The law cited states “although an applicant's misstatements in an insurance application, if shown to be material to the risk and fraudulently made, is grounds for cancellation of the policy, such representation, standing alone, does not render the policy void ab initio and may not be used to avoid liability arising under the policy after such liability has been incurred.”

The alleged misrepresentation and concealment of facts goes back to the spring of 2010, when the NCUA discovered an alleged fraudulent lending scheme by Anthony Raguz, chief operating officer at St. Paul, according to the complaint filed with the U.S. District Court Northern District of Ohio-Eastern Division.

NCUA attorneys said while CUMIS claims that Raguz “misstated his knowledge of any act, error or omission which might give rise to a claim in the bond applications, these alleged misstatements do not qualify as warranties under Ohio law.”

Tschudy said the matter has not yet been litigated but feels that CUMIS is on “solid footing.” He acknowledged that if CUMIS were to lose, the most NCUA would be able to recover would be substantially less than what the agency is seeking.

The NCUA projected that the CU's failure would cost an estimated loss of $170 million to the National Credit Union Insurance Share Fund.

“We don't want credit unions to think CUNA Mutual is not trying to pay this and to let the NCUSIF absorb this,” Tschudy said. “We wouldn't want people to get the impression that we're shirking not paying.”

NCUA placed the East Lake, Ohio-based St. Paul in conservatorship on April 23, 2010. The regulator later determined that loan fraud was among the culprits that led to the CU's collapse.

The NCUA, meanwhile, has been sued itself over the St. Paul Croatian collapse, by a Cleveland couple who contend the agency did not have adequate insurance.