The parties involved in the lawsuit have not returned calls for comment.

The creation of the credit union was funded, in part, by a HUD grant, along with city and county funds, according to the lawsuit, and the housing authority entered into a contract to pay the credit union annual support payments. The suit says the agency has ceased paying and is in default of its obligations under that agreement in an amount of $100,000.

Friction between the credit union and the housing authority has heated up since July 15 when the U.S. Department of Housing and Urban Development Office of Inspector General announced that a recent audit of the Housing Authority revealed that the agency had wrongly used public housing funds on projects that didn't provide public housing opportunities — including financially backing the credit union, according to the lawsuit.

The audit report, which is posted on the HUD Office of Inspector General website, concluded that the housing authority “did not follow HUD's requirements and its own policies regarding the administration of its program.”

“The [Housing] Authority, under the direction of its former executive directors, inappropriately used more than $6.3 million in public housing operating and capital funds to pay ineligible expenses for its commercial development, Metropolitan Centre, and two nonprofit developments, Ruthe and Isadore Freed Housing Corporation and Stark Metropolitan Federal Credit Union,” according to the audit report.

In the audit report, HUD recommended that “funds determined to be inappropriately used should be reimbursed by the [Housing] Authority to its operating or capital fund as appropriate,” and that the agency should “pursue appropriate administrative sanctions against the former executive directors for failing to comply.”

Instead of following HUD`s recommendation to reimburse its operating and capital funds, the lawsuit states that the housing authority attempted to deflect its own responsibilities by seeking to blame the credit union and sent a letter dated April 30, 2013, to Greg Kinsley, the manager of the credit union, demanding that the credit union (rather than the housing authority) reimburse $2,145,269 supposedly misspent by the agency.

In the lawsuit filed last week, the credit union alleges that the housing authority's “assertion of meritless claims against the credit union” has been done “maliciously and with the intention of harming the credit union” and in attempt to force the credit union to pay back funds that the credit union does not owe.

The credit union is asking the court to:

• Award the credit union damages from the housing authority in an amount in excess of $25,000, plus interest from the date each of the agency's support payments to the credit union were due;
• Declare that the previous agreements between the housing authority and credit union were legal and enforceable when entered into, and that the agency is not entitled to demand that the credit union repay all or any portion of the amounts paid to the credit union or its employees by the housing authority;
• Issue an order enjoìning the housing authority from continuing to interfere with the credit union's merger negotiations, including continuing to assert legally unsupportable claims against the credit union;
• lssue an order preliminarily enjoining the housing authority from taking any actions to attempt to evict the credit union from its premises during the pendency of this litigation;
• Award the credit union punitive damages against the housing authority for its malicious and intentional interference with the credit union's business relations; and
• Such additional and further relief as the court finds appropriate.