Navy Federal Credit Union Wins Appeal in Dispute Over Federal Court Access

The $128 billion Navy Federal Credit Union won an appeal on Thursday that confirmed federally-chartered credit unions are allowed to access federal courts through diversity jurisdiction.

The unanimous ruling by the U.S. Court of Appeals for the Fourth Circuit in Richmond, Va., overturned a U.S. District Court judge decision that dismissed a Navy Federal lawsuit because the federal court lacked diversity jurisdiction.

Diversity jurisdiction is one of the key ways that companies and private citizens can access federal courts, so that litigants from states do not hold a home court advantage. When a federal district judge limited that access for Navy Federal – and by extension all federal credit unions – the world’s largest financial cooperative appealed the lower court’s ruling.

CUNA and NAFCU submitted legal briefs in support of Navy Federal’s appeal.

The credit union filed a lawsuit in federal court in Alexandria, Va. in Nov. 2018 over a contract dispute with LTD Financial Services, Advantage Assets II, Debt Management Partners, Bayview Solutions and others. Navy Federal sold a debt portfolio to Advantage Assets II in 2102, which then resold those assets to the co-defendants. This resale allegedly violated Advantage’s asset purchase agreement with the credit union. What’s more, the co-defendants allegedly employed unscrupulous debt-collection practices that defamed Navy Federal, interfered with its business and injured its members, according to court documents.

Interestingly enough, the appeal centered on the meaning of a simple, three-letter conjunction connecting two clauses: “and.”

To establish diversity jurisdiction in order to adjudicate a lawsuit in federal court, Congress provided Section 1332(c)(1) that a corporation must be a citizen of every state and foreign state by which it has been incorporated and (emphasis added) of the state or foreign state where it has its principal place of business.

While this federal law regularly applies to state-chartered corporations, federally chartered corporations, not incorporated in the state or foreign state, do not fit comfortably under the first clause of the federal law, according to the Appeals Court ruling.

The district court ruled a federal corporation is not a citizen of the place where it has its principal place of business under 1332(c) (1). However, the district court also ruled that the use of the conjunction “and” between the two clauses meant that it applies only to those corporations that satisfy both: those chartered by a state or foreign state, not by the federal government.

Although Navy Federal acknowledged the first clause does not grant it state citizenship as a federal corporation, the credit union argued in its appeal that the second clause deems it a citizen of Virginia, which establishes diversity jurisdiction to allow the federal court to preside over the lawsuit.

“In our view 1332(c) (1)’s text, structure and context show that Navy Federal is correct,” the Appeals Court wrote in its ruling. “The plain meaning of and in context here is “in addition to,” and when we add something to nothing, something remains. Section 1332(c) (1) thus requires us to interpret and to give effect to the second clause even when the first clause does not specify a citizenship.”

“Today’s (Thursday) ruling in the 4th Circuit is a huge victory for Navy Federal and its members, and ensures that federal credit unions will have the same access to federal courts that all state-incorporated companies have enjoyed for decades,” Mary McDuffie, president/CEO of Navy Federal said. “Special thanks to our partners at the Credit Union National Association and National Association of Federally-Insured Credit Unions for their support in this case.”

NAFCU and CUNA praised the Appeals Court ruling.

“In a win for federal credit unions, the U.S. Court of Appeals for the Fourth Circuit overturned a lower-court decision and determined that a credit union may file a federal lawsuit in the state where it has its principle place of business,” NAFCU President /CEO Dan Berger said Friday. “This decision will ensure credit unions have equal access to our federal courts, and we are proud to have stood alongside Navy Federal Credit Union in this case.”

CUNA President/CEO Jim Nussle said, “The 4th Circuit’s ruling is a great step forward for federal credit unions in their mission to reasonably serve their members, better aligning federal and state-chartered credit unions as Congress intended.”

Lawyers for LTD Financial Services, Advantage Assets II, Debt Management Partners, Bayview Solutions did not respond to a CU Times request for comment on Friday.