Nearly a year after the NCUA filed a proof of loss claim to recover alleged monetary damages connected to the collapse of St. Paul Croatian FCU, the CUMIS Insurance Society has denied it.
According to the Aug. 18 complaint for declaratory judgment filed by NCUA attorneys, CUMIS acknowledged the proof of loss claim that the regulator filed Oct. 8, 2010 but has not paid on it citing alleged misrepresentation and concealment of material facts.
The NCUA filed a proof of loss claim with CUMIS for nearly $73 million. However, because CUMIS' fidelity bond has a $5 million coverage limit, the amount of money in dispute would be less than 7% of that figure, said Phil Tschudy, a CUNA Mutual spokesman.
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 United States District Court Northern District of Ohio-Eastern Division.
In the Aug. 18 complaint, the attorneys for NCUA said the CUMIS bond is subject to Ohio law and should be paid. 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 [from the start] and may not be used to avoid liability arising under the policy after such liability has been incurred."
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."
The attorneys representing the NCUA also argued that CUMIS' bond specifically insures against loss incurred as the result of employee or director dishonesty. At the time, Raguz was still an employee at the CU, the complaint noted.
Tschudy said the matter has not been litigated yet 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 they are seeking.
"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 Spokesman David Small said the attorney working on the case was not available at press time to comment.
St. Paul's financial troubles had been brewing since at least December 2009. In January 2010, representatives from the FBI and the IRS met with NCUA staff concerned there was alleged criminal activity occurring at the CU.
After an investigation, NCUA placed the East Lake, Ohio-based St. Paul in conservatorship on April 23, 2010. Founded in 1943, it served nearly 5,400 members and had approximately $238.8 million in assets.
According to an October 2010 material loss review from the NCUA's Office of Inspector General, it was determined that fraud was the cause of the CU's failure. At the time of the review, the NCUA projected that the failure would cost an estimated loss of $170 million to the NCUSIF.
During a Dec. 31, 2009, examination, the NCUA found the majority of St. Paul's loans were not actually share secured and a number of them were allegedly fraudulent. The NCUA also found that St. Paul's CEO "manipulated loan records and masked the suspected loan fraud by constantly refinancing certain loans or making advance payment on those loans," according to the OIG's report.
The NCUA's inspector general also criticized the CU's management saying it did not ensure that adequate internal controls and policies were in place and failed to resolve prior examiner findings in a timely fashion.
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