a condition of going forward. “We believe that we complied fully with everything that NCUA required us to do and we cannot see how we could responsibly spend another $500,000 or $600,000 of our members’ money doing something again that we believe we did right the first time,” explained Mark Hord, Community’s general counsel. Hord made a point of denying in the strongest terms that there was any agreement between the NCUA and the credit union over how the disclosures would be mailed and said that NCUA Chairman JoAnn Johnson had not recalled a conversation she had with Community CEO Gary Base on or about May 26 correctly. Hord said that the credit union did not consider the cost of litigation to be equal the cost of doing another mailing and that, if it did go to court, Community would seek a summary judgment in the case. He did not respond with what the CU might do should it win a summary judgment and should NCUA appeal. -