RICHARDSON, Texas — In a case that appears to center around an offer from a credit union that wanted to buy a stake in a highly successful commercial lending CUSO, discussions of a bank conversion and unpaid compensation packages, three former executives with Texans Commercial Capital, LLC have filed a lawsuit against the CUSO, Texans Credit Union and its President/CEO David Addison.

In a lawsuit filed on Dec. 29, 2006, former Texans Commercial president/CEO John C. O'Shea, former senior vice president/CFO Paul J. Valdez, and former executive vice president/COO Joel B. Fox, have claims against $1.9 billion Texans CU and the CUSO for defamation, fraud and breach of contract. According to the petition obtained by Credit Union Times, the three executives were fired in August 2006 for what Addison describes as a violation of “honesty, integrity, loyalty and common sense,” the petition reads.

Going back, O'Shea was hired in 2003 to start Texans CU's first commercial lending department from the ground up. O'Shea helped grow the department from zero to $745 million in loan commitments and $580 million in loans outstanding, while also managing the credit union's retail and mortgage lending operations, according to the petition. In approximately late 2004, because Texans was about to hit its limitation on the percentage of assets committed to commercial loans, the credit union obtained a waiver to increase its allowable percentage of commercial loans from 12.25% to 20% through the removal of loan participations of nonmember loans into a separate category.

According to the petition, in order to fit within the commercial lending limitation, Texans decided to establish a participation network through which it could originate loans and then sell them to other credit unions. That marked the launch of Texans Commercial Capital in May 2004. O'Shea was named president/CEO of the CUSO and remained executive vice president of Texans CU. Fox and Valdez, serving as chief credit officer and controller at the credit union respectively, were both promoted to their previously named positions at the CUSO.

Between April 2003 and August 2006, Texans Capital's success was significant. Credit Union Times profiled the CUSO in its February 2, 2005 issue. In 2005, one half of the $12.7 million profit earned by Texans CU came directly from the CUSO, according to the petition. Another 40% came from commercial loans purchased by the credit union from Texans Capital.

The conflict seemed to arise when on “several occasions,” Addison told O'Shea that he expected O'Shea to inform him if he was ever contacted by a competitor about leaving Texans Capital, according to the suit. Secondly, if O'Shea was ever offered an opportunity to leave, “Addison wanted the chance to make the last bid.”

While the temporary participation network was a temporary fix to avoiding the cap of commercial loans for Texans CU, the management, board of directors of both Texans CU and Texans Capital “knew that the remedy was temporary and that a more long term solution needed to be found.” One option discussed was selling the CUSO to a larger credit union with greater assets and a higher commercial lending cap. In 2005, the credit union's board approved the sale of up to 20% of Texans Capital with 5% to a “much larger credit union in New York.”

Texans CU apparently considered converting the financial institution to a mutual savings bank or some other form of banking institution in discussions that begin as early as 2005, the petition reads. Addison, O'Shea and two other executives were in on the discussions.

In an Aug. 31 e-mailed statement to Credit Union Times, Matthew Davis, executive vice president at Texans CU, wrote, “Texans Credit Union can not comment on pending litigation.” Davis did respond to a question about the bank conversion claim.

“Regarding the industry sensitive topic of conversion, Texans has no plans in the foreseeable future to convert to a bank,” Davis wrote.

Stuart B. Johnston, the attorney representing Texans CU, the CUSO and Addison, said, he too, “can't comment on pending legislation” and “the defendants have denied the allegations.”

Hal Gillespie, president of Gillespie, Rozen, Watsky, & Jones, P.C., the Dallas law firm representing the three former executives, told Credit Union Times the defamation cause of action is “based on what was said about the guys after they were cut lose.”

“The breach of contract [says] you should still be paid for services rendered,” Gillespie said. “This is an important matter involving serious allegations.”

Meanwhile, as discussions on the possibility of changing Texans Commercial's existing business model continued and the possibility of the credit union converting to a bank, O'Shea also began discussions about “golden handcuffs” for himself and his management team. According to the suit, in November 2005, Addison “committed to O'Shea that he and his management team would receive golden handcuffs.” At a March 2006 strategic planning meeting, Addison, O'Shea, Fox, Valdez along with six other executives met to review funding options, corporate culture and a potential conversion to a bank charter. The “number one strategic threat” to Texans Capital's success was short and long term funding, the petition reads.

During another strategic planning retreat held in June 2006 in San Francisco, the “primary focus” was how to convert Texans from a credit union to a bank. According to the petition, an investment banker from Sandler O'Neil was in attendance expressly to “discuss bank conversion economics and the probable credit union obsolescence regarding traditional credit union charters.” The possibility of selling Texans Capital was “specifically discussed.”

One month later, in July 2006, O'Shea was approached by representatives of Dallas-based NexBank and discussions began on possibly selling Texans Capital to the financial institution. Originally founded in 1922, the bank was purchased in 2004 by a group of Dallas-based investors. Calls to NexBank were not returned by press time. O'Shea spoke to Addison and another credit union executive about his conversation with NexBank. According to the suit, Addison said he would sell Texans Capital for $75 million, “which would have represented an absurd 12 times multiple.”

In addition to a possible sale, O'Shea said NexBank indicated possibly speaking further about opportunities with the bank for the executive, but no positions were offered or accepted, the petition reads. O'Shea met with Addison on July 31, 2006 and told him that he had been approached and “made clear that the talks were very preliminary, no offer had been made, and none was imminent.” During this same conversation, O'Shea also asked about the status of the charter conversion. Addison said it was “at least one year now more than likely two years away.”

“Texans had money to fund commercial loans for the next two months and that, after that, he didn't know,” according to the petition. In an Aug. 31 Dallas Business Journal article, Jay Champion, president of Texans Capital, said, through Texans' public relations director Shalissa Clary, that the credit union cannot comment on pending litigation. “But Champion also offered assurances about Texans' commercial lending abilities through Clary,” the article read. “Texans Credit Union and Texans Commercial Capital do have ample liquidity to meet current commitments and future funding needs,” [Clary] said. “She added that the credit union continues to take applications for commercial business loans,” according to the article.

According to the petition, Addison said he demanded four things from his employees: “honesty, integrity, loyalty, and common sense” and that the three former staffers “violated those expectations.” At a later meeting with a corporate credit union, Addison reportedly told employees that O'Shea, Valdez and Fox were no longer employed because they had presented him with “an ultimatum for an amount of money to be paid to them or they would leave.”

At the time of his termination, O'Shea said his compensation package included a base salary plus a bonus of up to 4% of Texans Capital's earnings plus accrual add-backs, the suit indicates. Valdez' and Fox's compensation packages included a base salary plus quarterly bonuses of up to 1% of the CUSO's earnings plus accrual add-backs, plus an annual bonus of up to 18% of their base salaries if Texans Capital met its projected net income.

O'Shea was owed a bonus of no less than $150,000 and Valdez and Fox no less than $15,000 each. Despite demand having been for the payments, the amounts remain unpaid, according to the suit.

Gillespie, the attorney with the firm representing the three former executives, said they are in the process of taking dispositions from all parties involved and that the earliest possible trial date would be in March 2008.

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